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Monday, 09 April 2012 09:41

State Venture Match Fund offers incentives for VC

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MICHIGAN — The Michigan Economic Development Corp. doesn’t want to be in the business of picking winners and losers, but it’s hoping a new venture match fund will provide a market-driven program aimed at filling a funding gap for early-stage companies.

The Pure Michigan Venture Match Fund, which was expected to be approved by the Michigan Strategic Fund as MiBiz went to press, is designed to have the state match funding from venture capital firms for investments in early-stage companies.

The goal for the fund is to attract more capital to the state, said Michael Psarouthakis, VP of business acceleration at the MEDC.

Companies can apply to the fund once they’ve raised between $700,000 to $1 million, and the state will match 50 percent — from $350,000 to $500,000. For companies that have raised between $1 million and $3 million, the state match is capped at $500,000.

In a competitive process, companies will apply to the fund via an online application by submitting a business plan of no more than 35 pages, plus supporting documents. The qualified lead VC firm must also submit a valuation and an evaluation of why it made the investment in the company. The cost to apply is $1,000.

The applications will be peer reviewed, and successful projects will be put to the Michigan Strategic Fund manager for a final decision. The entire process is expected to take from four to six weeks.

The state expects to be able to start taking applications by April 2.

The state will make the investment on the same terms as the VC, Psarouthakis said.

He said the program came about because of a gap in available funding for businesses. While startup and research-stage companies have funding options such as the federal Small Business Innovation Research program or the Biosciences Research and Commercialization Center in Kalamazoo, companies have a lack of options as they’re starting to ramp up operations — just before revenue kicks in or as revenue starts to ramp up.

“To be frank, there is a funding gap before VC funding comes into play, especially for Michigan,” Psarouthakis said. “There’s not as much capital in Michigan as on the coasts. And our risk tolerance is lower. … Ideally, we wouldn’t have to do a program like this, but we just don’t have the capital resources in this state. This is a great way to let the market decide and incentivize them to look at something they’ve not looked at in the past.”

The state Legislature committed $5 million to the initial program, which is part of the expanded 21st Century Jobs Fund that looks to generate more activity in life sciences, homeland security, advanced manufacturing and materials, clean technology, IT, and agricultural technology.

Unlike with previous rounds of state-run business plan competitions in 2006 and 2008 when hundreds of companies flooded the programs from the onset, Psarouthakis said he does not expect a huge number of companies to apply for this program. The reason, he said, lies in the strict requirement that the applicant must have already secured funding from a VC firm, and there is just not that much activity in the space the program targets. He expects the initial round of funding to last from 18-24 months and allow the state to help on approximately 10-15 deals.

“We anticipate attracting VCs to look at deals within the state,” Psarouthakis said.

John Kerschen, managing partner of Michigan Accelerator Fund I, said companies often struggle to pull together a syndicate of funders for a smaller deal — those under $5 million, for example, where it can be particularly difficult to attract out-of-state venture capitalists to the table. The costs for an out-of-state VC fund to do due diligence and manage the investment on such a small deal can be prohibitive, he said.

“It’s not a silver bullet, but it’s one more positive addition to the mix of resources that we have in the area,” Kerschen said. “We are still in a situation in the state and in the Midwest where there’s a relative shortage of capital, especially for early-stage ventures.”

Companies must have their primary activity and base in Michigan to be eligible for the program, but their sales and funding sources do not need to be in-state. Companies can also have other investors, as long as a qualified venture firm is leading the funding and as long as the VC leads at least 50 percent of the funding or $500,000, whichever is less.

“We don’t want the MSF investment to be less than the VC investment,” Psarouthakis said. “They may bring angels or a strategic partner, but we want to make sure there is a professional lead investor.”

Kerschen attended the initial public hearing for the program earlier this year, and liked what he heard.

“We’re looking to take advantage of this in the right situation,” Kerschen said. “This provides the opportunity to use state dollars to get a deal done. But it’s incremental.”

A West Michigan source familiar with the program who asked to speak off the record said the Venture Match Fund seemed to be little more than window dressing because there are few venture-backed deals in the state in the size range that the program targets. Deals in the $700,000 to $3 million range are more likely to find capital from angel investors or high net worth individuals than from VCs, the source said.

As MiBiz previously reported, VC funding in Michigan is at its lowest point in 15 years, according to the recent quarterly MoneyTree report from the National Venture Capital Association and PricewaterhouseCoopers. Across Michigan in 2011, venture firms invested $82.6 million in 31 deals, according to the report. VC investment plummeted 46 percent in 2011 versus 2010.

Nationally, venture investing totaled $28.4 billion for 3,673 deals, the NVCA recently reported. Michigan is generally about middle of the pack of states for venture funding.

“The key here is that we’re trying to help the market fill a funding gap,” Psarouthakis said. “We’re trying to create a program driven by the private sector that’s market-driven. The state is just partnering with the market.”

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