A trio of initiatives from the Michigan Economic Development Corp. aims to increase the flow of capital to startups and early-stage companies in the state.
By the end of the year, two separate but similar funds of $1 million and $2 million each could begin offering grants to university researchers and entrepreneurs seeking to validate innovations and prove out their concepts. A third fund, rather than providing direct capital, would pay to better coordinate activities among the nine angel investment groups in Michigan to leverage their strengths and share best practices on tasks such as due diligence and deal syndication.
The three funds will target the very earliest stages of the capital continuum, an area repeatedly identified in studies as a glaring need among Michigan startups.
“There is this gap that’s been recognized in the state,” said Fred Molnar, vice president of entrepreneurship and innovation at the MEDC. “There is a definite early-stage gap and that’s what we’re trying to fill. We think we can make a difference.”
The Michigan Strategic Fund Board of Directors recently approved issuing requests for proposals for administrators for all three initiatives.
As planned, the $750,000 Angel Capital Fund would pay for a nonprofit organization to coordinate the activities of what Molnar calls “a very divergent group” of angel investors in Michigan. The fund could serve as a conduit for the state’s nine existing angel groups to standardize due diligence, put together packages to syndicate investment deals, and share results and investment prospects, Molnar said.
“They do communicate, but they are all, in a lot of ways, islands among themselves,” he said. “The goal is to try to strengthen them by pulling them together into a cohesive group because we believe that as a group they’ll be stronger than individually.”
By bringing more cohesion to their activities in Michigan, the MEDC hopes to create greater interest and lure more high net worth individuals to become angel investors, Molnar said. He hopes to “see some unique ideas” in the RFP responses as to how the fund could better pull together angel investors in Michigan.
Kevin McCurren, an angel investor and an affiliate faculty member at Grand Valley State University’s Seidman College of Business, believes the $750,000 the MEDC earmarked to better organize angel investors in Michigan “will probably be some of the most cost-effective capital” of the three new funds.
Aside from coordinating statewide angel investment groups, Michigan needs an organization dedicated to helping form new groups, educating potential investors and recruiting new angels, especially from younger generations, McCurren said. Other states such as Wisconsin, Pennsylvania, South Carolina and Texas that have such a structure “tend to have stronger angel networks” investing in and mentoring young companies, he said.
“It will be money well spent,” McCurren said.
Michigan at the end of 2015 had 10 angel investment groups that last year put $16 million into startups and early-stage companies. Those groups had about 300 active angel investors, a 59-percent increase from five years earlier, according to an annual research report published by the Michigan Venture Capital Association.
The 128 startup companies based in Michigan that are backed with angel funds represent a 42-percent increase over five years ago.
After funding expires in three years for the Angel Capital Fund, the MEDC hopes to see an ongoing, private effort to link angel groups, perhaps through a new trade organization that promotes and unites its industry, Molnar said.
“We’re just trying to kickstart this. We’re looking at this as we’re going to help whoever wins the RFP spin this up and get everyone together, but after three years we’re pulling out,” Molnar said. “This has to become self-sustainable and it has to be useful enough where it’s self-sustainable so all the angels around the state say, ‘You know what, this worked. We’re all getting better because we’re all helping each other,’ so it becomes like a member organization.”
The two other funds the MEDC seeks to create would provide capital to researchers at public universities in Michigan to prove the concept behind their innovations or would offer seed capital for entrepreneurs forming a business around an innovation.
The MEDC wants to have a university administer the $1 million University Early Stage Proof of Concept Fund that over two years would award around $20,000 each to various researchers.
As venture capital funds and angel investors move upstream with their investments to mitigate risks, university researchers have limited options to tap for financing to validate their ideas, Molnar said. The proof-of-concept fund seeks to address that gap and help researchers determine whether an idea is worth pursuing, he said.
“If it works, fantastic — move on to the next stage and keep on moving,” Molnar said. “But the other way to look at it is if it doesn’t work, then you just failed early and that could be a good outcome. It’s done. It doesn’t work. You’re done with this and let’s move on and try something else instead of tying up time and resources.”
The MEDC’s $2 million, two-year First Capital Fund would offer early-stage funding to newly created companies that seek to commercialize innovations. The nonprofit administrator chosen for the fund will decide how much it would invest in an individual company, although Molnar envisions awards of $50,000 to $150,000 each.
The First Capital Fund “would literally be the first capital into a true company” and could help to position a startup to subsequently seek backing from angel or venture capital investors, he said.
“I look at it like it’s almost priming the pump. This stuff has to happen and we’re trying to incentivize it and quicken the pace, and hopefully we get more ideas and keep deal flow going,” Molnar said.
Responses to the RFPs for all three funds are due to the MEDC on Oct. 28. Molnar expects the Michigan Strategic Fund Board of Directors to award administration contracts in November.