Michigan’s venture capital industry needs to accelerate its growth even after the steady progress it has made in the last decade.
That’s according to Tom Shehab, the chairman of the Michigan Venture Capital Association and managing director at Arboretum Ventures in Ann Arbor.
Entrepreneurial activity has been on the rise in Michigan, and the state’s research universities rank among the nation’s leaders in patents and innovation, Shehab said. Yet there remains a constant gap in what VC-backed firms in Michigan need and what’s available today, he said.
All of that points to the ever-present need to grow the pool of in-state and out-of-state capital available for startup companies in Michigan that need funding.
“We need to accelerate strategy,” Shehab told MiBiz. “There are signals there of us going from crawling to walking, but now what we need to do is to be able to run. We need to keep watering the ecosystem so it grows and continues to bring in capital.”
Shehab offered that assessment following the release of the MVCA’s annual research report for 2018 that details the state of the venture capital industry in Michigan.
The report shows that Michigan continues to draw more outside capital to support startup businesses. Out-of-state capital under management by venture capital firms with a presence in Michigan inched up $90 million to $1.71 billion last year. The growth, albeit small, contrasts with a sharp decline from 2015 to 2016 after some outside firms moved on from Michigan after deploying the capital they had available in the state.
Even with the falloff from 2015 to 2016, out-of-state capital in the state remains ahead of where it was earlier this decade.
Shehab sees the upward movement in 2017 as further indication of how venture capital investors elsewhere in the nation are increasingly pursuing deals in the state and across the Midwest. He also cites data showing that for every $1 that Michigan-based companies raise from in-state VC firms, they attract another $3.83 in out-of-state capital.
According to Shehab, that ratio is “pretty remarkable when you think about it.”
“A lot of things are necessary in order for that to happen. You have to have great companies, you have to have great VCs and ecosystems to support those companies, and then you have to have the connections for those people to be interested to come to Michigan and invest in companies,” Shehab said. “There is a continued recognition of the importance of Michigan as a hub and it being attractive to VCs from all over the country and all over the world to come and co-invest with the folks that are here.
“It still needs to continue to grow and it’s something that we should always pay attention to, but the signals are all very positive.”
As out-of-state capital grew in 2017, in-state capital under management by Michigan-based VC firms declined from $2.40 billion to $2.17 billion, although it remains well above three years earlier.
Shebab doesn’t look at the year-to-year change for in-state capital as “being particularly concerning,” preferring to take the long view of multi-year trends, “but without attention — meaning us all having constant vigilance on it — that’s something that could have a significant impact over time.”
Statewide, 68 Michigan-based companies collectively received $179 million in venture capital investments in 2017.
FILLING THE ‘CAPITAL GAP’
The 134 venture capital-backed startups now operating in Michigan require $627 million in additional capital over the next two years to support growth, according to the MVCA. In-state and out-of-state firms have $403 million available for follow-on investments in portfolio companies to fund their growth.
That finding “does heighten our awareness that there does need to be more capital in the state of Michigan,” said MVCA Executive Director Maureen Miller Brosnan. “We have a maturing community here, so we need funds now for all stages of growth.”
Venture capital firms with a presence in Michigan last year raised $202 million of a targeted $369 million, and 11 firms based in Michigan are presently seeking to raise $657 million this year, according to the MVCA.
The so-called “capital gap” between what’s needed and what’s available will always exist “until an ecosystem becomes very, very robust and broad in scope and scale,” Shehab said.
MVCA research further supports a need to elevate the growth of both in-state and out-of-state capital flowing in Michigan, he said.
“We have an exciting and vibrant venture capital community in Michigan that is critical to driving economic growth in the state, but the data also speaks to the importance for us to continue to grow and support the venture capital community,” he said. “There’s good momentum. We can always do more.”
Among the firms raising money, Birmingham-based MadDog Ventures closed this month on its first venture capital fund, Mad Dog Venture Fund I L.P., after raising $26.6 million, exceeding a $25 million goal. The fund plans to target companies that develop and market cloud-based business applications.
BELLE Michigan Impact Fund in Detroit this month reported it had raised $3 million of a targeted $20 million for venture capital fund, according to a filing with the U.S. Securities and Exchange Commission.