Michigan’s venture capital industry maintained steady growth in the last year, although fewer out-of-state venture firms have an office in the state.
Three firms based elsewhere closed their offices in the state in 2016 after deploying their available capital in Michigan-based startups. That led to a decline in the overall capital under management in Michigan, even as the amount managed by venture firms headquartered in the state grew.
“They deployed all of their capital at this point and they’re done. We think that that’s part of Michigan’s market refining itself,” said Maureen Miller Brosnan, executive director of the Michigan Venture Capital Association. “In-state, we appear to be holding up very well.”
The overall amount of venture capital under management in Michigan by both out-of-state and in-state firms declined to $4.02 billion in 2016 from $5.26 billion in 2015, according to the MVCA’s annual research report released today.
The annual report provides an in-depth look at venture capital in Michigan.
Last year represented the first decline in capital under management since a dip in 2009, as the recession was taking hold, and just the second decline since the MVCA formed in 2001, when total capital under management totaled just $502 million.
Miller Brosnan attributes the sharp decline in 2016 to Michigan office closings by Cambridge, Mass.-based Flagship Ventures, Open Prairie Ventures in Effingham, Ill., and Cleveland, Ohio-based Early Stage Partners. Their departure from the market lowered the total number of venture firms doing business in Michigan to 33 at the end of 2016.
Out-of-state venture capital began flowing into Michigan a decade ago and its growth coincided with the formation of the Michigan Venture Fund by state lawmakers in 2006. The Michigan Venture Fund invested in venture firms backing startups based in the state and helped to lure firms here, significantly increasing the available capital pool. State lawmakers have been reluctant to create a successor Michigan Venture Fund.
Even with three fewer firms with an office here, Chris Rizik of Renaissance Venture Fund in Ann Arbor noted that out-of-state capital in Michigan remains high and above the level of 2011. The founder and a partner at Renaissance Venture Fund, which invests in other venture funds in Michigan and the U.S., said the state gets much more attention nationally today than ever before.
Of the 25 funds across the nation in which Renaissance Venture Fund invested, 60 percent had never previously done a deal in Michigan, Rizik said. Nearly all have since invested in the state or are close to doing a deal, he said.
“We have more funds around the country looking at Michigan than I have ever seen before. Whether they have offices here or not, they’re still coming around and looking and that’s the most important thing,” Rizik said. “The number of firms that are coming regularly to Michigan and are regularly looking at deals is the best it’s been. And every time we have a success, that makes it even more likely that out-of-state funds are going to come in here and look, because they want to look at places they can make money and find good deals.”
Overall, the industry “is certainly in the best shape I can ever remember us ever being in,” said Rizik, a 20-year veteran of the industry in Michigan.
There’s no indication out-of-state firms that closed offices in 2016 left for any reason other than having deployed their available capital, Miller Brosnan said.
“We’ve only see it for one year, but it is something we’re watching and we’re hoping that legislators watch it along with us, because while we’re not certain it’s an indication of anything other than what the market looks like at this point, it is noticeably different than what we have experienced here in the state,” she said.
Among the 25 venture firms based in Michigan, capital under management grew 9 percent last year to $2.4 billion from $2.2 billion a year earlier. The average amount of capital under management by Michigan-based venture firms grew in 2016 to $96 million from $88 million in 2015, and the average fund size increased to $50 million from $45 million.
Michigan-based venture firms invested $222 million last year in 54 startup companies, a decline from the $282 million put into 74 companies in 2015. The decline is likely the result of a normal investment cycle and follows a decline nationally in the amount invested and startups that got funding, Miller Brosnan said.
“We’ve seen this pattern evolve from 2011 to 2016 and expect that, as Michigan’s entrepreneurial and investment community matures, the ebbs and flows will be less dramatic,” the MVCA research report states.
Data from the MVCA shows the industry in 2016 continued a long-term growth pattern.
Over a five-year period, the number of active Michigan companies backed by venture capital grew 48 percent to 141 and the number of venture professionals working and investing in the state was up 41 percent.
The number of venture firms based in the state grew 25 percent, total capital under management increased 60 percent, and startups receiving funding grew 42 percent. Available capital for new investments increased 55 percent from 2011 to 2016, to $568 million, although that’s down 37 percent from 2015, due to the departure of the three out-of-state firms.
Despite the dip last year in out-of-state firms with offices here, the industry “is holding pretty steady” in the total number of venture firms operating in Michigan, Miller Brosnan said.
“That’s just churn and the normal turnover of business,” Miller Brosnan said. “The fact that we’re able to remain steady like that tells me we’ve built a really strong investment community here in the state and that we’re here to stay.”
Venture firms have about $424 million available for follow-on investments in existing portfolio companies in Michigan. That’s up 10 percent from a year earlier, but short of the estimated $504 million demand in the next few years.