Venture capital investing in Michigan maintained a steady growth trajectory in 2015, but industry executives see some potential headwinds beginning to emerge for the sector.
Namely, venture capital firms failed to meet their fundraising goals last year, resulting in a gap of $274 million between the available funds for follow-on investments and the collective demand from venture capital-backed companies.
Another cause for concern: For the first time since the Michigan Venture Capital Association (MVCA) began tracking the industry, the number of venture capital firms headquartered in Michigan last year actually declined, albeit modestly.
Still, venture capital investing hit new highs in a number of areas. Capital under management by both Michigan-based and out-of-state venture capital firms reached a record $5.26 billion last year, up from the $4.84 billion in 2014 and about double the amount of five years earlier, according to an annual research report from the MVCA.
The 2016 research report highlights the continued progress made since 2001 in building the venture capital industry in the state.
“We really have firmly established venture capital as part of what makes Michigan’s economy thrive,” said MVCA Executive Director Maureen Miller Brosnan. “Entrepreneurs in Michigan and those that invest in them are a big part of what has not only brought about the Michigan economic recovery but we are a big part of what’s going to move Michigan forward and sustain its diversified economy.”
The venture capital sector in Michigan remains a young industry and activity in the state pales in comparison to other top areas such as California. But while venture capital nationally has yet to return to pre-recession levels in terms of the amount invested and the number of active firms, the industry has made progress in Michigan over the last 15 years, Miller Brosnan notes.
Investments nationally are down 37 percent from 15 years ago, but have more than tripled in Michigan in the same period of time, she said. Nationally, the 798 venture capital firms combined had $165.3 billion under management in 2015, compared to 973 firms with $262.0 billion under management in 2001.
“We have a lot of really great ideas and talented people that are launching startups in Michigan. We have the capital to move them along and advance them, but we also have great opportunity for out-of-state investors to come in and also buy in and invest in those ideas,” Miller Brosnan said. “We appear to be the land of opportunity.”
Michigan-based venture firms had $2.21 billion in capital under management at the end of the year, double what they managed four years earlier. Firms based elsewhere that maintain an office in the state had $3.05 billion under management, twice the amount in 2009.
Seventy-four companies in Michigan collectively received venture capital investments of $282.5 million in 2015, a 48-percent increase over five years and up 174 percent from a decade earlier. Venture capital firms funded 32 Michigan startups last year.
Michigan is presently home to 141 venture-backed companies in Michigan, up 48 percent from 2010, according to the MVCA report.
FUNDRAISING FALLS SHORT
Amid the industry’s progress, however, the 2015 research shows that firms operating in Michigan came up short in their fundraising goal of $500 million.
Firms that raised funds during the year collectively netted $389 million from investors, a shortfall of 35 percent. If you exclude the $220 million that was raised by Ann Arbor-based Arboretum Ventures Inc. that ended up oversubscribed and was the largest ever capital raise in Michigan, the fundraising shortfall was 66 percent, according to the MVCA.
The annual research report also shows the number of venture firms headquartered in Michigan dipped from 26 to 25 last year, although their ranks remain well above years ago. There are another 11 venture firms that maintain an office in Michigan but are based elsewhere.
The decline in firms based here was the first ever for the MVCA and is cause for concern, according to the organization.
“Taken in tandem with the less-than-successful fundraising results in 2015, it could be an indication that venture firms are finding Michigan less hospitable to venture activity than other parts of the country,” according to the MVCA report. “If venture firms aren’t able to raise the capital they need to invest in Michigan, they may be forced to cease their investment activities in Michigan, creating a dire access-to-capital issue for startup companies in Michigan.”
The fundraising shortfall came as the 141 Michigan-based portfolio companies backed by venture capital have an estimated collective demand for $661 million in capital, and venture funds have just $387 million available for follow-on investments. That leaves a venture capital gap of $274 million.
For Miller Brosnan, the fundraising shortfall last year “causes you to take a step back and say, ‘I wonder if this is the beginning of something? Or is this just a blip on the radar?’”
“It’s something we need to keep an eye on,” she said. “Our venture capitalists are really watching it seriously.”
At the angel level, groups invested $16 million into startup companies statewide last year, according to the MVCA.
The nine angel groups across the state had 294 investors, a 59-percent increase from five years earlier. Michigan had 128 startup companies backed by angel investors, up 42 percent from 2011.