Venture capital funds based in Michigan more than doubled the amount they invested in startups in 2018, although the money went to fewer companies.
That’s one of the findings in the annual research report issued Monday by the Michigan Venture Capital Association. The report shows 61 startup companies collectively received $385 million in venture capital last year, the largest amount ever invested in one year in Michigan. That compares with $179 million invested in 68 startups in 2017.
The amount of venture capital invested in Michigan last year was more than three times the total in 2013, and the number of startups receiving funding grew more than 50 percent during the same period.
Along with the sizeable growth in the amount invested in 2018 came a wider gap in capital needs in the years ahead for the 140 venture capital-backed companies operating in Michigan.
Those companies need an estimated $967 million in follow-on venture capital investments over the next two years, according to the MVCA’s 2019 research report. Michigan-based funds have about $337 million reserved for follow-on investments, meaning companies will need to attract outside venture capital to fulfill their needs.
Given the growth in venture capital investing in Michigan in recent years and the maturation of venture capital-backed companies, MVCA Executive Director Ara Topouzian classifies that need as a good problem to have.
“People look at it and say, ‘This is great. We’re investing properly and there’s some interest,’ but it’s also saying that there’s just not enough,” said Topouzian, who joined the MVCA as executive director last month.
“We have definite talent in this state and the entrepreneurial community is doing some wonderful things, but they need the capital and that seed money to get going, so it’s kind of a double-edged sword of sorts,” he said. “We have the critical components to building a strong entrepreneurial and investment community — talent, research, capital and community — but as these companies reach their next stages of growth, we need additional capital to sustain it.”
Last year saw the largest venture capital deal ever recorded in Michigan, with a $77 million Series D investment in December for Kalamazoo-based Ablative Solutions Inc., which developed a catheter system to treat uncontrollable hypertension by deactivating nerves in renal arteries. That deal was co-led by Netherlands-based Gilde Healthcare and included Petoskey-based BioStar Ventures, Grand Rapids-based Michigan Accelerator Fund 1 and Kalamazoo-based Novus Biotechnology Fund.
On top of the amount of venture capital invested by Michigan-based funds, angel investors in the state put $52 million into 84 startup companies last year. That compares to more than $41 million that angels invested into 37 startups in 2017.
The number of angel investors in the state grew to 859 individuals at the end of 2018, up from fewer than 800 a year earlier and more than double the number from five years ago.
At year’s end, Michigan had 11 active angels groups. Two more have since been formed in 2019 in the Detroit area with Woodward Angels, an affiliate of Grand Rapids-based Grand Angels, and Birmingham Angels.
Venture capital funds managed by universities and economic development organizations in Michigan also grew last year to $46.8 million, a 19-percent increase from the prior year. During 2018, those funds invested $5 million into 47 startups, with 80 percent of the money invested at the seed capital stage.
Despite the year-to-year growth in venture capital invested by Michigan funds, total capital under management declined for the third straight year to $3.73 billion from $3.88 billion in 2017. Total capital under management in Michigan peaked in 2015 at $5.26 billion.
Since that time, capital under management by venture capital firms based elsewhere but with a presence in Michigan declined from a peak of $3.1 billion in 2014 to $1.53 billion last year. Capital under management by in-state venture capital funds held relatively steady since 2015 to end last year at $2.2 billion.
One of the MVCA’s goals is to increase the out-of-state capital flowing into Michigan, said Topouzian, who described the decline over the last few years as “something to keep an eye on, absolutely.”
“We would certainly like to see other investment looking to Michigan, more so than maybe it has been,” he said.
The decline in capital under management by out-of-state venture capital firms could reflect that they deployed their available capital in Michigan and are no longer actively investing, or recorded exits from their investments.
Twenty-seven venture capital firms were active in Michigan last year, 21 of which are based in the state. That’s down from a peak of 26 in-state firms in 2014.