Gov. Gretchen Whitmer seeks to inject $200 million into Michigan technology startups using federal pandemic relief funds.
As part of a broader $1.52 billion proposal for using federal American Rescue Plan Act funding that Congress approved in March, Whitmer’s Startup Resiliency Initiative would put $140 million into direct equity investments in tech startups with venture capital and angel investors.
Another $50 million would fund grants for business accelerators, emerging technologies and microloans, as well as three new capital funds. The remaining $10 million would go toward supporting technical assistance for angel investing networks, mentor-in-residence programs, SmartZones across the state, and business and financial training for startups.
With the proposed Startup Resiliency Initiative, the Whitmer administration wants to support the “many tech startups (that) are faced with significant economic challenges, including issues with cash flow and resources needed to support their technology development, employees and customers” during the COVID-19 pandemic, according to a 42-page plan that outlines how the state could use the federal funding.
“What we’re recognizing is the importance of the tech startup ecosystem here and the critical role it plays in growing the state’s economy,” said Josh Hundt, executive vice president and chief development officer with the Michigan Economic Development Corp. The MEDC worked closely with the administration and a “broad range of stakeholders” to develop the proposal, he added.
“By investing $200 million into this, we can specifically target an entrepreneurial and high-tech ecosystem through a more conducive environment for them, high-tech and high-growth opportunities, and continue to see the overall resiliency of Michigan’s economy,” Hundt told MiBiz. “We know that the startup ecosystem and these risk-takers have been hit hard over the 20 months of the pandemic, and they’re going to play a critical role in Michigan in the economic recovery.”
VC trends, bridging the gap
Whitmer has also set a goal to make Michigan a top 10 four-season state for venture capital investments, Hundt said.
Last year, venture capital investors backed more Michigan startup companies than ever before, although the amount invested in deals declined by half in a year when the COVID-19 pandemic altered deal flow. The sharp decrease in the amount of venture capital invested — from $514 million in 2019 to $257 million in 2020 — occurred as the number of investments in Michigan-based startups increased from 71 to a record 88 companies, according to an annual report from the Michigan Venture Capital Association.
Angel investors put $49.5 million into 102 startups in 2020 compared to $73.6 million in 106 startups in 2019, according to the MVCA.
At the end of 2020, Michigan venture capital firms had $431 million available for follow-on investments in portfolio companies, while the 165 startups backed in the last two years require a collective $1.2 billion in additional capital in the next two years to grow, according to the report.
While the amount that Whitmer proposes for angel and venture capital equity investments falls far short of what’s needed, Hundt hopes venture capital investors can leverage the state money with private capital to help to ease the capital gap in Michigan.
“There certainly are more good ideas (in Michigan) and more needs for startup assistance than has been available,” he said. “We believe a program like this with partners across the state in the ecosystem can ensure that there’s more venture capital assistance here, so the companies that start here can stay here and grow here.”
Whitmer’s plan for using $1.52 billion in American Rescue Plan funds for a wide array of initiatives — from economic and community development to support for small businesses and worker training and education — requires approval from the Republican-controlled Legislature.
One West Michigan-based venture capital investor who examined the Startup Resiliency Initiative proposal said he liked what he saw.
“The Startup Resiliency program sounds like a great initiative to support Michigan’s startup community for pre-seed, seed, and growth-stage companies and (venture capital) funds. Pre-Seed and Seed stage support is particularly important as the companies are typically in the early days and need that first funding to build teams and product before they get to the stage that coastal investors would engage,” Tim Streit, co-founder and general partner at Grand Ventures in Grand Rapids, wrote in an email to MiBiz. “As a VC, over the last 10-plus years we can really see the correlation between the sophistication and strengths of early-stage companies and the amount of early-stage support and capital. They go hand-in-hand. So if we believe in building a strong and diverse economy with well-paying jobs, this seems like a great initiative.”
Adrian Fortino, advocacy chair for the Michigan Venture Capital Association, hopes the Legislature will consider the proposal early in 2022.
Fortino, managing director of the Ann Arbor office of Houston, Texas-based venture capital firm Mercury, said there’s general awareness among state lawmakers of the need for greater access to capital for Michigan startups.
“We certainly believe there’s a great deal of support and acknowledgment that this is necessary for the state. We foresee broad support for this sort of effort. What we just hope is that it’s not lost in other things,” Fortino said. “For the companies and the funds that could get access to this, this is meaningful money that will really move the needle, so we’re just trying to make sure with all of the priorities that are in front of our legislators, that this remains as top of mind as possible.”
MVCA Executive Director Ara Topouzian views the proposed Startup Resiliency Initiative as a way for the state to partner with private venture capital investors.
The state many years ago provided funding to venture capital investors with a “fund of funds” that spurred growth in the emerging industry in the early 2000s and contributed to creating a greater startup culture across Michigan.
Topouzian believes Whitmer’s Startup Resiliency Initiative using American Rescue Plan funds “is going to be an opportunity that we may never see the likes of again.” The initiative’s approval could send a strong message to investors about the state’s support for venture capital investing and for startups, possibly spurring the flow of more capital from within and investors outside of Michigan.
“This is the first time in a very long time such an emphasis is being made for the tech community,” he said. “My hope would be that this is the tipping point for more activity.”