Published in Small Business

State extends funding to pair of capital funds

BY Sunday, October 28, 2018 03:26pm

The Michigan Strategic Fund steered additional money into two capital funds that support high-tech startups and growing small businesses in the state.

The Invest Michigan Pre-Seed Fund II received $3 million to invest in startups through loans or equity. Grow Michigan LLC will receive $9.6 million for a second mezzanine-style fund that will provide loans to growing small businesses.

Fred Molnar COURTESY PHOTO

State investments in both funds earned approval last week from the board of the Michigan Strategic Fund, which wants to continue to try to fill gaps for businesses seeking capital.

For startups, the capital gap exists at the earliest stages, said Fred Molnar, the vice president of entrepreneurship and innovation for the Michigan Economic Development Corp.

“There is a shortage of early-stage capital and a surplus of great ideas,” Molnar said. “There are just all kinds of ideas all over the state. Who knows if they’re going to be effective and turn into companies, but there’s not enough money in the ecosystem. Even with the money we’re putting in, there’s not enough money in the ecosystem by far.

“If we don’t do it and others don’t step up to do it, then those ideas are just going to wither on the vine. They’re not going to go anywhere. They either just stop or they might move out of state and go somewhere else where they can find money.”

The Michigan Strategic Fund initially awarded Invest Michigan $7.9 million in February 2014 to invest in new technology companies, and made follow-up investments of $2.5 million in September 2015 and $1.75 million a little more than a year ago.

Startup companies can apply to the fund for investments of up to $500,000 that would generally come in phases, as the business meets certain thresholds, Molnar said. The funding is intended to help high-tech startups move along their development phase and into the marketplace or to get positioned to attract angel capital or venture capital backing.

“It’s designed to either get them to product launch and revenue, or to the point a true angel or VC would be interested in them,” Molnar said.

Since mid 2015, Invest Michigan has made 88 investments totaling a little more than $10 million in 49 startup companies that went on to collectively attract $93.9 million in follow-on investments and generate $56 million in new sales, according to a memo Molnar wrote to the Strategic Fund board.

Further up the capital continuum, Grow Michigan provides loans to companies operating in the state that need growth capital. Loans are generally for companies with annual sales of $50 million or less that need between $2 million and $6 million.

The Michigan Strategic Fund first backed Grow Michigan with $10 million in 2012 “to provide economically competitive growth and acquisition capital to small businesses shut out of that market due to scale,” Molnar wrote in a memo to the Strategic Fund board, noting that companies often struggled because the size of their loans was “too small to be profitable for the lender.”

The state investment followed a 2008 MEDC study of banks in Michigan that “identified a material weakness which exists in nearly all capital markets and which has been addressed successfully in a number of other states,” Molnar wrote to board members.

Grow Michigan leveraged the $10 million Strategic Fund investment with $42.7 million put in by 16 banks across the state to create a mezzanine loan fund that went on to provide subordinate debt to 30 companies totaling $56.2 million. Borrowers then were able to attract $303.7 million in senior debt and equity, according to Molnar’s memo to the Strategic Fund.

The fund has closed two loans so far in 2018 totaling $10 million.

CEO Patrick O’Keefe, whose Bloomfield Hills firm O’Keefe & Associates Consulting LLC took over managing Grow Michigan a year ago, expects to close four more loans by the end of the year totaling another $10 million, which will make 2018 “one of the better years ever.”

Most of the loans are to growing manufacturers, O’Keefe said. Two loans he expects to close are for companies in the automotive sector.

Within 30 to 45 days, Grow Michigan formally will begin to approach banks that supported the first fund about investing in Fund II. He expects that many of the original investors will put money into the next fund that could total $50 million to $60 million

“The feedback we have from the banks is they like the product and they want to continue to participate,” O’Keefe said. “I fully anticipate that we’ll get great participation from our existing banks and a few more.”

Investing in a fund like Grow Michigan not only generates business for the banks, but also earns them credit for complying with the federal Community Reinvestment Act, he said.

Grand Rapids-based Mercantile Bank Corp., one of the banks that originally invested in Grow Michigan six years ago, will consider getting involved in Fund II.

“Grow Michigan seems to have provided a valuable resource in supporting Michigan businesses,” Mercantile President and CEO Robert Kaminksi wrote in an email to MiBiz. “We will certainly evaluate participation in Fund II, and if it looks as promising as the first fund, odds of our participation would probably be favorable.”

The Michigan Strategic Fund in November 2017 approved an extension of its original five-year commitment to Grow Michigan for two years through 2019. The commitment was set to expire at the end of last year. 

Molnar told Strategic Fund board members that “significant demand still exists for mezzanine capital as is currently being provided.” 

“Based on available capital and the existing pipeline of new projects, management of (Grow Michigan) anticipates available funding for investment in new projects to be exhausted prior to the end of the extension and likely at some time in early 2019,” Molnar wrote. 

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