Michigan Budget Battle Pits Startups Against Road Infrastructure

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It had been tacitly assumed by many in the entrepreneurial ecosystem that Snyder—who arguably knows more about the importance of bolstering early-stage startups and getting them access to capital than most government officials—would veto any bills that called for dramatic reductions to the MEDC’s budget. But then, his silence on the issue started to make people nervous. Some wondered why he hadn’t met with leaders in the entrepreneurial community privately to reassure them.

That was the climate when the University of Michigan’s Office of Technology Transfer hosted an “unconference” in June. At an unconference, participants suggest and then vote on small-group discussion topics by writing down their thoughts on sticky notes and posting them on a gigantic white board at the front of the room. Someone wrote, “MEDC funding: Now what?” and slapped it up on the board.

The MEDC discussion group attracted a who’s who of entrepreneurial power players, including Chris Rizik, a VC and longtime friend and former business partner of Rick Snyder (and an Xconomist); David Brophy, a U-M finance professor and founder of the Michigan Growth Capital Symposium; Terry Cross, an investor and tireless mentor to Michigan’s tech startups (he’s also an Xconomist); and a host of others who work in various parts of the ecosystem. The group was divided; some wanted government to get out of the way of economic development or at least produce concrete return-on-investment figures, while others found the idea of trying to keep Michigan’s entrepreneurial and VC ecosystems afloat without the MEDC’s support unfathomable. Everybody in the group agreed that seeing the state’s emerging entrepreneurial ecosystem come to a screeching halt would be a bad thing.

Return on Investment: Now What?

Paula Sorrell runs her own management consultancy, but between 2011 and June 2015, she was the MEDC’s vice president of entrepreneurship, innovation, and venture capital. Economic developers in other states, she said, are envious of the kind of economic growth Michigan has been able to create through its programs supporting entrepreneurship. There are “enormous opportunities” for private investors in the state right now, she said—opportunities that likely wouldn’t be there if the MEDC hadn’t identified gaps in the ecosystem and created programs to address them. In particular, she said the programs that entice venture capitalists to invest in Michigan companies have been successful, and there continues to be a “serious need” for them.

“Most of the people who say early-stage funding isn’t necessary don’t have all the information,” she said, adding that her team at the MEDC started collecting data on program beneficiaries during her tenure. “It’s popular to say that government participation in economic development is bad. The pendulum has swung back and forth on this, but it’s a mistake to ignore the gains Michigan has made or to go back.”

Complicating the political fight over the future of the MEDC is the mechanism through which the department is funded. Part of its budget comes from gaming revenues generated by the state’s Native American tribes. Over the summer, the Gun Lake tribe announced it would stop making casino revenue payments to the state as a result of a dispute over Internet gaming, further affecting the MEDC’s bottom line.

For now, the MEDC’s key entrepreneurial programs are safe—sort of. The department’s spending plan for the current fiscal year has been resolved; for the 2016 budget that began on Oct. 1, the MEDC’s portion shrank from $481.7 million last year to $351.8 million, and the department laid off dozens of people, also effective Oct. 1.

According to the MEDC’s Nelson, $15 million has been allocated out of the department’s budget to support key entrepreneurial programs, down from $25 million the previous two years. (It’s a relatively small part of the department’s budget—in comparison, the MEDC has earmarked about $34 million toward the popular Pure Michigan tourism campaign.) The MEDC made the cuts because of the casino revenue shortfall; the question of where the state will find money to fix its infrastructure remains up in the air. According to my sources in the Michigan House of Representatives, HB 4607 and HB 4608, which would pull money from the MEDC’s budget and put it toward road repairs, have been sent to the Senate’s Government Operations committee, where they will likely die a quiet death.

What’s certain is that this issue isn’t going away, and whatever reprieves the 2016 budget granted are temporary. Michigan’s roads are no closer to being fixed, and sources say the state’s startup ecosystem is not yet sustainable through the private sector alone. The MEDC will have to keep convincing lawmakers—and thanks to term limits, there’s a new crop every two years—that the department deserves to continue its existence.

“The case most of us are making is, we’re not at the point of total private sustainability when it comes to the entrepreneurial ecosystem,” the Mercury Fund’s Fortino said. “We’ve made great progress, but we’re not there yet. If you pull the rug out now, you stand to lose all those gains along with our national credibility. I travel the country and see other ecosystems, and we’re close; we’re actually getting there.”

Fred Molnar took over Sorrell’s job at the MEDC this summer, and he said the MEDC’s current funding levels allow the department to pay for core entrepreneurial programs, at least for now. “It’s enough to keep the gears moving,” he said. “With road funding still out there, theoretically there can still be cuts to the general fund [where the MEDC’s budget is drawn from], so I’m not certain we’re out of the woods yet. We look solid now, but time will tell.”

He pointed to the MVCA’s data as an illustration of what Michigan’s entrepreneurial programs have done for the state. The MEDC’s leadership is committed to keeping programs like the Michigan Pre-Seed Fund intact, he said, as evidenced by the department’s 2016 strategic plan outlining eight key priorities, one of which is “entrepreneurial and economic gardening services.”

Michael Psarouthakis

Michael Psarouthakis

The MEDC has hired Ohio-based nonprofit research and development firm Battelle to analyze the data Sorrell and her colleagues collected for the past few years to illustrate the efficacy of its programs. The report was originally slated to be released over the summer, but Nelson said she now expects the results will be made public by November. She declined to comment on the report’s contents, saying she hadn’t seen it yet.

Molnar said the purpose of the Battelle report is have an independent third party analyze the entire entrepreneurial ecosystem to determine the return on investment for the MEDC programs. Those numbers will also be used to benchmark the MEDC’s performance compared to other states. Molnar said he’s seen some of the initial data, but he didn’t want to get into specifics. “My gut feeling is that, overall, it’s going to be complimentary,” he said.

While the startup community anxiously waits for the Battelle report, many wonder what will happen to new ventures that have come to see MEDC programs as a necessary component of business development in the state.

“I’m optimistic,” U-M’s Psarouthakis said. “In the startup world, we see so much activity. Ann Arbor is rocking right now, and there are great things going on in Detroit and Grand Rapids. People are starting to get it. Could it be better and faster? Sure. But no matter where the action is, the whole state benefits greatly even if it’s regional. The money paid in taxes alone benefits the entire state.”

Earlier this month, Gov. Snyder was in Silicon Valley with Doug Rothwell, who heads up Business Leaders for Michigan. They were there to sell Michigan expatriates living in the Bay Area on all the changes afoot in the Great Lakes State—the burgeoning startup scene, investment opportunities, and abundance of good-paying tech jobs. Some would argue that none of those selling points would exist if the MEDC and its programs supporting entrepreneurs and venture capitalists hadn’t bolstered the ecosystem. (And those supporters see a massive disconnect in having the governor of Michigan touting the state’s entrepreneurial and economic gains while some of his fellow Republican leaders are pushing measures that would yank funding from the programs.)

Ultimately, the fact that more Michigan entrepreneurs aren’t vocally touting their successes—whether individual or collective, and to lawmakers or the masses—is another issue in the fight to preserve the MEDC programs, Psarouthakis said.

“That’s a Midwestern challenge; we’re not very good at giving ourselves credit even when credit is due,” he added. “That’s a problem. Legislators who don’t see any direct benefit in these programs are going to say, ‘I don’t see any jobs.’ The entrepreneurial community really needs to get the word out about where we want to go and what we want to do. There are dramatic benefits to the entire state, and it would be a shame if the programs were eliminated.”

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Sarah Schmid Stevenson is the Custom Content Editor for Xconomy Insight. You can reach her at sschmid@xconomy.com. Follow @Xconomy

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