High-Net-Worth Michiganders: Time to “Get Off the Dime,” Brophy Says
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Funding Gaps and the Swinging Pendulum of Politics
Chris Rizik, a Detroit/Ann Arbor Xconomist who leads Renaissance Venture Capital, a fund of funds, agrees with Brophy. He says the total amount of capital under management is “still looking good,” but he sees a potential capital gap, particularly for funds relying on contributions from Michiganders.
“The amount of VC here is still really strong—the past three years were the best ever,” he says. But shaking money loose from local investors remains a challenge. “A few Michigan VC firms have been really successful in raising money, but the concern is we’ll create a situation where we have haves and have nots. Some of this gap is the normal course of things, but to continue to strengthen the VC ecosystem, institutional investors and family offices have to be more engaged.”
Rizik says his firm has recently been making an effort to get major corporations involved in startup investing. “So far, it’s working really well,” he says. “But we still have a situation where major foundations and endowments are less active in Michigan than other places. The MVCA has done successful recruiting events that have borne some fruit, but we still have a problem.”
Rizik sees another dynamic at play: the number of smaller institutional investors in Michigan that are moving to an “outsourced Chief Investment Officer” model, where the person making the investment decisions is outside the state and may not have had much exposure to Michigan’s homegrown investment opportunities.
“The idea of outsourcing is good, but there needs to be some accommodation for the local investment community, like having the CIO set aside time to meet with local investors,” he says. He points to a recent deal where Renaissance invested in Next Coast Ventures, a firm based in Austin, TX, as a way of getting out-of-state VCs looking at Michigan companies. “Once people get exposed to Michigan, they see opportunities,” he adds.
Jonathan Murray, managing director at Draper Triangle Ventures, sees a combination of issues affecting Michigan’s venture capital picture, including a risk-averse Midwestern investing culture and changing politics at the state capitol. The “cycle of commitment” involved in economic development work, he says, is fairly lengthy compared to Michigan’s political cycles, where term limits kick people out of office after a handful of years.
“People lose interest, and we’re seeing that a little here, too,” he says. “Budget decisions have to be made and there are shifting priorities. We’re seeing a cycle now where money that could be available for VC is being put toward other things.”
The idea of using a fund-of-funds to attract more investment capital to Michigan has been a mixed success, in his opinion. While he praises the work done by the MVCA and Renaissance, he says there are two kinds of out-of-state funds: those that honor their commitments, and those that don’t. When legislators are looking at past programs, they want to know what kind of returns they yielded.
“Those can be hard questions,” he admits. “If legislators don’t hear the answers they want, the enthusiasm diminishes, especially when resources are limited. That’s where we are right now.”
Murray looks to Ohio as an example of what not to do. Like Michigan, Ohio’s government established a fund-of-funds in the mid-aughts, the $150 million Ohio Capital Fund, that was fully committed a few years later. Then the political winds changed direction, and a new governor was elected who felt the private sector should take it from there to avoid turning into corporate welfare. Ten years of momentum, Murray says, have now dissipated.
“Most Midwestern states recognized they needed to prime the pump, and Michigan did a particularly good job, but the support needs to be sustained over time,” Murray says. Reporting VC numbers annually is an artificial way to measure in the first place, he says, because looking at trends over a longer cycle is more meaningful.
After all, he says, the roots of Austin’s transformation, where a Texas college town morphed into a bustling, tech-driven metropolis over roughly the past two decades, had its roots in a series of meetings between the state government, the University of Texas, and the Texas Chamber of Commerce—that took place in 1957, about 40 years before the transformation began.
“The overall trend in Michigan is up, but there is a bit of a lull in support,” Murray says. “The MVCA does a good job in gathering and reporting data and educating legislators about the value of the sector, a lot of which is intangible. It’ll be interesting to see how it shakes out.”