As Michigan VC Scene Matures, Funding Gaps, Diversity Remain Challenges

In venture capital circles, one often hears that it’s not particularly useful to look at trends year over year; instead, analysts counsel, one should study trends in five-year cycles to get a more accurate picture of where things are.

From that perspective, Michigan’s venture capital scene seems to be healthier than it was five years ago, and certainly 10 years ago. But, amid a decline in venture capital deployed to Michigan startups for the second year in a row, there are still issues to work out, and signs of possible trouble ahead.

Looking at the Michigan Venture Capital Association’s (MVCA) annual report, released last month, the amount of venture capital raised in the state in 2017 was down from 2016. But some leaders in the local startup community say they aren’t worried—this is simply market ebb and flow, they say, or what typically happens in smaller VC markets as they grow and mature.

Statewide, the numbers are holding relatively steady, but in Detroit, venture activity has plummeted since its high point in 2014. A few of the other concerns voiced by local investors and startup leaders: Getting more high-net-worth Michiganders involved in local startup investing continues to be a challenge, although one that seems to stem at least partly from a lack of awareness of the opportunities that exist. Some venture capitalists feel there is an over-reliance on out-of-state capital to fund local companies, putting those companies at risk of relocating to be nearer their backers. Other VCs we talked to lamented shortages in seed funding and follow-on funding for existing venture-backed portfolio companies. Meanwhile, the already-dismal amount of capital going to diverse founders in Michigan—women, people of color, and members of the LGBTQ community—remained a small fraction of the total VC invested in the state last year.

But in Michigan, it’s hardly all doom and gloom. The state’s universities reliably pump out compelling intellectual property, there is some of the most abundant engineering talent on the planet, and the life sciences and IT sectors remain robust. Mobility companies saw an uptick in funding in 2017—a sector that is predicted to grow in the state as the development of autonomous vehicles ramps up.

However, as the initial excitement regarding Detroit’s transformation settles and the practical business of maintaining a venture investment community intensifies, Michigan VCs are considering the next steps.

“I see growth over the past five years, and I definitely see a heightened need for additional capital and new funding,” says Maureen Miller Brosnan, the MVCA’s executive director. “Overall, I see a growing and maturing of the ecosystem.”

According to the latest MVCA report, in 2017, there were 134 venture-backed companies in Michigan, up 26 percent from the total five years ago, but down slightly from last year, when there were 141. (The report doesn’t specify whether last year’s decline is a result of startups getting acquired, shutting down, or leaving the state.) There was a total of $179 million in venture capital invested in 68 Michigan startups in 2017; in 2016, the MVCA reported $222 million invested in 54 companies. That was down from 2015—the high-water mark of the past decade—when 74 Michigan startups pulled in $282 million in venture capital.

The venture capital firms operating in the state managed a total of $3.88 billion in 2017, the MVCA said. That represents a small dip from the previous year, when there was $4.02 billion in total capital under management, and a bigger drop from 2015, when $5.26 billion was under management.

The 2017 report also found that $403 million in venture capital is reserved … Next Page »

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