As Michigan VC Scene Matures, Funding Gaps, Diversity Remain Challenges
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for follow-on funding for existing portfolio companies—an increase from 2016’s $387 million. But the MVCA estimates $627 million in additional capital is required to adequately fund the growth of Michigan’s 134 startups for the next two years, meaning there is a $224 million shortfall.
“Challenges continue in the area of fundraising, unlike ecosystems that have been around for a long time, but that gap is significant,” Brosnan says. “We have to find a way to fill that gap.”
Of the $179 million invested in Michigan startups in 2017, $11.4 million went to eight companies led by a diverse founder, the MVCA reports. The 2016 report noted $6.8 million was invested in 13 local companies led by a diverse founder. Nine percent of Michigan’s VC-backed startups were led by a woman, person of color, or member of the LGBTQ community in 2017, compared to 17 percent in the 2016 report.
Brosnan calls the 26 percent increase in venture-backed Michigan companies over the past five years a bright spot in the report, and points out that 2017’s 68 companies receiving venture funding is double the number that snagged backing five years ago, when 34 companies received $242 million.
Michigan’s venture capital sector has come a long way since 2007, when the MVCA began tracking data. That year, nineteen Michigan startups raised $105 million in venture capital. From 2007 through 2011, an average of 28 local startups raised $177.6 million each year, according to MVCA data. Over the past five years, those annual averages rose to more than 64 startups raising nearly $250 million each year. Since 2007, a total of 472 firms located both inside and outside of Michigan have invested in local startups, the MVCA said.
Despite that growth, Michigan’s VC community is shrinking. The state had a total of 87 investment professionals working at 29 venture firms in 2017, down from 93 VCs at 33 firms in 2016. In comparison, the MVCA’s 2014-15 report said 115 VCs were working in Michigan, meaning the state has lost nearly a quarter of its venture capital professionals in the past three years.
“It’s not amazingly concerning because it reflects maturity,” Brosnan maintains. “Some VCs are retiring. It’s ebb and flow, but we need to make sure we’re backfilling [the ecosystem] with young entrepreneurs.”
Looking at earlier-stage deals, angel investment activity in Michigan has exploded: the MVCA tracked 797 angel investors in 2017, up 229 percent from five years earlier, Brosnan says. “That’s a good sign,” she says. “And it only captures those involved with one of the state’s 11 angel investing groups—there’s really no way to capture the number of individual investors.”
In Brosnan’s opinion, Michigan continues to gain momentum. “Michigan is still a popular place to launch companies,” she says, pointing to Autobooks and Lunar as recent examples. “As we see startups continue to grow, it creates increased demand for capital. Don’t be nervous; be encouraged by the fact that a large number of good ideas” originate in Michigan.
The state’s universities are key to the startup pipeline, she adds. For every dollar invested by a university or economic development-related fund in one of the 37 local startups that they supported last year, those companies raised $6.82 from grants, angel investors, and other sources, she says.
For the past eight years, Michigan has been led by Gov. Rick Snyder, the Republican who was a VC before he entered politics. Even though the state-supported fund-of-funds, so crucial to growing Michigan’s venture ecosystem, was established a few years before he came into office, it was helpful to the local investor community to have an ally at the Capitol—if for no other reason than he understood the industry. His final term ends this year, but Brosnan doesn’t predict a new governor will have a dramatic effect on VCs.
“It’ll probably create an opportunity to really engage someone in the idea that to continue on our current trajectory, the best way is by investing in entrepreneurs,” she says.