MVCA Report Reveals Strengths, Weaknesses of MI’s Capital Community

Xconomy Detroit/Ann Arbor ^[1] —

The Michigan Venture Capital Association^[2] (MVCA) hosted a town hall meeting in downtown Detroit Tuesday to discuss the contents of its annual report^[3], which takes a deep dive into the state’s venture investing ecosystem to get a sense of the current landscape and how it compares not only to past years, but the rest of the country.

The good news is that local VCs now have 15 years of solid data confirming the importance of VC firms, venture-backed startups, and angel investors to Michigan’s economic growth. (The MVCA also reported that 98 percent of members asked to submit data responded, so the numbers are conclusive.) The bad news is that, although Michigan does a better job of including underrepresented groups like women and people of color in the tech startup ecosystem than many other places, the data reveals that investors have a significant confirmation bias^[4] that continues to get in the way of underrepresented entrepreneurs finding funding for their companies.

During the town hall meeting, Maureen Miller Brosnan, the MVCA’s executive director, thanked the organization’s board repeatedly for having the “bravery” to examine diversity statistics in the first place. (The MVCA itself is an oasis of diversity, as it is run by three women^[5].)

“We’re one of the first states in the U.S. to look at it this way,” she said in a phone interview before the town hall meeting. “The board made a decision as a matter of policy and practice to look at where we stand. We spent some time last year establishing the baseline, and we’re really excited to do the follow-up work.”

We’ll get back to the diversity issue in a minute. First, let’s look at some of the key findings from this year’s report:

—Despite a national decrease, the number of venture capital firms headquartered in Michigan, their total capital under management, and number of venture capital investments made in the state has doubled and, in some cases, tripled.

—The total amount of capital under management by Michigan-based VC firms continues to grow: It’s now at $2.2 billion, a 47 percent increase in the last five years. There are 36 VC firms headquartered in Michigan, representing a 33 percent increase in the past five years. At the town hall event, Brosnan said Michigan lost two VC firms in 2016, but a new one, Three Leaf Ventures, opened to help offset the loss.

—Out-of-state investors continue to pour money into Michigan startups. Out of the total $5.26 billion in venture capital currently deployed in the state, $3.05 billion comes from investors outside of Michigan. Perhaps the most stunning statistic in the report is that every dollar invested in a Michigan startup by a Michigan VC firm attracts $4.31 from an outstate investor.

—There are currently 141 venture-backed portfolio companies in Michigan, a 48 percent increase in the last five years. Seventy-four companies in Michigan received more than $282 million from Michigan venture capital firms in 2015, a 48 percent increase in the last five years.

—There are now 128 startup companies in Michigan that have received funding from a Michigan angel group, a 42 percent increase in the last five years. With 294 investors across nine angel groups in the state, there has been a 59 percent increase in angel participation in the past five years. Last year, angel groups invested more than $16 million in Michigan startups.

—Michigan life science startups received the most venture capital in 2015, attracting 42 percent of capital deployed, while IT startups were in close second at 38 percent of capital deployed. In comparison, startups in the advanced manufacturing and materials sector scored 8 percent of the capital deployed.

—There were a couple of worrying statistics that revealed Michigan has a few capital gaps. According to the report, local VC firms have reserved about $387 million for follow-on funding for existing portfolio companies based in the Great Lakes State despite those same companies estimating they need $661 million in follow-on funding. In 2015, Michigan VC firms had a fundraising target of $599 million. The total amount raised in 2015 was $389 million, 35 percent less than targeted.

Overall, Brosnan said, the biggest finding is that Michigan is doing well in the realm of venture capital compared to the rest of the nation—and sometimes better than the rest of the nation. “We’re still a relatively young community, but while we see the rest of the nation contracting, we’re seeing Michigan continue to grow,” Brosnan added. “Why? Because we have a combination of research, talent, and ideas, and outstate investors are seeing that their dollars go far here. However, all that money coming in from outside the state should make our Legislature leery that [venture-backed] companies could leave.”

In an attempt to convince legislators that the money it appropriates toward the state’s “fund of funds,”^[6] the creation of which kicked off Michigan’s entrepreneurial renaissance about 10 years ago, Brosnan has been making frequent trips to Lansing to plead the MVCA’s case. Just last week, she was there celebrating the adoption of Senate Resolution 0162^[7], introduced by Sen. Rebekah Warren (D-Ann Arbor), which designates April 17-23 as Michigan Venture Capital and Angel Investment Week.

“Folks sometimes don’t understand the size of the industry here—it’s a $2.2 billion … Next Page »^[8]