Five “impactful, established” nonprofit early-stage evergreen funds would split $105 million to invest in Michigan-based startups, under a soon-to-be-introduced bipartisan package.
Under HB 5651, HB 5652 and HB 5653, the money to existing Michigan funds has the potential to become evergreens, or self-sustaining non-profits and university-backed organizations based on a model of reinvesting profits into early-stage startups, rather than distributing them back to investors. Additional groups that support start-up companies would also receive a piece of the pie.
Ann Arbor SPARK, ID Ventures (Invest Detroit), the Michigan State University Research Foundation, the University of Michigan Accelerate Blue Fund and Biotechnology Research Commercialization Corridor at Western Michigan University would receive the majority of the “Michigan Innovation Fund.”
The Michigan Innovation Fund was included in Gov. Gretchen Whitmer’s most recent budget recommendation, initially with a $60 million planned investment.
One of the bill sponsors, Rep. Alabas A. Farhat (D-Dearborn) said the goal is to “stop the trend of companies leaving Michigan to find the startup capital they need.
“We can’t continue to overlook the importance of helping grow all areas of our economy, especially Michigan entrepreneurs, and the impact they can have on future jobs and economic growth,” Farhat said.
According to the bill sponsors, Michigan is losing jobs and talent opportunities from a lack of early-stage investment capital for would-be entrepreneurs. New early-stage, pre-seed investment capital decreased in Michigan by more than 40% over the past several years.
For every $149 of academic research expenditures in Michigan, there is $1 of funding, according to the bill sponsors, while California’s ratio is close to $7 of academic research expenditures for $1 of funding.
Startups in the Great Lakes region take an average of two years longer to raise their first $500,000 than startups on the coast, according to ID Ventures. From 2020 through 2022, University of Michigan startups raised $2 billion in total investment, but almost half left Michigan. Those who stayed found 80 percent of their funding coming from out-of-state investors.
Bill sponsors referenced other Midwest states, like Ohio, that has 11 pre-seed funds, including six fully-funded evergreen funds, and beats Michigan in early-state investment at $75 million annually, compared to Michigan’s $24 million.
“Michigan has amazing talent and strong research institutions,” Hoskins said. “There is real potential to be a leader in creating and growing innovative startups. Other states, especially on the coasts, figured this out a long time ago and, more recently, our neighboring states. The Michigan Innovation Fund is key if we truly want to generate more opportunities for entrepreneurs, leverage the state’s research universities and see our state emerge as a leader in business growth and compete with our Midwest states.”
According to information on the proposal put out by ID Ventures, the creation of five self-sustaining evergreen funds would result in investments in at least 500 additional Michigan-based startups, the creation of 5,000 full-time jobs and at least $5 billion in additional investment.
Early-stage evergreen funds usually need to deploy at least $60 million in investments to become self-sustaining, according to ID Ventures.
The initial $105 million investment in the five funds would come from the state’s Venture Michigan Fund I and II (VFM), which was created in 2003 to promote Michigan economic development and has seen recent returns of around $100 million.
The bills would put current available and future returns from the Venture Michigan Fund into the MI Innovation Fund, meaning funding would not impact the General Fund.
The funding breakdown would include 85 percent to support the state’s existing evergreen-focused funds and long-term sustainability goals. Of that 85 percent, the funds would be required to allocate at least 80 percent to financial investments in startup companies, but could use the other 20 percent for administrative or operational costs and programming, including technical assistance, coaching and mentoring.
The other 15 percent of the investment would support other “ecosystem organizations” that provide programming and technical assistance to startup companies, which Farhat said would support an “innovation ecosystem in Michigan.”
Future funding also from the VFM would continue to support the MI Innovation Fund, broken down into 40 percent to the state’s evergreen funds for investing, 40 percent to other investment fund programs and 20 percent to entrepreneur and innovation ecosystem programming.
Article courtesy MIRS News for SBAM’s Lansing Watchdog newsletter
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