Detroit-based nonprofit will manage a new statewide fund created to provide needed early-stage capital to startups in Michigan.
Despite the name and initiatives focused primarily on community development in its hometown, Invest Detroit will spread funding from the $4.2 million, two-year First Capital Fund across the state. Invest Detroit intends to meet regularly with Michigan’s 17 SmartZone business incubators — including those in Grand Rapids, Holland and Muskegon — and do other outreach “just to make sure this program represents the entire state,” said Vice President and Managing Director Martin Dober.
“The deal flow is pretty small in Michigan,” Dober said. “It’s important for us to look at the entire state.”
Founded in 1995 by Detroit Renaissance, a group now known as Business Leaders for Michigan, Invest Detroit manages an assortment of capital and loan funds, including two early-stage venture capital funds: Detroit Innovate and First Step Fund. Both funds previously have invested in West Michigan companies, including Grand Rapids-based Varsity News Network Inc.
Invest Detroit’s loans and investments through 2015 totaled $451 million and leveraged more than $1.42 billion in total investments, according to the organization’s most recent annual report. The two venture capital funds through 2015 deployed $6.4 million to fund 86 companies with co-investments that leveraged $300 million in capital.
Invest Detroit also administers the annual Accelerate Michigan Innovation Competition.
The First Capital Fund will offer early-stage funding to newly created technology-based companies seeking to commercialize an innovation. The fund will invest $50,000 to $150,000 into each deal, providing the capital a startup needs to perform a market analysis or validate an idea, for example.
Invest Detroit will award funding to companies in phases, Dober said. A startup approved for $150,000, for instance, could receive an initial $100,000 capital infusion and the remaining $50,000 after meeting specific goals, he said.
“Our intent is to get the money to companies quickly,” Dober said.
The First Capital Fund’s goal is to increase the early-stage capital invested in tech-based startups in Michigan, “create a capital climate that supports the development, retention, and attraction of venture-backed technology companies in Michigan” and to build a “pipeline of high-growth technology company deal flow for the subsequent stages of funding, attracting investments both within and outside of Michigan,” according to a briefing memo to the Michigan Strategic Fund Board.
“We’re priming the pump, really, and trying to get as many companies up and going as possible,” said Fred Molnar, vice president of entrepreneurship and innovation at the Michigan Economic Development Corp.
The Michigan Strategic Fund Board that oversees the MEDC last month awarded a two-year contract to Invest Detroit to manage the First Capital Fund. Invest Detroit raised another $2.2 million in private capital to match the $2 million in state funding.
The ability to leverage the state funding with private capital was the “primary differentiator” in recommending that the Strategic Fund award the contract to Invest Detroit over three other bidders for the contract, Molnar said.
“We’re doubling the MEDC investment,” he said.
In forming the First Capital Fund, plus a $1 million University Early Stage Proof of Concept Fund, the MEDC wants “to fill the funnel” and provide needed capital at the earliest stages for startup companies and address a growing funding gap, Molnar said.
As venture capital funds and angel investors moved upstream with their investments to mitigate risk in recent years, startup companies and university researchers have been left with limited options to pursue for early financing, Molnar said. Together, the MEDC’s two funds aim to begin filling that gap, he said.
“You have these young companies and they usually hit family and friends for funding, and eventually you get to that point of, ‘Now what?’” Molnar said. “They’re here and the angels are here, and so this gap exists within the state of Michigan. It absolutely exists and so we have two funds to try to mitigate that.”
Michigan State University will manage the two-year University Early Stage Proof of Concept Fund under a contract the Michigan Strategic Fund awarded in November.