Filling the VC funding gap in Michigan

June 8, 2015 – MiBiz

The venture capital industry’s success over the last decade in Michigan has created a significant challenge as the demand for funding in the next few years far outpaces the availability of capital, requiring a broader approach by managers creating new funds. The Michigan Venture Capital Association’s annual research report identified an estimated $1.3 billion need from existing portfolio companies for follow-up investments in the next few years. Prospects to help fill that gap include institutional investors that historically have not put a lot of money into state-based VC funds — the pension funds, endowments, foundations and family offices. But that could be changing as they now appear to have a greater willingness to invest their money in Michigan companies, sources said.

Part of the higher interest from institutional investors stems from the maturation of the state’s venture capital industry that has many firms now looking to form larger, successor funds in the next few years, said John Kerschen, co-managing director of Michigan Accelerator Fund I. Michigan-based funds that formed in the last decade continue to progress with their initial investments and reached a level where they will “be generating returns to those investors that are attractive,” Kerschen said. “That will help draw more LPs that can contribute larger dollars into our next generation of funds.”

Institutional investors have been reluctant to put money into the small, first-time funds in Michigan that have formed over the last decade and first want to see a track record of success, he said. “Institutional investors that can invest all over the country or all over the world aren’t going to entrust large sums of money to small, first-time, unproven fund managers — and most of us in the state are still in that early development,” Kerschen said. “The bulk of the Michigan-based venture organizations are still relatively young and we need to prove our capabilities via returns.”

Michigan Accelerator Fund I has so far invested $10 million in eight portfolio companies. The firm in time will begin to look at forming a second fund, Kerschen said. more