The fund, called, the Michigan Early Stage Venture Capital Investment Corporation, is similar to a spate of state venture programs that have swept through Oklahoma, Iowa, Arkansas, Utah and Ohio.
Michgan’s fund was signed into existence by Governor Jennifer Granholm after passing both the state senate and house of representatives, according to an announcement.
The fund will provide capital to Michigan venture capital firms to invest in “information technology, life sciences, advanced manufacturing, and alternative energy technologies,” the statement read.
The new legislation calls for Michigan’s state government to raise capital through the issuance of debt carrying a guaranteed minimum return, to be committed to local venture funds. The debt will be serviced by proceeds from the underlying venture funds. The state government is required to service the debt should venture profits not sufficiently cover it.
“The fund makes us a true limited partner,” and not a lender to venture firms, said Jason Burr, treasurer of the MVCA. The MVCA is headed by Mitchell Mondry, co-founder and vice president of M Group, who was appointed president of the MVCA last year.
Burr said the fund is structured as an evergreen vehicle, meaning that proceeds from underlying funds will be reinvested into subsequent local investment vehicles.
The new fund has the backing of the Michigan Venture Capital Association, which will take one of the fund’s seven board seats. The other board seats will be filled by the state treasurer, the chief executive officer of the Michigan Economic Development Corporation, two candidates selected by the governor, one selected by the state senate and one selected by the state house of representatives.
Burr said a similar program launched in Oklahoma in 1993 had already proven very successful, yielding a long-term 17% return for the state after the debt was serviced. “Of course, they’ve had some hits in the past few years,” Burr noted.
Oklahoma’s venture program issued debt with a guaranteed return of Libor plus 50 basis points. Similar programs in other states are much newer, Burr said – Utah and Ohio are still selecting board members while Arkansas and Ohio are in the process of selecting underlying fund mangers.
Citing National Venture Capital Association statistics, Burr said that every $22,000 invested in venture capital in a region generates roughly one job. Burr said the new Michigan venture fund may create 6,000 new jobs. A press release said the program would have “no effect on the state budget for five years and is likely never to impact it.”
In order for the state to lose money on its venture capital fund, the underlying fund managers would need to fail to generate long term returns equal to or greater than the issued debt’s guaranteed coupon.