Yup … what she said …

In a good Freep article today, Katherine Yung described some of the dilemmas surrounding raising capital in the state of Michigan.

Despite growing awareness of the importance of venture capital, Michigan ranked 25th among all states and the District of Columbia last year for the amount of venture investment, down from No. 20 in 1997, according to the National Venture Capital Association.

Venture capital firms invested only $105.4 million in the state last year, a drop of nearly 17% from 2006

Unfortunately for the state, the political echelon is targetting “advanced manufacturing”, as a priority, among several others.

Later on Ms. Yung notes:

Like many Midwestern states, Michigan has lacked a strong entrepreneurial culture for much of the last century because of its reliance on large manufacturing companies.

Well, there is truth to that. But 2 years ago, during the initial 21st century fund effort, 700+ entrants applied for funds. Probably close to 400 companies. Quite a few would be called startups.

The number of entrants should give the political echelon here a clue that we may in fact have a large group of people literally crying out for funding. The issue is that the funding is largely non-existent in the state and otherwise highly focused in several very narrow areas, some of which are, such as “advanced manufacturing” not necessarily what the state needs.

I am not saying Katherine is wrong, her analysis is correct. The large manufacturing companies have dominated the business landscape. Completely. It is hard for a small company to get funding here, in large part due to the lack of capital for new companies, due to the dominance of the manufacturing industries.

Well, as manufacturing companies race with each other to set up new shops in China, some of us are trying to grow small companies here in Michigan. And we are running into a lack of local VC and generally funding choices.

If the state of Michigan wishes to get serious about startups, and growing companies in the state, I invite them to speak to small business folks like me. Eliminating the SBT is a step in the right direction. We can use that money to partially pay for a real live working person (hint, taxes and consumption in the state). If the federal government wishes to grow the economy, they might want to consider zeroing out the self employment tax. I can hire a person for several months with the money I save on that tax, and they will be consuming and spending money, as well as paying taxes.

Now make getting small investments easier, bringing more capital into the state to invest, and more VC’s, specifically those with a track record of success in high tech … well …

Well, since we are in 25th place in the country, and the Bay area is about 3x the second place folks, who are 1.1x the third place folks … These are estimates from the PWC Moneytree survey. See https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=region . The midwest as a total was 4.46% of the $5.6B investment in Q1 CY2008. Silicon Valley was 33.71%, about 8x the midwest area investment rate. Michigan is a fraction of that 4.46%. Looking over that list in the midwest, “advanced manufacturing” doesn’t quite show up. IT services and computing is in the noise. 1 deal at about $2M. In Silicon Valley, software, IT services, and computing took in a total of $604M in Q1. Thats 2.3x what was done in the entire midwest. Wonder if we (the midwest) are doing something wrong?

Most of the groups we have heard about getting funding here, have been getting it from out of state. Then the investor wants the company to move. Taking all those nice high wage high value jobs with them.

Uh … whoops.

We had a brief discussion with someone that wanted us to move our company to Ontario. No issues with Canada, I do like it there. But that change was a little bigger than we want to make right now.

All these things are interconnected. VC’s mean startups (well if they invest in the state, and they should be given incentive to do so), and startups mean jobs. Jobs mean more taxes, and more ancillary jobs. Startups (not “advanced manufacturing”) mean jobs that are less tied to the manufacturing sector, which is learning to speak Mandarin as rapidly as possible (and there is nothing wrong with this, manufacturing will always seek the low cost producer of their products and raw materials for their products … they have to).

I want to thank Ms. Yung for a good article. Hopefully the political types will read it, and realize that there are issues that need to be addressed.

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