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Published in Finance

State-backed seed capital fund hits the ground running

BY Sunday, October 11, 2020 04:38pm

A new capital fund seeded with state money got off to a quick start and has made investments in a half dozen young technology companies since launching two months ago.

Administered by the Michigan State University Foundation, Michigan Rise has at least a dozen more potential deals to fund in the pipeline and is considering at least 30 more startups, a reflection of the high demand for early-stage capital.

Michigan Rise Executive Director Jeff Wesley COURTESY PHOTO

“The startup community is growing and thriving,” said Michigan Rise Executive Director Jeff Wesley.

“There’s no shortage of need out there. We have a significant pipeline of people we’re talking with around the state, and as we do this we’re trying to do outreach around the state to make sure we truly invest in those high-tech, high-growth companies and do it in a way that the whole state benefits,” Wesley said. “I think we’ve had a big impact in a short amount of time.”

The Michigan Strategic Fund Board in April allocated $3 million and contracted with the MSU Foundation to manage a new pre-seed capital fund for five years. The MSF Board may provide additional funding in subsequent years.

The MSU Foundation matched the state funding with a $2.4 million commitment over five years, starting with $942,000 in the first year of the contract, Wesley said.

Michigan Rise formally launched in mid-August after working for four months to prepare and lay the groundwork for investments.

“We had taken advantage of that period between April and August,” he said. “There were tons of companies around the state that were connecting with us.”

86 Repairs, a Grand Rapids-based service provider that acts as a third-party contract maintenance manager for restaurants, is among the young tech companies in which Michigan Rise invested.

The Michigan Rise investment is part of a larger capital round 86 Repairs seeks to raise that will enable the company to continue expanding its technology platform, co-founder and CEO Daniel Estrada said.

“Because we help restaurant operators lower costs and gain operational insights they’ve never had before, 86 Repairs has grown over 30 percent this year despite a very challenging environment in our industry,” Estrada told MiBiz. “We anticipate our growth to accelerate even more in the coming months.”

86 Repairs is the lone West Michigan-based company Michigan Rise has backed so far. Others are based in Detroit, Ann Arbor and East Lansing.

Funding diversity, filling gaps

Michigan Rise intends to invest $250,000 into startups across funding rounds, starting with an initial investment of $50,000 to $150,000, said Michigan Rise Director Prem Bodagala. Investment prospects generally have a product or service that’s in pilot mode or generating early revenue, he said.

Michigan Rise seeks to ensure funding goes to a diverse pool of startups. Of the investments made to date, 60 percent of the founders and leaders at the companies Michigan Rise backed “can be considered diverse,” Bodagala said.

“That’s something we’re being intentional about also,” he said.

Michigan Rise follows two prior early-stage funds the state created since 2011 that collectively provided $20.5 million in capital to 125 tech startups, which went on to leverage the investments to attract nearly $560 million in additional capital.

The early deal flow that averaged one investment per week after Michigan Rise’s mid-August launch was the result of administrators’ outreach and the need for early-stage capital. Many angel and venture capital investors — seeking to mitigate their risk — have moved upstream to support companies that are more developed, Wesley said.

That’s led to a funding gap at the pre-seed and seed levels, he said.

“The efforts throughout the state have created great momentum and I think the startup community and focus on the Midwest with VCs continues to grow. The challenge with that is when you look at the funding opportunities, they tend to move to the better opportunities, which is kind of up the pipeline,” Wesley said. “It’s kind of the natural progression that others move to the better startups, as there’s more opportunities.”

The COVID-19 pandemic has driven the need for early-stage funding even higher, Bodagala said. The pandemic put the brakes on series A financing and left many investors reluctant to do new deals as they focused instead on supporting their existing portfolio companies, he said.

“That’s created some opportunities for us as well,” Bodagala said.

Michigan Rise matches investments with support such as mentoring and business coaching from the MSU Foundation’s Red Cedar Ventures and the Spartan Innovations subsidiary that vets and commercializes innovations by MSU students and faculty. Those groups can help startups with strategy, pursuing additional funding, sales and marketing plans, and access to a broad network of peers and professionals that include angel and VC groups in the state, Wesley said.

“We have a really deep bench of experience because of our support from the MSU Foundation. We bring a lot to the startups,” Wesley said. “Engagement’s a big part of what we’re doing because at the end of the day that’s what seeds good opportunities, that’s what seeds good investments. Hopefully, the collaboration puts those companies in the best place for success.”

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