Michigan’s big bet on small tech fell flat. Now the $250M bill is due

The Whitmer administration projects that claims could cost the state $22.9 million in lost tax revenue during the current fiscal year, $67.6 million in fiscal year 2021 and $75 million in fiscal year 2022. (Shutterstock)

LANSING —  A decade has passed since Michigan borrowed the last $250 million for a $450 million venture capital initiative that hoped to spur the creation of futuristic, high-tech startup businesses.

Now, Gov. Gretchen Whitmer has been handed the bill, even though some of those companies have since left Michigan.

The debt from the initiative is among a series of looming budget pressures inherited by the first-term Democrat, who wants a new repayment plan to minimize costs while preparing to borrow more money for highway repairs.  

The Venture Michigan Fund, created in 2003 under former Gov. Jennifer Granholm, attempted to jumpstart the economy and turn the state into the next Silicon Valley. The plan called for taxpayers to back private venture capital firms, which gave money to early-stage businesses in exchange for an equity stake in those firms.

Results were mixed, and lawmakers disbanded the program in 2015 after $450 million in borrowed spending, calling it a risky use of taxpayer money. 

The final tally for the program: 56 startup firms that now employ 1,760 Michigan residents, according to the state. That’s a cost of roughly $255,000 in taxpayer money per job.

A 2018 audit concluded the Venture Michigan Fund failed to live up to early hype and identified two companies that were sold and moved out of the state after receiving a combined $1.1 million in state funding.

Those firms, not directly named in the audit, took 100 jobs with them. It appears at least two other taxpayer-funded startups have left Michigan or closed since that time, according to a review by Bridge Magazine. 

Tangent Medical Technologies of Ann Arbor was sold to ICU Medical of California, Relume Technologies of Oxford was sold to Revolution Lighting of Connecticut, Lynx Network Group of Kalamazoo was bought out by Everstream of Ohio and the California-based Concerto Health closed its Michigan offices in May. 

Local phone numbers for all four firms no longer work, and the facilities are listed as “permanently closed” in Google business records. 

Granholm and state lawmakers authorized the Venture Michigan Fund in the early 2000s at the onset of an economic downturn that gave way to the national Great Recession. The state borrowed money for the program in 2006 and 2010.

State officials were “throwing everything at the wall to see if it would stick and jumpstart the economy,” said Craig Thiel, of the Citizens Research Council. “This was one of them, and obviously it has not materialized like they thought it would.”

At the time, state officials were “throwing everything at the wall to see if it would stick and jumpstart the economy,” said Craig Thiel, research director at the Citizens Research Council. “This was one of them, and obviously it has not materialized like they thought it would.”

While the program was disbanded five years ago, principal payments on the final $250 million in loans the state took out to pay for it are just coming due. And because there is no money left in the Venture Michigan Fund, the state must pay back the lender with tax vouchers it had put up as collateral. 

The Whitmer administration projects claims could cost the state $22.9 million in lost tax revenue during the current fiscal year, $67.6 million in fiscal year 2021 and $75 million in fiscal year 2022.

But the governor is proposing a plan her administration says would “free up reserve cash” and reduce total state costs: Buy back the vouchers, and pay the lender back with cash instead.

If it doesn’t, the state could have to issue additional tax vouchers to fully repay the lender, according to a Budget Office briefing. 

That’s because the lender — Stanton Equity Trading Delaware LLC, a Credit Suisse affiliate — is not based in Michigan and does not have a state tax liability it could use the vouchers to reduce. 

Stanton would have to sell the tax vouchers to a Michigan firm that could use them to cut its tax bill. But those vouchers typically sell at about 90 cents on the dollar, so Michigan would have to give Stanton additional vouchers to make up the 10 percent difference and fully repay the debt.

The Whitmer administration estimates the buyback plan could save the state $3.8 million this year and $11.2 million next. 

It sounds complicated, but it’s the same thing then-Gov. Rick Snyder did in 2017 when his administration paid off the first $200 million the state had borrowed for the Venture Michigan Fund. 

It’s a sound approach, according to James Hohman of the free-market Mackinac Center for Public Policy.

The venture capital program “accomplished neither its goal of creating new Michigan industries nor in being costless to the taxpayer,” Hohman said. “It’s good that the governor is doing what she can to minimize their costs, but they should never have happened in the first place.”

Whitmer will need sign-off from lawmakers. 

The State Budget Office says it needs the Legislature to approve an initial $19.1 million in spending by March 1 “in order for the voucher purchase to occur and the associated financial losses to be avoided.”

Investors stood up for the Venture Michigan Fund program in 2015 when lawmakers put it on the chopping block, arguing it had helped attract other early stage investors and played a role in creating well paying, high-tech jobs in the state. 

Success stories from the second round of Venture Michigan Fund investments the state is now paying off include companies like LLamasoft of Ann Arbor, which builds advanced supply chain software, and Pixel Velocity, another software firm in Ann Arbor. 

Funding startups can be a “very risky investment” but “I think you do have to look at the long game,” said Ara Topouzian, executive director of the Michigan Venture Capital Association. 

Topouzian, who began running the association in 2019, didn't have firsthand knowledge of the defunct Venture Michigan Fund but said the state is generally in a “good spot” for venture capital and is no longer viewed as the kind of “flyover state” it once was. 

“You’re not always going to see immediate returns on some of these deals,” he said. “I think that folks need to understand that startups are going in and out of business all the time. It’s risky, but these [venture capital firms] are the ones investing because they see the potential of that startup.”

As of 2019, more than 140 venture-backed startups were operating in Michigan, according to the Michigan Venture Capital Association’s annual report. Twenty-seven venture capital firms are headquartered in Michigan or have an office in the state.

The Michigan Venture Fund did not directly fund startups. Instead, the state invested taxpayer money into other venture capital firms which were then supposed to also invest a similar amount of their own money in Michigan companies. 

But only four of 11 venture capital firms matched the state investment in Michigan startups during the first round of the program, and only two of 10 had matched the state in the second round as of late 2016, according to the 2018 audit

“Although VMF was generally compliant with the legislative requirements, the actual financial results of its investment activities indicate that VMF may not have achieved the success envisioned when the legislation was enacted,” Michigan Auditor General Doug Ringler’s office concluded.

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Comments

Kevin Grand
Tue, 02/25/2020 - 7:38am

It's continually grating to hear politicians from "both" political parties tell us that it is somehow the government's role to be choosing winners and losers in the marketplace.

Never has. Never should.

For a Governor who claims to be a leader, instead of saddling future governments with debt from these con artists posing as legitimate businesses looking for a handout, she should instead put an end to this shakedown of Michigan Taxpayers once and for all.

Zeroing out in the state budget and shutting down another blatant (and unconstitutional) agency like the MEDC would also be a step in the right direction.

Rick
Tue, 02/25/2020 - 8:44am

Well Kevin - we agree on something! MEDC and SPARK (created by Rick Snyder for his campaign to be governor) are two perfect examples of 'crony capitalism'. A bunch of us pushed for audits of the companies that we taxpayers funded. Both showed little job creation at a high price. But both continue to get tons of taxpayer money and have boards filled with venture capital folks who use our money to support companies they have lent money to. Often the money we 'contribute' is used to pay back the venture capitalists even when the business fails.

And if you ask for a list of companies funded by SPARK and MEDC so you can see what happened to them you're in for a battle. They don't want you to be able to see what happened.

Matt
Tue, 02/25/2020 - 8:15am

Funny how a bunch of politicians of all stripes with no experience in start ups or in the businesses they want to germinate think that all it will take is money and presto, there it is!. The other lesson is when you hear Governmentals say we want to be the NEXT Silicon Valley, Seattle or Disneyland or Switzerland or wherever, they rarely know why this happened in those locales nor do they realize that you rarely succeed by doing something they're already doing. The successes are because of doing or being something different which by definition something a bunch of boobs sitting in a conference room in Lansing or Washington never thought of.

Le Roy G. Barnett
Tue, 02/25/2020 - 9:12am

Matt: You could also have used as an example Michigan wanting to be the next Vandenberg Air Force Base or Kennedy Space Center at Cape Canaveral by spending at least $1,000,000 to make us a site for launching rockets. Our state is too far north for this to be a workable plan.

Matt
Wed, 02/26/2020 - 7:45am

Yep and I've heard the next Mayo/Rochester waved about too! If someone says the 'next XXX" it's already too late!

THE COWBOY
Tue, 02/25/2020 - 8:16am

You can that MEDC for this mess!

Arjay
Tue, 02/25/2020 - 8:43am

Time and time again always proves that government should not be in private venture capital business. A good idea will always have willing investors from the venture capital world, and these investors have the smarts and the know how to separate the fraudsters from the legitimate inventors. Otherwise, they would not be venture capitalists very long. For the State, stick to building roads, running courts, providing state law enforcement, and things they are constitutionally obliged to do, and get completely out of any business that only benefits a few.

David Waymire
Tue, 02/25/2020 - 8:47am

There are no low tax, low service regions of the nation able to attract sufficient numbers of talented young college grads to jumpstart a tech economy. We have bet on factory work and low-paying warehouse jobs since we started cutting taxes in 2000...and it's pretty clear, we aren't serious about attracting talent or good paying knowledge economy jobs with our state's policies. Until we agree to invest in ourselves, we won't see folks invest in us to create these kinds of jobs of the future. We rank 44th in per resident support for higher education, 31st in the share of college graduates in our population and 32nd in per capita income. You can't follow Mississippi's low tax policies and expect Minnesota's high income economy.

Matt
Wed, 02/26/2020 - 8:29am

Your thinking doesn't hold up to the data, TX, TN, FL, ID and NV along with others all come to mind as low tax, fast growing states attracting people from high tax often shrinking CA, NY, CT, MA, NJ , IL, RI. Even Washington is well in the bottom half of tax burden ranked by state. Nor is MN ranked that high for econ/pop growth over all and about equal to MI for econ growth. Accounting for where kids move right out of college is a big mix of various reasons. Recreation opportunities being the biggest next to the job offer. I wouldn't bet higher Ed support turns out any better an explanation either most kids don't care, they're already out!

https://wallethub.com/edu/states-with-highest-lowest-tax-burden/20494/
https://www.usnews.com/news/best-states/rankings/economy/growth

Anonymous
Thu, 02/27/2020 - 12:41am

David,
As much as I want to resist what you are saying, I must agree with you, the people of Michigan in the aggregate really don't care about individual academic successes, individual responsibilities, about community financial success. Look around, the whiners of 'northern Michigan' complain about the conditions in northern Michigan, while having excellent colleges up north they never talk about that or about how the northern kids are taking advantage of those schools, or how those in the northern communities being creative and developing new ways to address problems, all they want is people’s money from down south. And in that way they are the same as the urban whiners that never talk about the kids academic successes all we hear is about how bad the schools are, how great the high school athletes are, never hear about community successes that are solving problems, we only hear about how they need more of other people’s money.
Michigan is still struggling with the culture that was developed when southeast Michigan industry was dominating 1950s; ‘do as little as possible, for as much as you can get’. Today we finding that those who are able to succeed in the Michigan schools because they work as hard as they can to achieve/get as much as they can want to go where those working smarter are heralded as stars of the communities. Michigan has good schools, good teachers, but the culture of student responsibility and driver of academic success is lost to the drive for more money and more spending. This true for community problems/issues, the creativity and willingness of residents is lost to the desire for agencies to get control and grab for more of other people’s money.
We [Michigan] need to change our culture to one that learns from success and leverages what is learned, that revels in creativity and innovation and promotes change and those that are change agents. We need to hold the agencies, programs, and spending accountable for results/performance.

middle of the mit
Fri, 02/28/2020 - 8:40pm

Anonymous, you say this:

[[[ Look around, the whiners of 'northern Michigan' complain about the conditions in northern Michigan, while having excellent colleges up north they never talk about that or about how the northern kids are taking advantage of those schools, or how those in the northern communities being creative and developing new ways to address problems, all they want is people’s money from down south]]]

I don't know where you got that idea from, and since I am the only one this board who has openly said I am from Northern MI, I am going to assume I am the 'whiner' you are talking about. Yes, we have many find two year community collages that some of our residents use, and then move on from. It still doesn't negate the fact that there is little up here for economic growth. We are FAR from most cities and there is NO mass transit or much of anything unless you like to fish, hunt or ski. And skiing isn't something you can do all winter anymore.

You tout individualism but then yet tell us those people are supposed to contribute to the community. It it all individualism or the community?

[[[ in the aggregate really don't care about individual academic successes, individual responsibilities, about community financial success.//they never talk about that or about how the northern kids are taking advantage of those schools, or how those in the northern communities being creative and developing new ways to address problems, all they want is people’s money from down south.]]]

We don't want you down south to give us your money, we want you to come up here and spend it on services and vacation. It's not like we are Kentucky or Alabama and want a handout because without said handout our State would go bankrupt.

Maybe you city folk need a refresher course on rural living. You are trying to equate rural living with the back woods hollers. This isn't Alabama.

Anonymous
Mon, 03/02/2020 - 9:15pm

If the 'whiner' label fits, moaning about local needs, about money, avoid asking about different approaches, resisting change, then wear the label and accept the path northern Michigan is on.
A few years ago there was a Bridge article about a northern school district that made the school buses WiFi hot spots, that seemed innovative, why haven't we heard more about it [how its working] and what other such ideas are being used up north, that is disappointing?
Individuals who revel in their individualism can contribute to the community by being individuals doing what they enjoy, by working with people of like interests, with organization that are using those special interests and efforts. The challenge maybe is to get the local organizations open their activities and organizations to new people and ideas. If there are local individuals that find their measure of success in living in wilderness, they could be a good resource to share experiences for local children or for people thinking to move locally to live off the grid. If the local organizations need to change from only fitting people into their mold and begin looking for people’s knowledge and skills and ask how the can fit their service in the community.

Stephen C Brown
Tue, 02/25/2020 - 8:59am

Here's a pipe dream. It takes decades of persistence with a core group of local financiers, entrepreneurs, and indigenous talent to start a new industry. Better done through Chambers of Commerce, if they know what they are doing. I lived in northern CA in the 70's, and there were people everywhere that you would meet at parties, record stores, in the parks, etc. that were trying to commercialize interesting new technologies, like video games, personal computers, laser holograms, etc. It takes a village from the bottom-up, not the top-down.

Maureen
Tue, 02/25/2020 - 11:41am

We're paying companies who have moved jobs out of state? Why? Where is the clawback?

Ben W. Washburn
Tue, 02/25/2020 - 9:22pm

Kevin, Matt & Arjay:

I seldom agree with you guys, but here, you are straight-on.
Since about 1980, a combination of international competition and policies promoted by the 1% have made "Jobs, Jobs, and Jobs" the mainstay of all stripes of politicians who want to seem to be relevant to the electorate. Sadly, it's not just them who do this stuff, but a dominant part of the electorate who expect that local and state government can effectively do something about this. This is just another example why they can't. What can you do, more than your ordinary comments, to change those expectations?

If there are two things that our state and local governments can do to improve our economic growth climate, they are:

1. To fix those damn roads which stymie economic development, meaning the county mile-road grid and their industrial area links, and the State roads. Most voters unfortunately place their residential streets ahead of those more economically important needs.

2. Expedite court disposition of commercially important civil lawsuits, by whatever means needed, whether by a special State subsidy to the courts, or by a strong intervention by the State Supreme Court and the State Court Administrator. No one talks about this business climate factor. Make it a priority to ramrod these cases to judgment within 90 days of filing.
Ethical businesses will be made more stable and successful. And the slimy ones will more quickly be shown the door. Right now, it takes anywhere from 18 months to 3 years for these claims to be settled. And that's a huge drag on legitimate businesses, and a huge benefit to the slimier kind.

Note that I leave the federal government out of this question. There are some things that it can do to generate more economic development. But this issue presented by this article is whether or not State government can do anything significant (and I have included local government in that same category).

middle of the mit
Wed, 02/26/2020 - 3:02am

1 How do you propose we pay for this? Up here in the North, Yes, we place our residential streets above the State because that is WHAT WE PAY FOR ON TOP OF what the State pays for.

Once again! Tell the Northern Michiganders why you despise them so much! PLEASE DO THIS!

They NEED TO HEAR THIS! Come on elitists! Run your mouths!!!!

Matt
Wed, 02/26/2020 - 7:15pm

I get the road thing on a base level and think you're absolutely right being skeptical of the prioritization the public would choose but is there any evidence that it actually effects what businesses end up really doing? I can't say I've seen any nor do they seem to be anymore excited to pay 45 cent addition than the average citizen.

Anonymous
Wed, 02/26/2020 - 12:37am

Michigan like most government organizations don’t build on their strengths/expertise/purpose. They [politicians and staff] read headlines and try to be part of the headlines
What we need is for government to identify what they are best position to deliver or what should best for them to do, such as infrastructure, first responder services, being the repository for well established ‘good practice’ and prevent them from investing in private companies.
Rather than this investing in technology startups it would be better for them to create high speed fiber optics network infrastructure that such companies could tap into, it could be asking what knowledge and skills they need and include those as classes in the education system, it could promote the people that are learning those knowledge and skills.
Better to let the marketplace decide who are the winners/losers and let government work to ensure that people and the organizations they create have equal opportunity to access the marketplace. The more people that can take their ideas, their efforts, their dreams to the marketplace the better for all of us.

John S.
Wed, 02/26/2020 - 11:07am

As many have argued, let the capital market decide which new start-up businesses are worthy of loans and which are not. Let the uncertainties and risks fall upon private equity firms, not the taxpayer. There are plenty of other areas for state spending that will help to attract businesses including especially infrastructure, public education, and the provision of information to prospective businesses. Those are developmental expenditures and have public good characteristics.

Dan
Thu, 02/27/2020 - 10:20am

The 2018 Audit link appears to be broken (the report I opened was a House Fiscal Agency document regarding Liquor Code in MI).