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Michigan Bill Sparks Debate On Venture Michigan Fund

AP Photo/Paul Sancya

Earlier this month, State Rep. Al Pscholka (R-Stevensville) introduced legislation to fast-track the elimination of the Venture Michigan Fund. It’s designed to invest in venture capital firms around Michigan, that in turn, help them invest in growing businesses and hopefully create jobs. The fund has already had a large impact on the state, but there are worries about how it could affect the state’s budget in the future.

Jack Ahrens remembers how venture capital looked in Michigan back in the early 2000s. And it wasn’t pretty.

“Michigan was always pretty much of a laggard," Ahrens says. "I mean, I’ve been in venture capital in Illinois and Minnesota and now here in Michigan, and Illinois and Minnesota have always had pretty vibrant venture communities. But we only did one deal in Michigan, I think.”

Ahrens, who now runs the venture capital firm TGap Ventures in Kalamazoo, says Michigan was basically a non-factor in the market. It was so bad that, in 2003, the state legislature took it upon itself to fix the problem.

It passed a law creating the Venture Michigan Fund, designed as something of a venture capital fund for venture capital funds. The fund would loan money to different firms in the state, who would then use it, plus other money they raised, to invest in small, growing Michigan companies. The hope was to serve as kind of a seed fund, giving these companies an initial boost so they could start investing more, leading to more jobs in fields like technology and engineering.

"But almost more importantly in the short run, they’re creating an infrastructure within the state of Michigan in venture capital and funding of companies that didn’t exist before," says Tom Kinnear, the chair of the board for the Venture Michigan Fund.

The effectiveness of venture capital can take decades to evaluate because the firms cost a lot to start before making any money later on. So it’s impossible to really judge how well the Venture Michigan Fund has spent roughly 450 million dollars so far. But signs are positive. A decade ago, Michigan only had three or four V-C firms. Now: twenty-three, according to the latest report from the Michigan Venture Capital Association. 

“It’s clearly had a positive impact on the economy of the state, I’d say," says Ahrens. "It helps move us from a metal-bending, mundane business state to getting more and more into technology, because venture capital backs technology. And those are the types of jobs you want to create.”

But Rep. Pscholka says we shouldn’t start celebrating just yet. The benefits may be good, he says, but there’s simply too much risk.

“Well, by nature, venture capital is simply that. It is risky, by nature. And to use $600 million of hardworking Michiganders’ money for venture capital is just not a role that state government should be playing. And it’s just not where we have a lot of expertise.”

$150 million more is on track to be spent over the next few years. But Pscholka wants the risk to end now. That’s why he proposed legislation earlier this month to end the program, without another dollar spent.

Pscholka’s largest concern is how the fund is structured. Unlike most state programs, the Venture Michigan Fund isn’t funded as a line item in the state budget. Instead, it’s funded by debt. And if the Fund doesn’t make enough money back on its investments, it pays off those debts by selling vouchers on taxes. According to a recent report by the House Fiscal Agency, that could cost the state $140 million over the next three years alone.

What Pscholka is really upset about, though, is what happens if the fund ends up succeeding and investing in a booming company. If that happens, he says, taxpayers would never see those profits.

“The point is the structure that was set up by the legislature doesn’t work," says Pscholka. "The tax vouchers that were turned into cash by banks, even if it had funded Twitter, let’s say, that money would never go back to the General Fund of Michigan. It only goes to the Michigan Venture Fund. So the taxpayers have simply granted $600 million for this endeavor. What my bill does is it cuts off the last 150. The first 450 are still in play.”

According to the original bill, the money would end up going back to the state eventually, in 2054. However, there’s even debate as to whether that’s accurate. But for the next few decades, at least, Pscholka is right.

There is good news, though. Lawmakers and public officials are already meeting to discuss what the future of the fund should look like.

“I think what we’re talking about now is making sure it’s fine-tuned going forward to optimize for the taxpayers, the businesses, the venture funds in the state of Michigan," says Kinnear.

Details are scarce and a solution is likely still a long way off, but if it works out, the end result could be a real compromise instead of a partisan squabble. 

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