News Story

The State as Venture Capitalist: Michigan Fund Loaned $7.7 Million, Creates Only 20 Percent of Promised Jobs

A state fund intended to create 390 Michigan jobs has loaned $7.7 million to 35 companies and created 79 jobs — only 20 percent of the number initially promised.

Ann Arbor SPARK received an $8 million grant in 2006 to create the Michigan Pre-Seed Capital Fund, which used $7.7 million of that amount. The grant was awarded as part of the Competitive Edge Technology Grants and Loans program, which exists "to encourage the development of competitive edge technologies to create jobs in the state."

Skip Simms, manager of the Michigan Pre-Seed Capital Fund, said in an email, "We saw a need for early stage capital for start-up technology based companies, which the private sector wasn’t providing at the time."

According to Simms, the fund "allows companies to really ramp up the commercialization of their business."

Funding for the Michigan Pre-Seed Capital Fund came from the 21st Century Jobs Trust Fund, which is administered by the Michigan Economic Development Corp. As of September 30, 2011, more than $30 million remained in the Trust Fund. The pre-seed account is one of several public venture capital-type programs administered by the 21st Century Jobs fund.

The fund was touted by Gov. Jennifer Granholm for its goal of diversifying Michigan’s economy.

"Through the fund, we are laying the foundation for a new Michigan economy by developing a multi-dimensional entrepreneurial ecosystem that provides start-up businesses with seed capital, coaching and the support infrastructure needed to develop businesses in Michigan," said the former governor.

A 2005 study by the Mackinac Center found that this message is a common refrain among Michigan governors. In 1975, Gov. Bill Milliken created the Michigan Job Development Authority in part to "diversify the Michigan economy." A report from the House Fiscal Agency found that diversification of the Michigan economy was a goal of the Michigan Strategic Fund that Gov. Jim Blanchard created in 1984.

"Every governor back to Kim Sigler in the 1940s has promised to diversify Michigan’s economy with some department or program,” said Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy. "At a minimum, the anecdotal evidence has shown that they have failed. In the past decade, we became more diversified not because of central planners but because of our almost catastrophic decline in manufacturing jobs as a result of bad public policies."

In addition to claims that the fund would diversify the Michigan economy, Gov. Granholm predicted that the 21st Century Jobs Fund would boost job creation in Michigan. While 390 jobs were projected to be created by the 2006 grant that formed the Michigan Pre-Seed Capital Fund, Simms reports that companies receiving loans from the fund have created only 79 jobs.

A second Michigan Pre-Seed Capital Fund was created by a $6.8 million grant in 2008. The second fund invested loans and equity in over 45 companies.

According to the latest 21st Century Jobs Fund annual report, eight companies received loans from the second Pre-Seed Capital Fund to each retain one job. These loans totaled $340,000.

A third Michigan Pre-Seed Capital Fund was created by a $9.1 million grant in 2010. All Michigan Pre-Seed Capital Fund grants came from the 21st Century Jobs Trust Fund.

Michigan has an overlapping, often confusing system of government funding and supporting a variety of industries in the state. Michigan Capitol Confidential will be taking a look back at how these select companies have performed in relation to their initial promises.

The Michigan Pre-Seed Capital Fund is still accepting applications from firms seeking capital investment.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.