Filling the Gap in Startup Seed Funding

June 26th, 2019

Martin Dober, managing director of Invest Detroit Ventures, talks about the challenges of Michigan startups looking for early-stage investment and support, and how our team is working to solve them.

Invest Detroit Ventures (ID Ventures) is working to raise philanthropic and government support to turn our First Capital Fund into the state’s first evergreen seed fund. What does that mean? It means that we are aiming to build the fund to be large enough that we can significantly grow the portfolio so that the returns coming in from those investments can cover new investments (cash flow “in” will be greater or equal to cash flow “out”). That can only happen when the fund gets to a certain size and when there are enough portfolio companies to increase the odds of getting some major returns.

Why is this important? Because seed investing is hard. The risks are much greater and time frames for returns are much longer. Technology risk, market risk, execution/team risk, financing risk, business model risk, regulatory risk—these are just a few that investors have to stay focused on. But in backing a good team, early investment can eliminate some of those risks and help companies hit milestones that will drive future, larger venture capital funding rounds.

In Michigan, most of the early seed investing is currently done by state or foundation-backed nonprofit funds, university funds, or first-time venture funds. Venture capitalists have the advantage over most entrepreneurs in Michigan, since we’re not fighting each other for deals. With a general lack of venture capital in Michigan, VC’s have their pick of where to invest, and as a result, it just makes it easier to focus on deals where some of the early risks have been reduced. There is an understandable tendency for Michigan funds to move to later stages, but this means that the gap for seed financing grows larger.

Currently, the First Capital Fund makes investments of up to $250,000 to early seed-stage startups across Michigan. In a little more than two years, the fund has backed more than 30 companies. It is a revolving fund, where returns are reinvested into additional companies and used to support operations. To date, the fund has been supported with $8.8 million from partners that include the Michigan Economic Development Corporation, the Ralph C Wilson Jr Foundation, New Economy Initiative (NEI), and Invest Detroit Foundation. We’re also taking returns from $10 million of investments from our prior funds and revolving them into this fund, bringing the total assets under management for the First Capital Fund up to $18.8 million. Unlike traditional venture capital funds, there is no carry and no fixed (i.e. 10-year) term.

By increasing the size of the fund to make it evergreen, we can turn it into a sustainable, persistent source of funding for Michigan startup companies in all technology sectors, continuing our commitment to inclusivity by funding and mentoring entrepreneurs from under-represented populations, including woman, minority, and immigrant founders. Additionally, it will be a more patient source of capital for startups, as it is not locked into the same 10-year time frame as most venture capital funds. It fills a crucial gap for early stage funding and offers a recognized, go-to source of seed capital for entrepreneurs.

It’s not an impossible task. We’re over $18 million toward our $30 million fundraising goal that we believe will successfully turn the First Capital Fund into the sustainable model we envision. And we’re the organization to do it. ID Ventures is supported by a great team with over 40 years of combined seed financing experience. We have a track record of helping companies hit the milestones they need to raise larger rounds of venture capital, and we provide additional support programs like Hacker Fellows and Accelerate Michigan Innovation Competition. We believe in the innovation and the talent that exists here in Michigan, and we know we can help our entrepreneurs and startup community succeed.