State Venturing Into Capital Funding

    LANSING — Michigan ranks low in the amount of venture capital available to start-up companies, and even lower in the amount that is actually invested in these firms.

    Gov. Jennifer Granholm, therefore, has signed a trio of bills that Lansing hopes will pull more investment to high-tech industries in the state.

    “To create jobs in Michigan,” the governor said, “we have to be a magnet state for new investment. Creating incentives for venture capitalists to invest in these groundbreaking advancements helps spur new business opportunities and provides high-tech and manufacturing jobs for Michigan workers.”

    Two of the bills Granholm signed emerged from the Senate, 834 and 835, while 5322 came from the House. The three are expected to produce a $150 million fund to help new businesses get on their financial feet.

    SB834, sponsored by Rochester Republican Mike Bishop, created the state’s venture capital investment corporation. In turn, the corporation will establish a fund that would make investments with qualified venture capital firms. Up to 15 percent of the fund’s total could be invested in a single company.

    A fund manager, with board members’ approval, would decide in which companies the state would invest. To be selected for venture investments, a firm would have to invest two dollars for every dollar of principal guaranteed by the state, through available tax credits.

    Which venture capital companies will get the state’s money will be likely based on a firm’s probability of generating at least a 6 percent return from its investments, its ability to solicit investments, and the likelihood that it can invest two dollars for every dollar of state tax credits.

    A company would also need to have a significant presence in the state, and consider investing in minority-owned businesses.

    SB835, sponsored by Kalamazoo Republican Tom George, allows an investor to claim a Single Business Tax credit equal to the amount invested and approved by law. But a credit can’t exceed the difference between the amount actually repaid and the amount set aside as the repayment due in the agreement made with the state.

    SBT credits can be claimed for tax years beginning in 2009 and through 2020.

    If an investor can’t claim an SBT credit, HB5322 allows for the credit on an income tax return. Sponsored by Rep. Fran Amos, R-Waterford, the bill amends the state’s income tax act and allows for claims in tax years 2009 through 2020.

    “This package will help make venture capital more available in Michigan,” said Sen. Jason Allen, R-Traverse City, chairman of the Commerce and Labor Committee.

    “Michigan excels at innovation and developing new technologies,” Allen explained, “but many of these operations move out of the state to produce the goods because of the lack of capital available in Michigan. This needs to change.”

    The law hopes to fuel investment in high-tech businesses and the life-science industry. Software firms, automated-equipment makers and pharmaceutical companies are three of the likely targets for early stage investments.

    SBT credits will be limited to $30 million each year and to $150 million in total. A fiscal impact on income tax credits hasn’t been established yet because it’s not known how many investors would be willing to participate in the fund, the rate of return they would get, and the rate of return the fund would receive.

    Backers of the package felt the fund will spur economic development in the state. But opponents argued it was the wrong time to hand out more tax credits with the state cutting programs to balance the annual budget.

    If the state backs an investment that doesn’t generate the targeted rate of return, then the state has to make up the difference in tax credits. Money from the state’s employee pension fund will be used to lure more venture capital to Michigan. Up to 5 percent of that fund can be invested in Michigan companies and venture capital firms.

    Testimony before a Senate Committee said that Michigan ranked 44th of the 50 states in the amount of venture capital it has for start-up companies, and that much of the capital held by Michigan investment firms is spent with out-of-state businesses.

    An estimate from the Michigan Venture Capital Association (MVCA) said that 6,000 new jobs would be created in the state and more than $100 million in new investments would be made in Michigan from the proposal in its first full year. The MVCA also said that it takes an investment of $21,627 to create a new job.

    Seven people will comprise the corporation’s board of directors, two appointed by the governor, with one each being named by Senate Majority Leader Ken Sikkema, R-Grandville, Speaker of the House Rick Johnson, R-LeRoy, and the MVCA.

    State Treasurer Jay Rising and Michigan Economic Development Corp. President and CEO Don Jakeway will also serve as directors.

    Jakeway said he felt the program would leverage from $750 million to $1 billion of new venture capital funds over the next five to seven years.

    The MEDC said the state drew $122 million of those funds in 2002, down from the $232 million that was invested in Michigan in 2000. The investment figure for 2003 should be available soon.

    The Michigan Venture Investment Corp., as it’s known, must be incorporated by July 1.

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