Before 2010, funding for emerging high-growth businesses in Detroit was scarce. Most local entrepreneurs looking to startup in southeast Michigan had to look outside the state for investment.
That all changed when Invest Detroit, with a $5-million grant package from the New Economy Initiative, launched the First Step Fund, the city’s first venture capital fund.
The First Step Fund is designed to address the deficit of startup financing in southeast Michigan and promote economic development by identifying, nurturing, and fostering demand for early-stage, commercially viable businesses that can scale—resulting in job creation and increased tax revenue for the southeast Michigan region.
Since its founding, the First Step Fund has invested in 74 companies, mostly in Detroit and Ann Arbor. It has also been committed to assisting, women, minority, and immigrant founders. Of the 19 investments made by Invest Detroit in 2017, more than half were in companies run by diverse founders. The First Step Fund’s typically makes initial investments of $15,000 to $150,000, with some companies receiving follow-on investments as high as $150,000. The fund sometimes partners with other investors for investments between $150,000 and $500,000.
Martin Dober, vice president of Invest Detroit and managing director of its affiliate, Invest Detroit Ventures, is proud of the work the program has done to help startups and emerging businesses in the region.
“As we get returns from the companies we invest in, we go out and invest in additional companies. As companies give us back those investments, we’re able to help other companies down the road.”
For example, Llamasoft, an Ann Arbor-based supply chain software company that counts companies such as Ford Motor Co., General Motors, Land of Lakes, and Whirlpool among its clients, is one of the venture capital fund’s biggest success stories to date. In 2011, the First Step Fund invested in the fledgling startup, and after TPG Capital purchased a majority stake in the company for an undisclosed amount in May 2017, the First Step Fund received a significant return on its money.
“It’s really great,” Dober says. “Now, like 6 years later, we received payment more than 10 times our original investment. In that one investment we were able to make, we’re able to help 10 more companies.”
But it doesn’t always work out that way. Many investments the fund makes don’t result in a return. This tolerance for risk, however, is essential to growing the region’s culture of entrepreneurship.
“We take a lot of risk in investing in companies, and we expect a lot of them to fail,” says Dober. “But we’re seeing a lot of great companies, and we’re seeing returns from investments we did a long time ago.”
Watching companies flourish is gratifying, Dober says. He points to WorkIT Health, an Ann Arbor-based company that uses a website and app to help people recover from heroin and opiate addictions along with clinics in Michigan and California. A $50,000 First Step Fund investment helped the company launch.
Additionally, Invest Detroit helps creates other opportunities for emerging Michigan businesses. Since 2014, Invest Detroit has managed Accelerate Michigan, the state’s largest business plan competition, which Ann Arbor SPARK originally operated with funding from NEI. Every year, more than 200 companies apply to compete for a total of $1 million in grants and investments, including the $500,000 grand prize.
Although Invest Detroit primarily supports technology-based companies, it has found winners in companies like Ash & Erie, an online retailer featuring clothing for shorter men. Through Invest Detroit Ventures’ newer affiliate, the First Capital Fund, Ash & Erie received a $37,500 investment. The company has gone on to secure other investments, including $150,000 for a 25 percent stake from billionaire Mark Cuban when it was featured on ABC’s “Shark Tank” in October 2017.
“We have a variety of different funds through Invest Detroit, some for technology businesses and some set up for traditional businesses,” Dober says. “We also look to invest in Detroit–in neighborhood businesses, retail businesses, and other businesses related to things happening in the city.”