Plan urges tax credit for startups-Michigan could back loans for high-risk, high-profit firms

Venture capital leaders in Michigan will announce a plan Friday to set up a $150 million fund over the next five years to invest in state-based companies specializing in alternative energy, life sciences, fuel cell research and advanced manufacturing.

By:
R J King
Detroit News

The plan is to be outlined at the Detroit Regional Chamber’s four-day Leadership Policy Conference on Mackinac Island, which begins Thursday. It calls for state lawmakers to approve tax credits that financiers can use to back loans for up to 100 start-up companies.

Spearheaded by Dick Eidswick, president of the Michigan Venture Capital Association in Ann Arbor, the effort is designed to create investment in traditionally high-risk, but high-yield, companies. If approved by the Legislature, the fund that would use money from venture capital firms and financial institutions would be launched next year, he said.

The program would be patterned after the 10-year-old Oklahoma Early Stage Venture Capital Fund, which has produced an average annual return of 22 percent, Eidswick said.

A draft of the bill, sponsored by Sen. Michael Bishop (R-Oakland), is expected in the next few weeks. Michigan investment firms now have $606 million in venture capital funds under management, far behind such nearby states as Illinois, which has $4.4 billion in such funds.

"The tax credits would only back up the loans," said Eidswick, managing partner of Arbor Partners, a venture capital firm in Ann Arbor with about $32 million under management.

"Our research shows venture capital firms have an average annual return of 20 percent, so if we maintain that pace, the tax credits will never be tapped," he added.

But public watchdog Michael LaFaive said the state should not be in the business of creating such tax credits.

"I don’t think the state should do this," said LaFaive, director of fiscal policy for the Mackinac Center for Public Policy in Midland. "I recommend the state adopt a broad initiative of tax cuts, labor reform and regulation reductions to attract companies."

How Michigan ranks

The state only trails California in research and development spending. Compared with other states, Michigan is:

* No. 8 in information technology spending ($15 billion)

* No. 11 in installed personal computers (6.7 million)

* No. 8 in Internet use (6.5 million)

* No. 6 in Internet commerce ($19 billion)

Source: IDC Corp. information technology research firm, Framingham, Mass.