As coastal tech giants and traditional automakers joust for ultimate control of the future of the U.S. auto industry, the industrial heartland is at a significant disadvantage in a key area: It's a relatively small source of capital for financing the startups defining much of the future of mobility, and likewise, its companies are a relatively tiny recipient of venture capital funding.
In last year's fourth quarter, 77 percent of U.S. venture capital funding was raised by startups in just three states: California, New York and Massachusetts, according to PwC and CBD Insights. Funds based in those states also are by far the biggest providers of such capital.
With the exception of Illinois, the states of the industrial Midwest — including automotive-centered Michigan, Ohio and Indiana — failed to make the list of the top 10 recipients. Together, startups in the bottom 40 states received just 10 percent of U.S. venture capital funding.
When it comes specifically to mobility startups, companies based in the "big three" states of the venture capital world are also the biggest beneficiaries of funding by far, said Reilly Brennan, a Detroit-area native who runs San Francisco-based Trucks Venture Capital, which focuses on mobility.
That means when successful startups exit the venture round of funding and repay their investors, most of the profits go to the coasts.
The Great Lakes states see "only a tiny fraction of venture capital deals, despite producing one-quarter to one-third of the nation's research and development, new patents and top talent," said John Austin, an Ann Arbor, Mich.-based senior fellow of the Metropolitan Policy Program of the Brookings Institution. "Great Lakes VC funds are currently seen as too small or too unknown for investors — at a time when VC is funding fewer firms, with bigger exits."
This situation impedes development of an indigenous entrepreneurial ecosystem around mobility that would help flyover country, venture capital executives and others said.
"Besides the exit profits going back into a state where the investments come from or are made, successful founders locally can support up-and-coming entrepreneurs," Brennan said. "Some of those groups start their own venture funds, and the system is a self-reinforcing community. If you have deals where the majority of exit profits go elsewhere, you inhibit this flywheel effect."
As the main home of the U.S. auto industry, Michigan might suffer from this reality more than any other state, yet business and political leaders have only begun addressing it substantively.
Trucks was an initial investor in Ann Arbor-based May Mobility, which operates autonomous passenger shuttles. May has raised about $84 million total, including a recent funding round of $50 million led by Toyota.
"I tried all the king's horses and all the king's men to get Michigan investors to back that company" at the start, Brennan said. Only one, Ann Arbor's Ludlow Ventures, joined Trucks.
Michigan Mobility Institute co-founders Jessica Robinson and Chris Thomas are addressing the geographic imbalance in funding by launching Assembly Ventures, a venture capital company based in Detroit, with a partner in Berlin, which is seeking worthy mobility investments in traditional automotive ecosystems.
"We can bring things forward with our network that people in Silicon Valley can't," Robinson said. "Companies must understand the end [OEM or supplier] customer that might integrate their own hardware and software to get to market."
There also is the Landing Zone, an incubator and networking space in downtown Detroit where more than 50 startups co-locate. "We make introductions of those companies to in-state and out-of-state VC firms to highlight the deal flow they can get by investing in Michigan," said Josh Hundt, chief business development officer for the Michigan Economic Development Commission, whose PlanetM mobility group launched the incubator in 2017.
Still, it's not yet as if mobility startups are sprouting up everywhere in Michigan. "We haven't really seen a lot of companies on the EV and AV side," said Pat O'Keefe, CEO of Grow Michigan, a mezzanine fund capitalized by Michigan banks that has invested in startups.
Detroit-based automakers and their capital could become more of a factor. "We're seeing [the OEMs] focus more on integrating their mobility efforts into master strategies," Robinson said. "That's what could start to tip the market toward Michigan."
