Detroit Becomes Venture Magnet As EV Tech Startups Drive Growth

Detroit has not in recent history been regarded as a center of technological innovation. But that perception is both false and fast changing, due in part to the dramatic growth of electric vehicle demand but also due to the increasing role that electronics play in even gas-powered vehicles. 

As a result, venture funding in the Detroit area is growing. Interestingly, the boom in auto tech is now creating offshoots with applicability in other areas of the economy, driving a broader appreciation of the opportunities that new businesses in this area are developing. Venture funding is pursuing these developments. JL 

Marc Vartabedian reports in the Wall Street Journal:

The Motor City ranked second, ahead of destinations such as Berlin and Miami, in a PitchBook Data report on venture-capital ecosystems worldwide that have shown the most growth, scoring high on metrics like the amount of venture-capital dollars that startups raised. As automakers based in the Detroit area pour billions into developing EV technology and government subsidies boost demand for gasoline-free models, commitments at the startup and venture level have grown. Startups based in the Detroit area raised $429 million in the first three quarters this year, a 12% increase from the same period last year and a 40% rise from what the area raised during 2021.

An unlikely city sits near the top of a venture-capital list: Detroit.

Long a symbol of industrial decline, the Motor City ranked second, ahead of destinations such as Berlin and Miami, in a PitchBook Data report on venture-capital ecosystems worldwide that have shown the most growth, scoring high on metrics like the amount of venture-capital dollars that startups raised, according to the analytics firm.

Electric-vehicle-related tech has been one recent driver of Detroit’s growth in the venture sector, investors said. As automakers based in the Detroit area pour billions into developing electric-vehicle technology and government subsidies aim to boost consumer demand for gasoline-free models, commitments at the startup and venture level have grown. 

 

PitchBook’s report, released this month, said that Detroit’s second-place ranking behind Dubai was evidence that the region is emerging as a venture-capital hub. The ranking took into account Detroit’s surrounding areas including Ann Arbor and Warren.

From the third quarter of 2017 through the first half of this year, Detroit-area startups raised $4 billion over 694 deals, according to the report. The ranking analyzed metro areas’ one-year, three-year and five-year growth rates for venture deal, exit and firm fundraising activity. The analysis took in data through this year’s second quarter.

“Detroit is usually not the city you hear about,” said Chris Thomas, co-founder and partner at Detroit-based Assembly Ventures. “Detroit has an important role because you have unique entrepreneurs that understand the old and the new.” Thomas said Detroit’s venture market has grown significantly thanks to electric-vehicle tech, but also startups developing tech in sectors such as financial technology.

To be sure, Detroit’s venture scene is tiny compared with big markets like Silicon Valley and New York. The electric-vehicle future that startups are working toward also faces challenges as sales growth of electric vehicles in the U.S. has slowed because of sagging consumer demand for these models.

 

“If the adoption of electric vehicles is even 50% of what we thought it would be, that extends development cycles and substantially hurts the liquidity of funds that are active in these areas,” said Adrian Fortino, a managing director at Houston-based venture firm Mercury Fund, which has an office in Detroit.

Fortino said he believes the main driver of Detroit’s venture growth is its move away from being a one-industry city. Startups across a variety of sectors are raising capital, he said. 

More broadly, venture hubs outside of traditional U.S. tech centers are growing in part because founders are moving to cheaper locales to start businesses and remote deal making allows them to be based far from clusters of investors. Detroit, for its part, has fewer than 40 active venture firms, said Ara Topouzian, the executive director of the Michigan Venture Capital Association.

Detroit has been helped by the state of Michigan committing capital to back the development of electric-vehicle-related tech, and the federal Infrastructure Investment and Jobs Act and the Inflation Reduction Act providing support for the technology.

This investment has trickled down to the startup level and helped boost the ecosystem, investors said. Startups based in the Detroit area raised $429 million in the first three quarters this year, a 12% increase from the same period last year and a 40% rise from what the area raised during the easy-money days of 2021, according to PitchBook.

Our Next Energy has a $1.2 billion valuation. PHOTO: REBECCA COOK/REUTERS

In August, Assembly Ventures raised its first fund, a $76 million vehicle to target seed through Series B stage investments. Assembly’s limited partners include strategic corporate investors such as warehousing and logistics provider Renaissance Global Logistics and 

Stellantis

 Ventures, the venture arm of Stellantis, which owns Jeep, Chrysler, Dodge and Ram.

Assembly Ventures has had at least one unicorn emerge from its portfolio: Detroit area-based battery startup Our Next Energy. Assembly invested in a $25 million Series A for ONE in 2021, a subsequent $65 million financing and then a $300 million Series B capital raise at a post-money valuation of $1.2 billion. The latest round was led by Fifth Wall and 

Franklin Templeton

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In June, Ann Arbor, Mich.-based Arboretum Ventures, a healthcare-focused venture firm, raised a $268 million fund. The firm was founded in 2002 and said that a quarter of its portfolio companies are based in Michigan.