Five years ago, Michigan had seven early-stage companies raise money from venture capital investors in the first quarter. This year that number climbed to 31.

The story behind this growth was more than a decade in the making, as state and local leaders crafted a policy to make early-stage investments more robust and lay the foundation for a startup ecosystem that is finally coming to fruition.

“I’ve been involved with this since Michigan began its push in late 1999 or early 2000,” says Michael Finney, the president and chief executive of the Michigan Economic Development Corp. (MED). “Fast forward 14 years later and most of the strategies that we put in place are things that are really starting to bear fruit.”

Over the course of three governorships with commitments from successive state legislatures, Michigan managed to implement an investment system that is bucking national trends.

The number of venture capital professionals in the state rose by 84 percent over the five-year period, while the number of professionals declined by 13 percent nationwide, according to data from the MED. Over the same period, the number of venture capital firms rose by roughly 50 percent to 33 firms either headquartered in or that have offices in the state.

The bulk of the firms investing in Michigan are, at this point, homegrown in part because of the success of the state in financing its own ecosystem.

“Michigan was a state that had a handful of VCs with maybe three or four firms, and now we have several billion of capital under management,” says Finney. “Michigan was not competing in the venture capital space in a real way.”

The state’s push into venture capital began with the creation of a “life sciences corridor.” Michigan committed $1 billion from the tobacco settlement funding it received for a 20-year period. In fact, the state’s evergreen fund now makes direct investments and fund of funds investments in venture capital firms investing inside and outside the state.

One of Michigan’s wins is ProNai Therapeutics, which raised a $59.5 million round in April. “We’ve made direct investments in 150 startups from our universities,” says Finney.

New legislation from regulators also created Venture Michigan roughly six years ago to raise capital through pledging tax credits in exchange for money. Through the mechanism, Michigan was able to attract $150 million which the state is deploying in another fund of funds.

Further buoying the state’s investment community is the raft of recent exits of venture-backed companies. “There’ve been quite a few exits of venture-backed companies in Michigan,” says Jan Garfinkle, the founder and managing director of Michigan’s largest investment fund, Arboretum Ventures. “There’ve been 18 companies that have exited for over $1 billion. That’s a huge factor.”

Garfinkle also pointed to the state’s fund of funds efforts as a reason for its success in attracting startup capital.

For Ted Serbinski at Detroit Venture Partners and a recent transplant to the Motor City, the cheaper cost of capital means that startups can get more bang for their buck. “An Internet startup can be anywhere in the world. When you’re a scrappy startup why would you pay $5,000 a month for rent in New York or San Francisco, when you can be in Michigan where the cost of living is much lower,” Serbinski says.

Garfinkle also pointed out that the cost savings mean that starting a company in Michigan is one-third as expensive, so exits that are lower rake in the same returns as the big blockbusters on the coast.

Photo via Flickr user Marty Hogan