One Hand Clapping – Entrepreneurship In Ann Arbor, Michigan

I spent a few days in March in Ann Arbor Michigan as a guest of Professor Thomas Zurbuchen, Associate Dean for Entrepreneurial Programs, and Doug Neal, Director of Center for Entrepreneurship in the Engineering School at the University of Michigan. I gave a keynote on entrepreneurship to MPowered, the student Entrepreneurship Organization, spoke on a panel on Entrepreneurship and the Aerospace Industry, and gave another keynote at the Ann Arbor New Tech Meetup and A2Geeks, the regional startup network. I got smarter about engineering and innovation in “flyover country”, met some wonderful people and shared some thoughts about what it might take to spark an innovation cluster in Ann Arbor.

This post is a personal view of what I saw in Ann Arbor — in no way does it represent the views of the fine institutions I teach at. Read this with all the usual caveats: visiting a place for a few days doesn’t make you an expert, I’m not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn’t see enough.

One Hand Clapping – Creating an Innovation Cluster – The Ann Arbor Experiment
In my short time in Ann Arbor, I spent time meeting with:

The good news:
Entrepreneurship and innovation has been embraced big time at U of M. The Engineering School has 5,600 undergrads and 3,000 graduate students. It’ s probably no coincidence that the Dean of the Engineering School founded a company and gets what “startup” means first hand. The Center for Entrepreneurship in the Engineering School is akin to Stanford’s STVP program. It offers 35 entrepreneurship courses. Everyone I met in this program “gets” the principles of Agile, Lean and Customer Development big time. The TechArb is the engineering student accelerator/incubator (cofounded by the local VC) and also embraces these ideas. Finally, I was impressed to find a robust local entrepreneurial community centered around A2Geeks and the Tech Brewery (after I met Dug Song I understood why.) (I didn’t have enough time to connect with the entrepreneurial groups working on medical devices and life sciences, but they are another big component of the startup pool coming out of the University.)

What needs work:
It’s been 33 years since I was last in Ann Arbor. (I call it the best school I was ever thrown out of.)  I was incredibly impressed with how far the University has inculcated innovation into the fabric of the Engineering School. However the challenges that still needed to be addressed were pretty apparent.

You Can’t Start a Fire Without A SparkA Lack of Venture Capital
For an Engineering School so focused on innovation and startups the lack of sufficient numbers of venture capitalists in the local community for Cleantech, hardware, Web/Mobile apps and aerospace was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the school would have been crawling with VC’s fighting over deals. Instead it seems that students who graduate simply pick up a plane ticket with their diploma. (Of course, some do stay. The spin-outs from Center of Entrepreneurship are impressive. Many of those companies are still Ann Arbor, but the ecosystem is a limiting factor.)

While one can’t recreate all the happy accidents that made Silicon Valley, it doesn’t take a rocket scientist to realize that it’s the combination of technology entrepreneurs and risk capital that are two of the essential ingredients in any cluster.  (I list some of the others in the diagram below.)

Innovation Cluster – What’s Missing in Ann Arbor

Therefore the lack of critical mass in Venture Investors in Ann Arbor was palpable – and incomprehensible. This place could support at least one or two seed funds like 500 Startups, and a couple of True Venture/Floodgate-type of VC’s as well as more Cleantech investors. Getting them in Ann Arbor would solve the other missing piece; the lack of a startup culture.

A Lack of a Startup Culture in the Community
Visiting Silicon Valley you can’t mistake that its primary business is innovation. In Ann Arbor and southeast Michigan entrepreneurship is a small part of a more diverse business culture. One of the characteristics of a cluster is that it isn’t hard to find other like-minded individuals. In Ann Arbor, they’re scattered in between the auto industry, biotech, hospital workers, etc. As a consequence Ann Arbor lacks the culture of risk-taking and respect for failure critical in an innovation cluster. You see it in the existing angel groups and VC’s. They feel more like banks than risk capital. And that lack of tolerance for failure and comfort with the status quo gets fed back to the entrepreneurs. Getting a few experienced super-angels and/or VC’s seeding 5-10 Lean Startup deals here a year, with a couple of Cleantech/energy deals as well, could kickstart the culture.

Not My Problem
The interesting thing is that no one seems to own the problem. The University of Michigan tech transfer office has an incubator but 1) mixes software, hardware, med devices and life sciences deals in the same program, and 2) takes no ownership of figuring out how to get a risk capital ecosystem in place. Surprisingly, the same with the entrepreneurship center in the Business School. I would have thought they’d be leading the charge.
The new governor of Michigan, Rick Snyder was a venture capitalist in Ann Arbor, so I’m surprised he hasn’t jawboned some combination of Michigan alumni working in venture capital in Silicon Valley to return, and paired them with the old-school money from the Auto industry, that’s hiding under mattresses. —- The real test of a cluster “catching fire” is not when it provides local employment, but when people from outside the area start coming to work and invest there. These guys are this close to making it happen. It would be a shame if it didn’t.

Lessons Learned

  • U of M has a College of Engineering dean who “gets it”
  • He’s turned the school into an outward facing school, fostering an entrepreneurial and innovation culture
  • The Center for Entrepreneurship is on board with passionate faculty, innovative curriculum and excited students
  • The area has almost no experienced Angel, super Angel or Venture Capital (as we know it in Silicon Valley) for web/mobile apps, hardware and software
  • The lack of experienced risk capital means a lack of experienced mentors, coaches, and infrastructure.

Listen to the post here: Download the Podcast here

28 Responses

  1. For those in Ann Arbor wishing to get a taste of startup culture and sweat equity by fanatical founders, check of Current Motor Corp, makers of handcrafted, powerful Lithium Battery road worthy scooters. They raised capital, and got that flamboyant visionary former GM of of GM…..Lutz, Bob Lutz. It’s been a long night ‘ere.

    I ordered one for myself. http://www.currentmotor.com/

  2. Oh, and tell John harding, the founder of Current Motors, that I sent you for personal startup coaching. You want lean, they are damn skinny. Great bikes.

  3. “Flyover country” and “flyover states” are used often enough as derogatory phrases here in the Valley that I would avoid them altogether.

  4. This sounds similar to the situation in Minnesota, although the momentum for the startup culture here does seem to be going in the right direction.

  5. Upstate New York has been working to address many of the same issues as Michigan and we have learned a few lessons that might warrant more explicit incorporation into the slide shown above. First, there is plenty of technological innovation, but first time entrepreneurs need to be able to find more experienced mentors who can help them get their ideas ready for funding. Private angel/seed capital exists in these communities, but will not be placed in teams that are naive in matters other than technology and disconnected from potential customers and business partners. Mentors with entrepreneurial backgrounds help to open minds, doors, and wallets. Second, most of these communities do not have access to large enough numbers of mentors locally (ref. 30+ years of brain drain), which means there needs to be a network that spans multiple communities in a region as well as globally distributed alumni and expatriates (i.e online community that augments local efforts). Third, while everyone loves to think that research commercialization will create the next big thing, there is not enough capital and time in the world to get sufficient numbers of research spinouts growing to create an entrepreneurial community, let alone create a sustainable effort. At the same time, the numbers of students emerging from these institutions willing to take the risk of starting something new is unprecedented. Which leads us right back to the issue of connecting them to the right mentors.

  6. Steve, I never knew that you were a Michigan-alum. Its great that you took the time to assess the needs of the Ann Arbor/Metro-Detroit startup scene. Forging ahead, this region will need a strong entrepreneurial push to help catalyze its economy.

    My personal goal (I have recently returned to the Metro-Detroit area) is to help bring together a much more cohesive startup community. From my observations in Boston, NYC, and Silicon Valley, much of the energy that drives entrepreneurship comes from a strong community-driven fabric. It is necessary for ‘old-Detroit’ money to pivot and help foster the rebirth of this storied area.

  7. What’s it going to take to bring the angels and VC’s into ann arbor? Most of the innovation and culture change has been spurred by student leadership and grassroots initiatives, but how can we get investors to come to Ann Arbor?

    • Deal flow, or else an irrational desire to will companies into existence through capital. Right now, it’s hard for folks to identify opportunities here without turning over some huge rocks.

      We have a lot of folks who successfully start companies here, and go elsewhere (not just for funding, but for community). Ann Arbor is a better place to raise a family than all of the SF Bay Area (so we get a lot of “Mich-again” boomerangers), but for a lot of young founders, the lack of visible startup community and activity is troubling.

      We sent the Occipital guys to TechStars, where they didn’t get funded, but bootstrapped their #1 paid iPhone app (RedLaser) they sold to eBay last year. Olark also didn’t get major funding out of YCombinator, but bootstrapped to profitability in under a year. Chirply just closed a killer round post-YC with all the Valley super angels. We could have kept all those guys here – as we did when Ben came to Ann Arbor to bootstrap Mobiata (with the #1 paid travel iPhone apps) and sold to Expedia last year.

      There’s plenty of talent. But little visibility and apparent activity, which is why we started http://a2newtech.org – but we need to do a lot more.

      What we could really use here is a team of clueful startup hype men (in the rap sense) like Andrew Hyde and Jeremy Tanner (come back to the D!) are for Boulder’s startup scene. http://Boulder.me , http://boco.me , startupweekend, etc. – all pure genius I’ve been fortunate enough to witness first-hand. Not ashamed to admit that Boulder is our playbook – we just don’t have the Brad Feld/David Cohen/etc. “founder fathers” (ha!) to help inspire what happens next. Jason Mendelson did come out to tell us a thing or two, though:

      http://www.slideshare.net/dugsong/ann-arbor-startup-community-development-h109-1759718

      Props to UM students for blowing it up on campus. Looking forward to seeing these efforts graduate into the community. :-)

    • It’s going to take a big exit from a local company..

  8. Thanks Steve!

    Things are getting better here, and with UM’s $1.2 billion annual research spend, something good has to come of the amazing talent we produce here (other than it fleeing to the coasts – and unfortunately to huge companies, not startups).

    I agree with your assessment of the funding situation, but good teams can indeed find funding elsewhere – just my own experience, but we raised $33M for Arbor Networks from coastal VCs, $25M in Swiss private equity for Zattoo, and $1M for my current company, Duo Security, from True Ventures and a new local seed fund, Resonant Ventures. It can be done.

    Re: cleantech and energy, there are certainly folks finding deals here (Vinod Khosla, Bill Gates, Bill Joy, and others have been sniffing around), but it’s a different game entirely. Life sciences, advanced manufacturing, and pharma have historically been targets for Michigan (we have a large manufacturing labor force politicians need to thing about), but folks are starting to understand the advantages of building lean software companies here.

    BTW – we’re organizing a Michigan Lean Startup Conference ( http://leanstartupmi.com ) in May with a bunch of the guys I travelled with on Dave McClure’s trip to Asia (Eric Ries, Dan Martell, Brant Cooper, etc.). It will be in Grand Rapids, home of the Momentum startup accelerator program ( http://momentum-mi.com – in the extended TechStars network), which is working to help seed things on the west side of the state. There’s also Ludlow Ventures and Detroit Venture Partners (backing the upcoming Funded By Night competition: http://fundedbynight.com ) looking to kickstart things in Detroit.

    Any startup folks in Michigan, or looking to come here – there’s no StartupVisa yet, but as I discussed with PG, we are only 45 minutes from Canada (for non US founders who need to renew) and we have a HUGE talent pool at the University of Michigan. We also lack Silicon Valley’s echo chamber, so if your idea works in middle America, it’ll work broadly elsewhere (lots of big franchises got their start here in Ann Arbor – Domino’s, Little Caesars, Avis, Borders, Eden Foods, etc.). Come visit and we’d be happy to host you at the Tech Brewery and give you a tour!

  9. Steve brings up a good point about “ownership” of the problem of Venture Capitol, but what is the solution? All of the motivated academics in the world can’t create an entrepreneurial culture, so U of M won’t be taking responsibility and shouldn’t lead this charge (and neither should the government). It is also well know that VC’s do not care about creating local employment.

    Lean Business Modeling and Agile Product Development can often leap-frog the need for Venture Capitol. Do we really need to aspire to be Silicon Valley, or can we innovate our own unique culture of collaboration and entrepreneurship?

    • I would tend to agree with Holly’s comments about Lean Business Modeling and Agile Product Development. These are at least a valid substitute when money is tight.

  10. If you ask me, we (specifically, Ann Arbor) is as far as it is because of Dug. He is selfless and an awesome guy.

    We need to multiply his efforts, a lot of the entrepreneurs around here are trying.

    We need (Angel) Investors who act and care like Dug. Most investors here are VCs and they have fiduciary responsibilities. There is a lack of mentorship and seed capital.

    Once there is enough reason for a majority of entrepreneurs to stick around, we can start building a meaningful community.

  11. To prance about yet again upon my usual pony, I should mention that my personal vision for All Hands Active is that it will become Ann Arbor’s underground university and start-up incubator. It’s not yet where it needs to be to do all that, but it is getting better. From within AHA, I’m working on a startup, Babolog was just launched last night, and CranSort is ongoing. TechArb is great for students, but for those who have graduated beyond the sphere of UofM or come from EMU/WCC need their place too. I want AHA to be that place in addition to continuing to educate and tinker.

    WRT to the larger problem of no enterprise culture here, I can’t help but wonder if drawing together Dug Song, Center for Entrepreneurship, Tech Transfer, David Bloom, and everyone else whose name I’m currently forgetting to break down the problem better and trace a path to solving it could help. Meet over huge sheafs of paper and draw everything out with beer and bi bim bop. Let me know if you’re interested in this at all, as I’d be very interested in attending this.

  12. It’s interesting. I moved to Ann Arbor because it was affordable and holds potential for my long term interest in biophysics, and biosciences. As a bonus I’ve had some good luck lighting campfires around my fruit sorting hobby business (Cransort) at the tech brewery and AHA. Both have been great resources and helped me meet a few key people.

  13. I appreciate your candor and insight, and I think you’ve nailed the critical components. U of M (through the CFE and Zell Laurie) can be a catalyst for activity for a new generation of entrepreneurs, though it is only one element to the bigger picture as you point out. As the local VC you met with, I’m quick to point out that there are a handful of other VCs in the area, just few who’s strategy it is to write a first check and most of whom play in the Med Tech space. Ann Arbor has had a good deal of recent success in the med device/health care space, but it can’t seem to kick start the web 2.0/IT space; in part it is a direct result of the lack of that seed stage capital. This lack of seed capital is easily measured and verified. I agree whole heartedly with you, as I would love to see a fund like 500 startups or True Ventures setup shop here. Detroit Venture Partners and Ludlow are on their way to doing that and I look forward to working with them.

    However that in itself won’t do it. One of the primary mechanisms driving this revolution of new lean startups is the COOPERATION that exists between funds like SoftechVC, 500 Startups, Baseline, etc… with the firms like Lightspeed, Union Square, etc. Pick any YC or TechStars backed startup and they have 4-5 investors at least! Our last 2 deals in Ann Arbor (yes we do invest actively in Michigan) were brand new startups, and we couldn’t find anyone else locally to join in that early risk with us, though we were able to find funding from outside the state. Michigan investors and companies have long had a history of not cooperating, and it needs to change.

    So what does this mean? It means I HOPE for the following: I hope we see more angel funds such as DVP, Ludlow, and Resonant show up and get active. I hope that we can encourage more angel investors who will throw $25K-$50K along-side the angel funds. Finally it makes me sad and a bit frustrated to see the level of VC bashing that occurs from that entrepreneurs and angels in the community and I hope that they will find better ways to cooperate as ultimately the relationship can be symbiotic. As an aside, I think blame exists on all sides for a lack of effort to really cooperate and I myself will do my best to not perpetuate it.

    Last point is a suggestion for the entrepreneurs in Ann Arbor and Michigan who read your blog (and yes a blatant advertisement for RPM). It is hard for me to come up with an instance of turning down a pitch from a new legitimate startup in Michigan (legitimate – read: savvy enough to get a warm introduction). Yes, I’m a VC and have a different bar than angel investors, and I may say no to investing in your company today, which may have nothing to do with you or the merits of your company. It is a process. Get to know us, we may say yes tomorrow. (BTW..Dug, I seem to remember we gave you a term sheet, you just happened to have options!)

  14. I visited the incubator last summer and was disappointed. Ann Arbor was far behind not just Silicon valley but even with several incubators in India I work with. And this is despite the technical excellence of students & faculty.

  15. This program is in the Engineering school. They have another in the Business school.
    Why does this feel like an impedance mismatch? Your program at Stanford is for the engineers.
    Why are the engineers more interested in starting companies than the business people? It just struck me reading this, and it does not make sense.
    MBAs, where are you?

  16. Steve – as always – great post – and very insightful. I think you could touchdown in many parts of the U.S. and see the exact same dilemma. We’re here in Phoenix (6th most populated city) and we have many of the exact same issues. Boston, NYC, SFO/SV, Boulder, Austin, RTC, L.A. – are definitely at the forefront – but that type of community support (and spirit) does take a while to filter more broadly. For example – lot’s of activity just coming online this year here in Phoenix – including a new VC firm (Venture51.com), and at least one new accelerator – AZDisruptors.com. Last fall Dave McClure presented at an event here – and this year Mark Suster is scheduled for the same one. Those kinds of visits – and your’s to Ann Arbor (plus other places) really are inspirational to the community overall I know you travel a lot – and still do – just wanted you to know it really does help – and is appreciated!

    PS: Great to see you at the Commonwealth Club. Your blog is great – but no substitute for live! ;-)

  17. Thanks again for your insights Steve.

    The discussion in the comments section here brings to mind a keynote speech I heard a few years ago at MGCS (Michigan Growth Capital Symposium) where, after a couple days of the usual “if there was only more money here …” commiseration, the presenter, a partner in an extremely large, non-Michigan-based fund, said, essentially, “Stop your whining. Build something of value and money will come.”

    Of course, more local money would be great, and is probably required for a sustainable entrepreneurial ecosystem of the size we’d all like to see here, but it’s way too easy to point to the VC’s and say that all that is missing is money. In the end, success here starts and ends with entrepreneurs creating real value, and that is going to be what drives the ecosystem.

    I applaud the work that the Center for Entrepreneurship has done at the University, the grass roots community building that Dug and others have worked tirelessly at, and the commitment Marc and the other local VC’s have to creating local success. I am also encouraged by the increased level of activity and apparent momentum here and there is a lot to be optimistic about. But, there is still plenty of work to be done – having a bunch of new LLC’s doesn’t map to an equal number of scalable startups (that warrant outside investment), but it’s certainly something to build on.

    Like Dug said in his first post above, I think in the end, it simply comes down to deal flow. Put differently: build real, “investable” companies, the money will come, and then we can talk about a sustainable ecosystem.

    Now back to prepping for my next “music appreciation” class …

  18. Most large institutions have attempted some kind of “incubator” (silicon, data, bio, commodity products) with varying degrees of success – many of these are showpieces – local offices of large corporations intent on pirating technology developments from campuses as cheaply as possible, while returning income to the university (often bypassing the researchers) via space-rental or other deals.

    Some other versions work reasonably well as genuine incubators – your assessment of U of M/Ann Arbor’s effort for example – and still others have struggled just below the radar for some time (Michigan State has had a bio park in place for at least three decades, and some of its efforts have been successful, but it’s usually very quiet there).

    It would be very useful if there were a broader scale for assessing these – what’s being funded, what is the VC “density”, how risk averse is the enterprise etc.

    This is a tall order – and would be controversial, but tech “corridors”, “campuses”, and “research parks” are all about metrics and will strive to maximize a rating metric if it’s available for the PR value.

    Here at the University of Illinois, I believe that the scarcity of the VC/Coaching infrastructure continues to be a hindrance (as is the geographic isolation) . A set of metrics that would give these operations that are still finding their way a solid compass heading to follow.

    • The last sentence should read “A set of metrics would give these operations that are still finding their way a solid compass heading to follow.

  19. [...] message messages and it sure paid off.  Recent articles in Xconomy and positive pieces by a renown technology blogger have taken our message [...]

  20. [...] of serving customers and clients largely unrestricted by geography. Steve Blank believes “the real test of a cluster is when people from outside the area start coming to work and invest there.” [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 151,741 other followers