Experts: Michigan needs to do more to nurture start-ups

Posted on October 28, 2011

Like many entrepreneurs, Marisa Smith left a 9-to-5 job and started her own company to find a more flexible schedule and have more time with her young family.

A lot of 60-hour weeks and a few brushes with failure later, Smith says her Web-based marketing company, the Whole Brain Group in Ann Arbor, is growing nicely. But she says Michigan needs to do more to nurture a culture for business start-ups such as hers.

“There’s a lot of start-up free workshops, which is all great,” she said recently. “But once you are started, there’s a whole other set of challenges. … That’s all been by trial by fire, by messing it up and having some really near-misses multiple times before you learn those lessons.”

After a century of relying on a few giant corporations for its economic muscle , Michigan is slowly trying to promote a more entrepreneurial business model characterized by risk-taking, lifelong learning and market nimbleness.

As Smith’s experience shows, there have been some promising beginnings, including the creation of business incubators in Detroit, Ann Arbor, and several cities across the state. But results remain modest.

The Kauffman Foundation, a Kansas City-based nonprofit that studies and promotes business start-ups, reports that Michigan ranked 33rd out of 50 states for entrepreneurial start-ups in 2010.

Charles Ballard, a professor of economics at Michigan State University, said nurturing such an entrepreneurial culture will prove key to reinventing Michigan for the future.

“We were so successful with these gigantic companies, and need to become more nimble,” he said, “rather than rely on a few dinosaurs.”

Mich. needs to do more nurturing of start-ups, but size of movement is unclear

Becoming an entrepreneur is all the rage right now in Michigan. Various business accelerators, also known as incubators, have sprung up all over the state to aid entrepreneurs. And the near-collapse of the auto industry in recent years has provoked a lot of buzz about reinventing Michigan’s economic model.

But for all the excitement, it’s hard to tell exactly how many entrepreneurs are working in Michigan today, or how broad the movement is toward a more diverse and nimble work force.

State and federal labor force data don’t capture the level of entrepreneurship directly. Surveys of the labor market “often miss these little guys,” says Charles Ballard, a professor of economics at Michigan State University. “The little guy who has a good idea and makes something in his garage and has one employee, that person is often under the radar screen.”

If the numbers are fuzzy, everyone agrees that Michigan needs to do more to nurture entrepreneurs, said John Austin, president of the State Board of Education and a fellow of the Brookings Institution. He urges Michigan to spend more on education and health care research, since many new spin-off firms come from those fields. Having a more welcoming attitude toward immigration would help, too.

“Immigrants are a disproportionate share of new start-ups and technology firms. They’re just not wedded to the old paternal firms that made us great,” Austin said.

By most measures, Michigan has just begun its transition from an economy based on one huge industry and a network of giant corporations to an economy based on individual entrepreneurship.

Most of the business incubators catering to start-ups, like Ann Arbor SPARK and TechTown in Detroit, are barely a few years old. The Kauffman Foundation, a Kansas City nonprofit that studies entrepreneurship, estimated that Michigan had about 250 entrepreneurs per 100,000 residents in 2010. That ranked Michigan 33rd out of the 50 states.

By contrast, there were 300 entrepreneurs per 100,000 people in neighboring Ohio and 510 per 100,000 in Georgia and Nevada, the nation’s leading states for entrepreneurial activity.

Metro Detroit ranked 12th out of the 15 largest metropolitan areas for entrepreneurial activity, lagging such metro areas as Los Angeles, Houston, Miami and Atlanta, Kauffman reported.

Another indicator is the number of venture capital deals done in the state, as reported by the National Venture Capital Association. The group reported that venture capital deals in the state — usually characterized by investors bankrolling promising companies that are ready to expand rapidly — peaked in 2000 with 55 deals totaling $286 million in equity investments.

But that number dwindled during the recent recession and its aftermath. During 2010, Michigan saw 33 deals worth $152 million.

For decades, of course, Michigan didn’t need to nurture its entrepreneurs. The automotive industry generated vast numbers of good-paying jobs for blue-collar and educated workers alike.

By now, though, everyone agrees Michigan needs a new economic model. Michigan’s manufacturing work force totaled almost 900,000 as recently as the year 2000. But two recessions in 10 years and brutal competition saw that factory work force dwindle to 464,800 in 2009.

And while the auto companies have regained some ground, nobody expects manufacturing jobs to get back to the level of peak years.

With that in mind, Michigan has seen a rush of activity in recent years to nurture smaller start-up businesses. Business incubators are offering mentoring and training classes throughout the state, including at TechTown at Wayne State University, the accelerator at Ann Arbor SPARK, the Southwest Michigan Innovation Center in Kalamazoo, which caters to entrepreneurs in the life sciences, and the Macomb OU INCubator, a partnership of Macomb County and Oakland University.

In the aggregate, hundreds of people work for start-up firms based at these incubators, and thousands more people have gone through various training programs offered.

In addition, new funding is flowing toward the entrepreneurial sector from organizations like the New Economy Initiative, a collaborative effort of several foundations to foster a more nimble business model in the region, and Detroit Venture Partners, the venture capital firm started by Quicken Loans founder and Chairman Dan Gilbert and his partners. In less than a year of operation, Detroit Venture Partners has already bankrolled several small start-up firms.

“It’s a very exciting time for the state,” said Julie Gustafson, executive director of the Macomb OU INCubator.

The goal, says Paul Krutko, president and CEO of Ann Arbor SPARK, is to not only start firms here but keep them here as they grow. Michigan often loses promising young firms that move elsewhere to find qualified workers or easier access to capital.

“If you can grow a company from one to 10 and then from 10 to 100, there’s a pretty good chance that company is going to keep its headquarters here,” he said.

Infrastructure needed

Most agree that Michigan needs more work on its entrepreneurial infrastructure. In California’s Silicon Valley, entrepreneurs can draw on a whole network of talent spotters, venture capital investors, and legions of tech employees ready for new challenges. Michigan is still mostly geared toward a big-corporation model.

One way to tell whether a state nurtures an entrepreneurial culture is to look at what wealthy people do with their money, said Skip Simms, senior vice president of Ann Arbor SPARK.

In Silicon Valley in California, the tech capital of the nation, wealthy tech stars often plow their millions back into new start-up firms. In Michigan, wealthy people more often invest in the stock market and try to avoid any risk to their capital.

For entrepreneurs like Sri Rao of Rochester Hills, this tight-fisted attitude remains perhaps the key problem.

“It’s very, very difficult to get funding around here. Folks here are very, very focused on short-term cash flow, and they’re not willing to focus on a long-term potential,” he said

Then, too, young people coming to Silicon Valley expect to be serial entrepreneurs. Michiganders tend to be more conservative, looking for an employer they can stay with, Krutko said.

Time for new thinking

Mostly a more entrepreneurial culture comes down to thinking in whole new ways.

Rao, the Rochester Hills entrepreneur, said Michiganders need to start thinking more like entrepreneurs. That’s quite different from thinking as a member of a corporate culture.

“I think what Michigan needs to do is get people that are engaged in the automotive space forever to begin to focus their skills on other disciplines,” he said. “Some of it’s training in other skills, but more importantly, it’s approach and attitude.”

Matt Mosher, 29, a Detroit-based entrepreneur whose Web-based firm helps place candidates with the right jobs, says entrepreneurialism can help revive the state’s distressed economy.

“You have to attract young people,” he said. “The way you’re going to do that is attract some really fun, cutting-edge companies to work for.”