Years ago, when Monica Wheat went on conference calls to talk to other entrepreneurship professionals, people tended to discount her city, Detroit. “They were like, why is Detroit on this call?” said Wheat, who founded Venture Catalysts.
Now, people will wait to start a meeting if a Detroit representative is running behind, she said.
Michigan, led by the growing ecosystems of Detroit and nearby Ann Arbor, is emerging as a powerhouse in the tech space. The state’s venture capital share has jumped from $300 million in 2016, to almost $3.1 billion in 2020 — 866%– according to Crunchbase. That makes it the state with the fastest growing venture capital rate.
The auto industry’s collapse made people desperate in Detroit, pushing them into risky entrepreneurship. A few miles west, Ann Arbor’s research through the University of Michigan sparked new innovation. Up north, in Grand Rapids, entrepreneurs were scaling new ventures. Out of the 556 privately held VC-backed companies founded since 2010, 127 were in Ann Arbor, 95 in Detroit and 40 in Grand Rapids. People who are part of the business community say it has a different cast than that of larger, more established places.
“Having that unique culture and being really scrappy, being a group of entrepreneurs that know how to hustle and have to work harder for that first check, because it does take longer to get that first check in a place like Michigan as opposed to being out in California,” said Trista Van Tine, who now runs the Ann Arbor Entrepreneurs Fund, a group of local entrepreneurs who have pledged 1% of their company equity, investment carry or annual profits to local nonprofits to support their community.
For the last decade, the ecosystem has been growing, producing many large exits and some unicorns. For instance, Cisco bought Ann Arbor-based Duo Security for $2.35 billion in 2018. Detroit-based sneaker and streetwear marketplace StockX raised a $110 million Series C round in 2019 and a $275 million Series E last year. Earlier this year, British technology firm Clarivate PLC bought Ann Arbor-based ProQuest for $5.3 billion. The flow of funding is coming from Michigan investors and outside funders backing Michigan-based ventures.
Detroit, once a city with a tarnished reputation, is now being taken seriously by other ecosystems, leaders say. While the state still dominates in automotive tech, innovators are building successful companies in other industries such as life sciences, artificial intelligence and fintech.
It’s growth clearly isn’t slowing down: Just last month, Beringer Capital bought a majority stake in Detroit-based content marketplace Benzinga for $300 million, and Ann Arbor-based Workit Health raised a $118 million series C round earlier in the month.
It’s likely only getting started, leaders say.
A Midwestern Style of Entrepreneurship
Detroit is closely tied to Ann Arbor, which is about the same distance from Detroit as San Jose is to San Francisco. Leaders hope to make them into a tighter ecosystem with the growth, says Van Tine. Already, efforts have been made to increase the public transportation between the two areas.
Van Tine, who worked in Silicon Valley building AXA Venture Partners, came back to her home state of Michigan last year to run the Ann Arbor Entrepreneurs Fund, which is in the process of rebranding to the Michigan Founders Fund to encompass more communities.
“We realize that this is something that’s important to the whole state,” she said. “We need to help create these connection points and be that bridge between all of the different areas of entrepreneurship happening throughout the state.”
Michigan offers many things Silicon Valley does not, making it appealing to a different type of entrepreneur. For one, the state’s midwestern culture is more family oriented. Founders often live and breathe their companies in the Bay Area, Van Tine said. But in Michigan, you can build a successful business and still have other defining factors, such as hobbies or your family, a quality that’s become more valuable to people throughout the pandemic.
Michigan also has a collaborative culture. Founders often help each other out, connect each other to their networks and want to see others succeed. It’s the case in many middle-America states’ ecosystems — such as Austin, Texas or Boise, Idaho. It’s not, however, typically the environment founders get in Silicon Valley. For one thing, It’s a whole lot cheaper to live in Michigan than California.
Today’s business leaders look back to a time when the tech model seemed out-of-reach in the Midwest. When Carl Erickson launched his Grand Rapids, Michigan-based software development company Atomic Object in 2001, the state’s startup ecosystem barely existed.
He had just left a 10-year teaching job at Grand Valley State University to work for a different tech startup. But when that venture went belly-up months later, he and Bill Bereza, a former student of his, launched their own business, which has grown into an 80-employee company that brings in about $16 million annually.
As Erickson built Atomic Object, he and other entrepreneurs looked to a rising Silicon Valley ecosystem as an example. In fact, Erickson says he noticed the connotation around entrepreneurship change back then.
“The whole world started thinking more about startups and early stage companies, and the word entrepreneur went from kind of a weird, old fashioned word to like a hip and modern word, and an exciting word,” he said.
The Birth of an Ecosystem in Detroit
Entering the automotive industry was often an easy, and stable, career choice for many Michiganders — especially in Detroit, where many would graduate high school or college and find a job at Ford, General Motors or Chrysler.
“In the early days, there wasn’t a high tolerance for risk,” said Wheat, whose nonprofit Venture Catalysts is working to build an inclusive ecosystem in the city through events, connecting founders to funding and accelerating startups. “There was this thought of like, why take a risk on a small company that may not go anywhere, when you have this very direct path towards financial stability?”
Wheat worked in the auto industry, with GM and Ford, to identify startups that would make good partners. She became passionate about startups. The only problem — the innovative Detroit-based startups she dreamed of funding were far and few between in 2006. She didn’t get very far.
That was the same year Erickson expanded Atomic Object to Detroit. But soon after, the office closed — there just wasn’t enough demand yet in the city.
Then the 2008 economic crisis hit, and the auto industry became less stable. GM and Chrysler filed for bankruptcy and 100,000 people lost their jobs. This was a turning point: Michiganders began looking at entrepreneurship as a more appealing choice.
“Here’s this moment, where everything I thought I knew was solid and steady isn’t quite so solid and steady,” Wheat said. “So why not take this risk and try something different?”
In 2010, Wheat began working with Boulder, Colorado-based Techstars. She advocated for an accelerator in the city (along with many other emerging markets). Wheat eventually ran Detroit’s accelerator and launched Detroit Startup Week shortly after.
It took awhile to build a robust network — at first, Wheat sent entrepreneurs to Chicago to get more funding. Soon, early entrepreneurs and people in finance began investing back into the ecosystem. Atomic Object’s Erickson did this. He started funding innovators in 2006 and now is the board chair of Michigan Capital Network.
The population of Detroit is about 80% Black, which has made it easier for the ecosystem there to prioritize diversity, Wheat said. It’s normal for women and people of color to have a spot at the table, she said. Because of this and leaders, like her, who are intentional about creating a diverse ecosystem, equity and inclusion have been at the forefront of the building from the start, Wheat said. “We’re obviously not perfect, and we have things that need to be fixed,” she said. “But it wasn’t abnormal to see women, to see people of color, just running things, or founding companies.”
Room to Grow
Michigan still lags when it comes to supporting other kinds of entrepreneurs. The state was ranked 32nd in Bentonville, Arkansas-based Heartland Forward’s Entrepreneurial Capacity Index, which looks at the percent of private sector employees with bachelor’s degrees or above at young firms five years of age or less from 2018 data. In 2017, the entrepreneurship rate for firms with employees in Detroit was 17 per 1,000 working-age residents, according to an economic equity report by thinktank Detroit Future City. Detroit ranked 99th among the country’s 100 largest cities.
Detroit is full of small mom and pop shops and solopreneurs, said Katrina Turnbow, who works with small business owners as the founder of Detroit-based Kanopi Social and a Google Digital Coach. People of color are also more likely to start small enterprises like these, she said
While resources for entrepreneurs running small shops have grown with the tech ecosystem, these owners still aren’t getting the support they need, Turnbow said. “In Detroit, the true entrepreneurs and solopreneurs, 90% of them fit into the mom and pop space, and desire education, information and knowledge, not necessarily, you know, all of these other resources to go talk to funders and competitors,” she said. “We need equality, we need access and accessibility on an even playing field, outside of just having to say I’m going to a pitch competition.”
Much of the progress Wheat and other builders had been working toward in Detroit came to a head right before the pandemic, leaving many plans canceled or paused. But the ecosystem adapted, and many tech companies thrived because of the changing market. “In true Detroit-style, there was resilience in the midst of it,” Wheat said.
Future Outside of Auto
While it’s a common narrative, the future of Michigan’s ecosystem is not in automotives, leaders say. As the big deals show, entrepreneurs are building powerful companies in industries such as cyber security, life sciences and communication. “Even if you just scratch under the surface a little bit, you see a lot more activity happening in these other verticals, and a lot more money being secured by these startups from outside of the state of Michigan, that are solving problems in these other spaces,” Van Tine said.
University of Michigan students leave its campus with skills in subjects such engineering, biology and environmental policy. Van Tine, who’s also a mentor at the university’s Center for Entrepreneurship, said she’s noticed an increase in students with a desire to work on sustainability issues applying to the program.
As a whole, Michigan’s ecosystem is setting itself for continued growth, she said. “We’re at least taking the right steps for the future,” she said. “I think it shows that we’re really poised for even more growth than we’ve seen in the last 10 years.”
Wheat’s advice to ecosystem builders: Strategy and partnerships are king. “This is a game won from agility and experience,” she said. “This is a playing field where a strong, connected network is table stakes.” Find the “ecodev tribe,” she said, “We are a growing number globally and are building big things in markets everywhere.”
This story has been updated to correct the spelling of Carl Erickson’s name.