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A2’s tech sector:
Big ideas, big money

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Grace Hsia is CEO of Ann Arbor startup Warmilu.

Grace Hsia is CEO of Ann Arbor startup Warmilu.

Can Ann Arbor become the next big thing in high tech?

Story by Julie Halpert

Photos by Benjamin Weatherston

Grace Hsia, a 23-year-old graduate student at the University of Michigan, thinks she has the next big business idea and she spends most of her waking hours making sure it succeeds.

As an undergraduate engineering student, she and a team of five others got a patent on a non-electric heat technology they use to make infant warming blankets. She’s CEO of a company they founded, Warmilu, which seeks to reduce infant mortality from hypothermia, a condition that kills 140 infants in developing countries every hour.

“I am passionate about spreading warmth to save lives,” she said. Hsia and her five partners have raised $30,000 to launch the product, which is being tested in Bangalore, India.

For the past 17 months, Hsia has spent as many as 90 hours a week nurturing her startup from her cramped, 196-square-foot apartment in downtown Ann Arbor. She tends to her pet project while perched on her lone piece of furniture, a cappuccino-colored futon.

“People form new companies and that’s a more organic way of growing.” Jen Baird CEO, Accio Energy Inc.

“People form new companies and that’s a more organic way of growing.”
Jen Baird
CEO, Accio Energy Inc.

She also takes a full 16-credit class load in her master’s of entrepreneurship program and works 20 hours a week at the U-M’s Institute for Research on Labor, Employment and the Economy. She even manages to squeeze in exercise, logging 56 miles on a stationary bike on a recent Saturday while typing away at her laptop.

She doesn’t sleep much. “When you know your technology is saving lives, it really makes you go the extra mile,” she says.

Hsia is extraordinarily committed, but she’s not alone. Ann Arbor has a growing techie subculture of people chasing their dreams, hoping to cash in on the next great idea.

Tech-oriented entrepreneurs are getting help from an expanding support group: the University of Michigan, the state, economic development organizations, national technology companies setting up offices in Ann Arbor, other young professionals who view Ann Arbor as the perfect place to launch a tech business, and new venture capital firms which are filling the need for seed money.

This combination of dreamers and backers is fueling a fast-growing high-tech startup culture here.

According to a Feb. 1 report by the Brookings Institution, Ann Arbor has the seventh highest rate of patents per capita in America.

The University of Michigan’s Office of Technology Transfer launches a startup company, on average, about every 30 days.

Sara Wurfel, a spokeswoman for Gov. Rick Snyder, says nearly every part of the information technology industry is represented here, with more than 300 companies offering all levels of technical services, including cloud computing, website hosting and development, and mobile app creation.

“Ann Arbor is considered one of the top performing cities in the entrepreneurship sector in the entire state,” said Martin Dober, the Michigan Economic Development Corporation’s senior vice president for entrepreneurship and innovation.

A false start

Kenneth J. Nisbet, executive director of U-M’s Technology Transfer Office

Kenneth J. Nisbet, executive director of U-M’s Technology Transfer Office

Ann Arbor missed its first opportunity to capitalize on the high-tech boom three decades ago, said Craig Labovitz. He said he began working on the development of the Internet for the National Science Foundation here in 1982. Though Ann Arbor, with its strong engineering talent, was considered the hub of the effort, there wasn’t an ecosystem to retain the talent, so companies started moving to the East and West coasts, taking the engineering talent with them.

“We went from the pinnacle of the Internet to nothing,” he said.

He said he’s seen an “incredible transformation” in the last 10 years.

The University of Michigan is the most important high-tech driver. Its $1.27 billion research budget makes it the top research spender of any public learning institution. The money has provided a pipeline for starting and growing new tech businesses and commercializing ideas.

Steve Forrest, U-M’s vice president for research, points to a 2007 speech by U-M President Mary Sue Coleman, when she discussed the importance of partnering with the state and industry to further develop business ideas.

Forrest said there was a recognition that to attract the brightest faculty, you needed to offer them entrepreneurial opportunities. That “required us to change,” he said.

The university receives a third of the royalties and equity generated from faculty members’ intellectual properties, and that money is reinvested in entrepreneurial initiatives. This serves to help make Ann Arbor a more attractive community to students, Forrest said, adding that “a high-tech startup is not the only economic outcome of entrepreneurs. It’s all the businesses that support the startups, from dry cleaners to hotels and restaurants.”

Kenneth J. Nisbet, executive director of U-M’s Technology Transfer Office since 2001, has a $5 million budget to license ideas, provide patents and assist faculty inventors in starting companies.

Over the past 10 years, his office has helped produce more than 3,000 inventions, launch 98 startups, raise more than $1 billion in private venture funding and create more than 1,500 jobs with startups. Tech Transfer also runs a venture accelerator which houses 16 U-M startup companies.

This places U-M in the top 10 among all universities in tech transfer performance, Nisbet says.

In addition, U-M’s Medical School partners with industry to help commercialize faculty ideas in health care. Connie Chang, the Medical School’s Office of Business Development director, says that 40 percent of startup companies in Ann Arbor are from the health-care system.

The Center for Entrepreneurship, housed out of the Engineering College, has helped launch more than 100 startups. Doug Neal, the center’s executive director, said about 8,000 students are involved in entrepreneurial programs throughout the university.

Will Stone, coordinator for TechArb, which helps U-M students start companies.

Will Stone, coordinator for TechArb, which helps U-M students start companies.

The center’s Zell Lurie Institute, together with the Stephen M. Ross School of Business, also runs TechArb, intended to help any U-M student who wants to start a company. Roughly 15 teams of students over a six-month period take advantage of a workspace, caffeine and the Internet and get feedback on ways to grow their idea.

Out of the 97 companies started by students from 2008-12, 25 were funded, three were acquired, 39 failed and the rest are still active.

One success story is Mobiata, which manufactures iPhone apps for trip planning. It was generating more than $2 million in revenue when it was purchased by Expedia in 2010. Mobiata is still in Ann Arbor. In fact, many of the companies remain here, fostering a “dynamic startup culture in Ann Arbor,” said Will Stone, TechArb’s coordinator.

The big boys play here

The university works with Ann Arbor SPARK, which works to attract new businesses to Ann Arbor and convince local businesses to stay and expand.

SPARK has made high-tech development a priority. From 2006-12, it invested $6.6 million in 29 Washtenaw County companies, part of the $25 million it received from the Michigan Economic Development Corporation to provide early-stage capital to startups.

SPARK has helped attract major tech players to the area, including Google and Barracuda Networks.

Google set up an Ann Arbor office in 2006 for its AdWords operations, designed for advertisers to reach out to customers using Google. It moved to its current East Liberty location a year later.

Google spokeswoman Julie Currie said the talent base from U-M is a big attraction to Google. She wouldn’t disclose how many employees work here.

Silicon Valley-based Barracuda Networks, which focuses on network security and storage, outgrew its 12,000-square-foot Depot Street location where it had been since 2008 – jumping from 25 people to 200 – before it moved downtown into the former Borders space in November, encompassing 45,000 square feet. It’s now at 250 employees and is hiring one to two people a week.

“Ann Arbor is a logical place for a Silicon Valley company to expand,” says Sean Heiney, Barracuda’s vice president for strategic initiatives. “You get incredible engineers at a fraction of the cost of Silicon Valley.” Plus, he says, there’s lower turnover, because Ann Arbor employees appreciate a job with good pay and benefits and “are not concerned with bouncing around for the best thing of the day.”

Systems in Motion, a technology services company also headquartered in the San Francisco Bay area, picked Ann Arbor over Phoenix, Chapel Hill, N.C., and Austin, Texas, as a place to open its delivery center in January 2010. It now employs 130 people. Motivators were relatively lower resource costs and the university, said Debashish Sinha, chief marketing officer: “The talent at the senior level and the entry level has been outstanding.”

MyBuys, which offers personal shopping services for online retailers headquartered in the San Francisco Bay area, has grown its Ann Arbor workforce by 20 percent each year since 2008 when it set up shop here.

Spawning entrepreneurs

This tech culture is benefitting from so-called “serial entrepreneurs,” those who have started successful companies and moved on to another company once those are sold.

One of them is Jen Baird, 45, who launched the medical devices company Accuri Cytometers in January 2005. By the time she left in 2010, the company had a presence on seven continents. It was sold in 2011 and remains in Ann Arbor. She is now CEO of Ann Arbor-based Accio Energy Inc., which manufactures turbine-free wind energy.

She says it’s a good thing for the community when companies are sold, especially if they remain in Ann Arbor. She said a sale is often necessary to provide investors a return on their investment, and that also opens up the opportunity for those who started the company to redeploy.

“People form new companies and that’s a more organic way of growing,” she said, resulting in the Ann Arbor “ecosystem getting stronger.” She says all the senior executives of Accuri are now in other companies, and only one has left town. “That experience base is spreading out. Good people get passed around and help build new value.”

Labovitz, a co-founder of Arbor Networks, went on to co-found DeepField in November 2011. That company, which enhances delivery of cloud-based services, has a goal of being cash-flow positive this year.

Tony Grover, managing director of RPM Ventures, a $60˛million venture capital firm, says the large “exits” by companies that Labovitz and Baird started are “helping to create the next generation of entrepreneurs, since it spawns people with wealth and startup experience in a high-growth, high-technology business who use that to start the next company.”

He said it will ultimately take decades to realize the ripple effects on a large scale, but “we are starting to see elements of that in town.”

The techie godfather

Dug Song

Dug Song

Dug Song, 37, a computer security guru who helped develop the music-sharing service Napster, co-founded Arbor Networks, which grew from six to 300 people in the decade before it was sold. He’s already on to his next big computer security business; last year he started Duo Security, which has 1,000 customers in 80 countries.

But Song’s passion is breeding a pay-it-forward culture he saw modeled in Silicon Valley. He’s focusing on ways to help other startups, recently helping raise $1.5 million for DeepField.

He also founded Tech Brewery, where entrepreneurs can rent inexpensive space in a recently renovated former brewery built in 1880. It’s the ultimate hip space – an open room full of exposed brick and floor-to-ceiling windows where twenty- and thirty-somethings dressed in jeans and T-shirts sit side by side at computers.

Song negotiated an arrangement with the landlord, Doug Smith, where tenants can rent a desk for as little as $50 a month. “Dug is the den mother,” Smith says. “He takes people under his wing.”

Song pointed to Olark as an example of a tenant which grew from a single desk to a full-fledged office.

“I’m trying to build a grassroots tech community from the ground up,” Song says. “I want to provide a crucible for folks to run into each other and recombine.”

Silicon Valley’s little brother?

Ann Arbor has a long way to go before it becomes the next Silicon Valley. Grover says locals startups typically sell to larger firms for $150 million to $300 million. That’s respectable, but far less than the wealth that came from Dell, for instance, which transformed Austin. Having a company like that “would completely change Ann Arbor,” he said.

Lindsay Aspegren, a general partner in North Coast Technology Investors, agrees that Ann Arbor needs a recognizable public company to put it on the map. “Ann Arbor in the tech world is not something that really pops into the forefront of people’s minds when they think of success,” he says.

Tim Petersen, managing director of Arboretum, says the city needs more companies with “meaningful exits,” adding, “We need to encourage the Dug Songs of the world to stay here and start more companies.”

Song has no plans to leave, but he agrees that he’s one of the few entrepreneurs focused on building the high-tech community here. “In Silicon Valley, being an angel investor is a badge of honor,” he said. “We need folks who care enough to roll back in and contribute.”

He says too many who have benefitted financially from starting high-tech companies aren’t getting involved in the next wave of innovation. In Silicon Valley, he says, the atmosphere is exuberance, with the feeling that anyone can be a millionaire; here, the culture feels more adversarial.

At the same time, he doesn’t think it’s appropriate to model Ann Arbor after Silicon Valley. It’s more on par with the next tier down, university towns like Austin and Boulder.

“Boulder has gotten it right,” Song says. “It has a network of entrepreneurs and successful people rubbing elbows.” But he adds that with roughly $1 billion in startup exits over the past five years and a company sold every year, Ann Arbor is keeping pace.

SPARK CEO Paul Krutko says “the biggest challenge that will hold this region back is the mismatch between the jobs we’re helping to create and the qualifications and ability of our workforce training system to provide talent to fill those jobs.” He says that continuing to attract and retain talented people in Ann Arbor will remain a priority for his organization.

Krutko agrees with Song that it’s not appropriate to compare Ann Arbor to Silicon Valley, since Silicon Valley has about 10 times the population. But he says local access to advanced manufacturing expertise, especially in the area of connected vehicle research, offers a promising niche.

Nesbit says this area lacks a “critical mass” of early-stage funding, entrepreneurial talent and growth-stage industry. He hopes the university’s resources and mentoring will help address that situation.

“We have a natural Silicon Valley that’s never quite congealed,” adds U-M’s Forrest; there’s not enough intermingling between the academic community, the physical community of Ann Arbor and the high-tech industry that is common in Silicon Valley.

The university is reaching out to form strong partnerships with industry, he says, but there’s only so much the university can do. “We cannot cause the revolution. It will ultimately take local industry to make it happen.”

Beer, hacking and pitching

A busy day at Tech Brewery

A busy day at Tech Brewery

But it’s hard to see the shortcomings when looking at the number of well-attended tech gatherings in the area. One event, “Beer: 30,” occurs in the Tech Brewery every Friday, where up to 80 people convene to socialize and network.

On a recent Friday, Lida Hasbrouck, 26, was there with her shitsu dog that she brings to work every day. She was getting feedback from another tenant on the progress of the startup she and her husband launched last July for a virtual course pack. “This is not just about cheap rent. It’s about like-minded people providing support and encouragement,” Song said.

Anthony Oliver, 31, founder of a company called Sight Machine, which uses cameras in manufacturing for quality control, often stops by on Fridays. Oliver says Ann Arbor provides a quality of life unmatched in Silicon Valley. He recalls a recent conversation with a Silicon Valley entrepreneur, who said he was jealous of Oliver’s digs; he pays only $1,400 in monthly rent for a 1,600-square-foot house in Dexter on 10 acres. Ann Arbor “is a great community to start a tech startup,” Oliver said. “You feel more like a person and less of a number here.”

David C. Bloom, a 51-year-old startup coach, is on the board of a2geeks. He describes it as a group that “supports and promotes geek culture in greater Ann Arbor,” sponsoring events that attract thousands.

Bloom said, “California-based companies like Barracuda, Google and MyBuys are siting here because we’re all about resources, ecosystem and growth, stuff that’s hard to retain out West.”

The day after the Tech Brewery event, Song was a judge in the third annual Start Up Weekend Ann Arbor at Rackham Auditorium, a 54-hour event where 104 students and professionals pitched 55 primarily website and mobile-app-based businesses. On the same day, just down the street at Palmer Commons, students organized Mhacks, the largest student hackathon in the country. That 36-hour event attracted 550 students from all over the country, including 275 from U-M. Students formed teams and built web and mobile applications, vying for more than $10,000 in prizes.

Seeds and blooms

As technology development has flourished, the venture capital industry is growing along with it. The number of venture capital firms with an Ann Arbor presence has grown from four in 2000 to 16 in 2013. Some firms are headquartered in Ann Arbor, while others are setting up offices here.

Firms in Ann Arbor manage $1.8 billion, according to the Michigan Venture Capital Association.

This growth is occurring at a time when the number of venture capital firms has dropped by 30 percent nationally. And venture capital firms outside the state don’t hesitate to invest in companies here as well.

“If you talked to a venture capitalist on the West Coast 10 years ago and said you were building a company in Ann Arbor, he would have thought you were crazy and (would have) asked you to relocate,” said Grover. Now, he says, Ann Arbor garners as much respect as Austin.

When Jim Adox started EDF Ventures in 1997, he was the only firm in town. Now he sees an “explosion” in venture capital activity. He’s currently the managing director of the Ann Arbor office of Venture Investors, based in Madison, Wis. He has subleased the ninth floor of the First National Bank Building, where he’s located next to two other firms – Fletcher, Spaght Ventures, based in Boston, and Early Stage Partners of Cleveland. Now, a total of $400 million to $500 million is managed by collective funds located in the building. Adox says it lends itself to a water-cooler collaborative atmosphere, where they can invest in some of the same projects.

Petersen, the managing director of Arboretum, a $140˛million fund, says Ann Arbor’s activity has gone from small to meaningful in the past 15 years, though “we could use a few more funds the size of ours” to provide some stability and longevity and to write big enough checks.

Angel investment, where individuals contribute money to startup firms, is active. A group called Ann Arbor Angels, made up of 14 private investors, provided $3.4 million to eight companies in 2012.

“We’ve seen steady growth” in Ann Arbor, said Michael Cole, director of Ann Arbor Angels.

The high-tech road ahead

Jen Baird believes many important elements are converging, boding well for Ann Arbor’s high-tech future. “There’s increasing sophistication among angel investors,” she said. “Venture capital groups are expanding. We have a network of people with startup experience. All of that adds to the ecosystem.”

Hsia hopes that ecosystem will help her as she stays in Ann Arbor to work on her startup after graduating this year. Fully aware that nine out of 10 startups fail, she’s confident that she’ll become another Ann Arbor high-tech startup success story.

If not, she says she’s already had a marketable learning experience. “If this fails, I can connect with others to work on another startup,” she said. “It gives you the chance to look for the next great problem to solve.”

 

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