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Business Review Western MI
Business Review Western MI
Risky Business
(2008-02-07)
(wgvu) - Risky Business


Feb. 14, 2008

By Nathan Bomey
br@mbusinessreview.com

Michigan once changed the world. It was the entrepreneurial hot spot of
the industrial revolution, leading technological advances in
manufacturing for much of the 20th century.

But while Michigan was leading, the state's culture evolved into a
risk-averse society that shied away from new ventures. Now it's the
world that's changing, and Michigan needs to respond.

Michigan at the beginning of the 20th century was probably the
most entrepreneurial place on earth, said Stephen Forrest, the
University of Michigan's vice president for research. Today, at the
beginning of the 21st century, it is one of the least entrepreneurial
places in America. And we're sort of victims of our own success.

As Michigan's unemployment level has climbed to the worst in the
nation, political officials, economic development leaders, university
administrators and business leaders are trying reverse that trend.

The state government is beginning to invest in start-up ventures with
the 21st Century Jobs Fund, a 10-year, $2 billion program. Economic
development organizations such as Southwest Michigan First in Kalamazoo,
the Right Place Inc. in Grand Rapids, Battle Creek Unlimited, Lakeshore
Advantage in the Holland-Saugatuck-Zeeland area and Ann Arbor SPARK, to
name a few, are helping entrepreneurs launch businesses.

State universities are developing closer relationships with business
communities.

But how do you change a culture that for so long has relied on three
major corporations to sustain economic growth?
For venture capitalist and longtime entrepreneur Dick Beedon, it begins
by getting people to understand that starting a business is a cool
thing.

You change it by investing more money in entrepreneurialism so it
becomes a positive thing. Success changes things, said Beedon, a
former Californian who founded MacBeedon Partners in Ann Arbor.

A hundred years ago, Michigan was full of ideas. Now, ideas and
ambition and entrepreneurial spirit might be what save it.

Taking risks
Success changed Michigan in the early 1900s, when Henry Ford and others
revolutionized the way people get from here to there.
Michigan not only led automotive innovation it invented modern
manufacturing processes, such as the assembly line.

The problem was, the great success we had in creating large
institutional organizations created a few generations of employees, not
entrepreneurs, contended Chris Rizik, co-founder of Ann Arbor-based
venture capital company Ardesta.

Michael Finney, CEO of Ann Arbor SPARK, that region's economic
development organization, said the domestic Big Three automotive
companies provided a sense of security that proved to be flawed.

We have very much been a culture of entitlement. We had wonderful
employers here that allowed our employees to enjoy a tremendous standard
of living, Finney said.

As a result, we haven't focused on being as entrepreneurial as we
were in the early 20th century.

In 2001, Michigan boasted 294,100 jobs in automotive manufacturing,
according to the U.S. Bureau of Labor Statistics. That figure shrank to
223,100 in 2006 and the number is only getting smaller.

It used to be that having a job at GM or Ford or Chrysler was the
equivalent to having professorial tenure, Forrest recalled. I
think virtually everybody in the state who has thought about this at all
knows that that's not the model that's going to carry us
forward.

The culture here is different than the culture in California, for
example a state where the economy is driven by thriving
biotechnology, alternative-energy and information-technology sectors.

People look at entrepreneurialism differently in Michigan, Beedon
said.

In California, starting a company is celebrated. People want to
help. People are extremely excited about getting into the new big
deal, said Beedon, who lived there for 24 years.

In Michigan, however, the culture has become very risk-averse. And
so that's the big difference. When you start something, people shy
away from you.

Reshaping Michigan's image as a state bustling with entrepreneurial
spirit and driven by ideas is critical to the state's revival, several
officials said.

But getting people to understand that risk-taking is a natural part of
starting a business is difficult.

When the Small Business Foundation of Michigan releases its 2007-2008
Entrepreneurial Score Card this week, it will reveal general business
growth in Michigan ranked 50th in the nation. Moreover, the state placed
38th for entrepreneurial change though that was 10 spots
better than in the last study.

Starting a business is risky, and you might fail. But it's part of
the formula and you have to have it, Beedon continued. You have to
look at it like that. You can't point your finger at a failure and
say, See, that's why we don't do it.' And people around here do
that.

Jeff Schox, a technology lawyer, spent six years with Brinks, Hofer,
Gilson & Lione in Ann Arbor before starting his own practice. He
accumulated several Michigan clients, including companies such as Accuri
Cytometers and NeuroNexus Technologies, before moving to San Francisco a
few years ago.

He has a firsthand look at the differences between the entrepreneurial
environment in California and the environment in Michigan: Every six
weeks or so, Schox travels back to Ann Arbor for about five days to meet
with clients and occasionally teach at U-M.

One of the key differences, he noted, is Californians applaud
entrepreneurial spirit and generally accept failure.

Schox has never had a Michigan client go out of business.

Several of his Californian clients have.

It's OK to fail, he said, because if you fail fast, you just
have an opportunity to try again.

Michigan residents need to recognize that starting a company or making
a risky career move is what it takes to survive in the evolving economy.
Getting a job after high school and staying there until retirement is a
thing of the past, he said.

There is no such thing as security. Your security is how well you
can find your next job, Schox said.

State programs play a role
The idea that the state needs to be more entrepreneurial has to be more
than just rhetoric, U-M's Forrest said.

That message needs to be reinforced not only with words but with
actions and money. The Legislature needs to consider this a fundamental
value, otherwise this state doesn't have a positive future, he
said.

In California, they don't just say it, they act upon it. They have
lots of programs to encourage entrepreneurialism.

Through programs such as the 21st Century Jobs Fund, Michigan has been
investing public funds in start-up ventures particularly companies
in alternative energy, life sciences, advanced manufacturing and
homeland security and defense.

But one fundamental aspect needed to encourage entrepreneurialism is a
tax climate that is welcoming to business creation, said Scott Watkins,
consultant and director of administration for Anderson Economic Group.

There is a very significant risk in being an entrepreneur, and
anything the state can do to help alleviate some of those risks is
definitely going to be helpful, Watkins said.

Ron Kitchens, CEO of Southwest Michigan First, said Michigan needs to
return to entrepreneurialism.

What we've got to do is quit treating entrepreneurialism like
it's something new and continue to reinforce that it is our DNA,
that every company we see out there is started by an entrepreneur,
Kitchens said. People have been willing to trade high risk, high
reward for low risk, medium reward.

So what we have to do is reinforce the notion that as an
entrepreneur, you have more ability to control your future than you do
as an automaker.

The state needs to develop a new identity, Kitchens argued, by
effectively communicating the idea there is not one state economy, but
instead multiple regional economies.

In western Michigan, there was no venture capital fund six years ago,
Kitchens said. Now, there are eight.

Nonetheless, he said he still has to convince companies that are
considering locating in Michigan that I'm not Detroit.

They (don't) understand that Michigan is bigger than Detroit, that
there is an east and west side of the state. They've got to understand
that we're more than just the auto industry, Kitchens said.

We're seeing more opportunities and more individuals looking to
start companies than I think we've ever seen. We need to continue to
reinforce that there are opportunities.

Larry Freed agrees.

The state needs to educate the public about successful entrepreneurial
ventures, said Freed, CEO of ForeSee Results, with operations in Ann
Arbor and Southfield.

A lot of it is marketing, letting people see the truth. I don't
know that we celebrate it enough. I mean, we're trying. To a great
extent, it's about celebrating the success that we have, he said.

There's a lot of positives about this area that you can't touch.
You get loyalty from people that you don't get from people on the West
Coast. You get a good work ethic.

ForeSee Results started in 2001 and struck its first deal with a client
shortly after 9/11.

Freed, former vice president of Compuware, was still working for that
software corporation when he identified promising U-M technology and
realized there was a market opportunity for a company that gauges
customer satisfaction in Web transactions.

The corporation gave Freed the flexibility to start a new company
Compuware retained part ownership for a while and the business took
off. ForeSee has more than 100 employees today.

But Michigan needs to cultivate an entrepreneurial community that can
provide start-up leaders with options to join another local company when
they're ready to move on, Freed said.

It is really, really difficult to recruit people back to
Michigan, Freed said. It's tough to expect someone from the
West Coast, from Silicon Valley, to come to Michigan.

Following the money
Taking risks is the basic job description of venture capitalists, and
the state is lacking in V.C. resources, several officials said.

The state of Michigan has allocated up to $150 million to the Venture
Michigan Fund to distribute capital to V.C. funds in Michigan. Most
every entrepreneur in Michigan who is seeking V.C. money complains that
the state doesn't have enough, and opinions vary as to whether the
program is working.

But James Epolito, CEO of the Michigan Economic Development Corp., said
the venture-capital funding the state is providing is helping to change
Michigan's reputation.

We were always a fly-over state. Now they have to stop in
Michigan, Epolito said.

Beedon, for his part, called it a failure, but Ardesta's Rizik
said that Credit Suisse, which is managing the Venture Michigan money,
is doing a fantastic job.

Nonetheless, almost everyone agrees that the state needs more people to
take risks with their money.

The venture community is growing, Rizik said. But there is a
lot more needed. It's pretty well documented that the large
institutional organizations in the state that would be the investors in
venture-capital firms need to step up more and invest in venture-capital
firms in Michigan.

In 2007, V.C. investments in Michigan companies totaled $105.4 million,
according to a report by Pricewaterhouse Coopers, Venture Economics and
the National Venture Capital Association. That figure was down 16.9
percent from the 2006 level of $126.8 million but up 30.4 percent from
2005.

Overall, American companies received $29.4 billion in V.C. investments
in 2007. Michigan's portion of that pie represented about 1/300th of
nationwide V.C. funding.

Ken Nisbet, executive director of the U-M technology-transfer office,
praised the state's efforts to spur V.C. funding, but said the
business community needs to generate results to entice investors.

There is a need for early-stage risk money, he said. But you
have to build the ingredients so people will want to invest.

Michigan residents need to act, too, said Finney, CEO of SPARK.
It really starts within our core education and family systems, he
said. It's got to be taught and cultivated.

We don't have enough people who understand the value and
opportunity of taking that first risk.

Starting with students
Conversations about the state's economic malaise often come back to
education. Political leaders, school and university officials, and
economic development organizations generally agree.

It's more basic education than it is about entrepreneurial
education. This state needs to be a state that so aggressively promotes
the need for basic education of its citizenry, Finney said. With a
highly educated talent pool and work force, your prospects for all these
things you're talking about become more doable.

The state needs to invest in programs designed to retrain workers and
give them the skills to become entrepreneurs, Epolito said. People are
beginning to recognize that an education is essential to surviving in a
modern economy.

That culture is changing, and it's transforming as we speak,
because those opportunities to have a high-school education and go to
work and become a part of the middle class are no longer available,
Epolito added. Those days are over. So you have to start with
education, and we have to put a great deal of focus on education and
continuing education, and we have to begin to teach what the state of
the economy is, what the jobs of the 21st century are.

Finney said he's encouraged by the sense of urgency displayed by the
state's major research universities U-M, Michigan State University
and Wayne State University which united in the University Research
Corridor. A report by the Anderson Economic Group indicated that the URC
had an economic impact of $12.8 billion in 2006.

Presidents of the three universities have expressed a desire to become
more involved in local business. U-M, for one, is starting a business
engagement center aimed at facilitating communication and the sharing of
ideas between the university and the business community.

We're a very risk-averse state, Forrest said. "And in my view
the only solution to this problem is that the universities engage much
more strongly with the business world.

Michigan has 15 four-year universities, 29 two-year community colleges
and more than 50 independent colleges. Those schools can play a key
role, Schox said.

Everyone in the Valley understands the power of educational
institutions in Michigan, Schox said.

Sitting in a downtown Ann Arbor coffee shop recently, the technology
lawyer told a story about a class he occasionally teaches at Stanford
University and U-M. The course, a one-credit patent class for
engineering students, generally hosts students whose entrepreneurial
aspirations are encouraging, he said.

Five years ago, when he was teaching the class, his Stanford students
were taking the course because they wanted to know how to protect their
own inventions. His U-M students were asking questions about what they
had to know to get a job at Toyota.

But the students' attitudes are changing.

My (U-M) students now are more like my students at Stanford.
They're asking the right questions. They're not asking the
questions because they want to bolster their r sum for Toyota, Schox
said.

We need to be able to let these students dream.

Nathan Bomey is a reporter for sibling newspaper Ann Arbor Business
Review.
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