“So in this building here, for example, there are a lot of law firms,” Teshuba says, “and they just opened up a gynecologist’s office on the first floor. So culturally speaking, if we were to go to Detroit, every other company that would be in a building with us would be a tech company. Maybe we’ll be in a building with other app developers. We might be in a building with, you know, some other creative technology companies. So for us it would be a better fit. Plus a lot of the talent that we’re trying to attract on the design and programming side, they have a natural affinity to that area of Detroit.”
In short, it’s where they as a company need to be. It’s where they want to be. And they aren’t alone.
There are literally dozens of new technology startups currently up and running in the city of Detroit and the surrounding suburbs, mostly focused on software and business-to-business services, that are reinventing what the economy of southeastern Michigan can look like. It’s a recent trend, one that’s really only been happening since about 2010, when billionaire financier Dan Gilbert moved his company, Quicken Loans, into new offices downtown. It is evolving and changing on a weekly basis as new companies get started, new buildings come online, and new neighbors move in.
It’s part of a deliberate effort to overhaul the state’s “muscle economy” that for generations has been focused on manufacturing and the auto industry. In fact, the Big Three American automakers (GM, Ford, and Chrysler) were such a dominant part of the Michigan economy for so long—from roughly the 1890s to the late 1980s—that little else had sprung up in the area to employ the citizens or support the local economy after the industry collapsed in the 1990s. The choice for much of the city’s modern history was either to go and work for the Big Three or move.
Now that’s changing, and many in the area feel that software startups can be part of the solution, offering a high-growth, high-potential new alternative that could one day emerge as an anchor for the city’s economy.
“It’s about speed in which growth can happen,” says Jared Sta-sik, an associate with local venture capital firm Detroit Venture Partners (DVP), the largest software-focused VC firm in Michigan, with $50 million under management as of 2013. “A technology startup is so capital efficient that we can make a $500,000 investment that will last the company a year and create a few jobs. But it has high growth potential. If they find the right product that is the right fit for the market then, boom, whatever it might be could actually become a big employer. When we first invest in these companies, the number of jobs is not huge. But the idea is that they are extremely high-growth, high-potential jobs.”
And for the down-and-out Detroit job market, this is nothing but good news.
Tech entrepreneurship might seem like a new thing for Detroit, but, in fact, technology has been part of this city’s DNA since the very beginning. First, the region’s abundant natural resources made Detroit a leader in the horse-drawn-carriage industry in the mid- to late-nineteenth century. Then, Henry Ford arrived on the scene and those same carriage makers become some of the first to build bodies for automobiles. That, of course, grew into one of the great success stories of American business, but we all know how that story ended.
At its peak, the automotive industry formed the foundation of the Detroit economy, helping make the city the fifth-largest in the US and a key player in the country’s postwar economic boom. Fast-forward half a century and things in and around Detroit have changed dramatically. The city’s population has shrunk from its 1950 peak of about 1,850,000 to just 701,000 as of 2013, with about 25 percent of residents having moved out of the city in the last decade. Prior to declaring bankruptcy, Detroit was some $18.5 billion in debt, with $3.5 billion of that tied up in pension obligations.
But that’s the bad news. Since declaring bankruptcy and working to restructure its debt obligations, the city is now going all in on Internet technology in hopes that it could make up at least some of the economic slack from the long-struggling automakers. Optimism is high.
“The idea is that generally for these online software companies, their audiences can be anywhere in the world,” explains Ted Serbinski, vice president of Detroit Venture Partners (DVP), at his office in the Madison Building. “You go way back to 500 AD, if you wanted to bake bread you had to live next to a river to grind the flour. With the invention of electricity, now I can plug my KitchenAid into the wall, and I can make bread in here with my little toaster oven. The same thing is happening with the Internet. I can plug into Amazon Web Services, and now I can have a startup that serves millions of customers around the world. And now I don’t need to be in New York or Silicon Valley anymore. I can actually do it in Detroit.”
For fans of the Midwestern way of life, this has been a very significant development. Now they don’t have to choose between the work they want to do—software development—and the lifestyle that they want to live. And make no mistake: There are worse places to live than southeastern Michigan, despite all of the negative press that Detroit attracts. The cost of living is low, the lake districts are beautiful (“Traverse City: Pure Michigan”), and the state’s midcontinent location makes both the East and West Coasts a reasonably short flight away.
The business side of startup life in Detroit comes with a distinctive Midwestern bent as well. The focus here isn’t on the latest and greatest app or attracting the most users or page views. Conversations among Michigan entrepreneurs often turn on topics like “sensible growth” and “capital efficiency.” It’s a little old-fashioned, it’s a little conservative, but it’s exactly what many people would expect out of the Rust Belt. And, for some founders, it’s a good fit.
“I moved here from California,” says Serbinski, “and one thing we’re seeing is people that are kind of looking to start a family, so they’d like to buy a house and have a backyard. That’s kind of what my wife and I were looking for when we moved here. You have the Great Lakes and you have Traverse City, which is just this undiscovered gem up north. You can have a really nice life here with great schools and great values.”
It’s also proving to be surprisingly profitable for some entrepreneurs.
Mango Languages is a self-funded startup—“No thanks, we’re good,” says CEO Jason Teshuba about his interactions with potential investors—but in fact it is just one of several non-VC-funded businesses that I found in Detroit. Billhighway, which offers a cloud accounting solution for “shared bills” like those among roommates or membership organizations, is also funding its own growth, as is app maker Detroit Labs. It’s a little surprising at first—after all, venture backing is a fact of life for many technology entrepreneurs on the coasts (and a badge of honor for some)—but this more conservative approach just comes with the territory in Michigan. Rather than rely on money from outside the area, and the limitations that often come with it, many of these startups truly want to go it alone, and they structure their businesses to be revenue-positive and growth-oriented from the start.
As a result, they’re also taking their time as they grow.
“You’ve got to give yourself the time to succeed,” says Mango’s CMO Ryan Whalen. “You’re going to fail, but what you don’t want is to build a cost structure that will hit you if you don’t grow as fast as you expected. Focus. Find your niche. There’s power in focus.”
It’s about reasonable, organic growth. It’s about playing your own game. “Don’t worry about where other people are,” Whalen says, “just worry about where you are. There are enough pieces of the pie to go around for everybody.” And, most importantly of all, staying in the black. Entrepreneurs don’t come to Detroit (or stay there) to swing wildly at pie-in-the-sky ideas. The point in this town is to create revenue, create jobs, and help contribute to the rebirth of the city.
It might be quaint, but there’s no denying that this attitude is making gains. The Detroit area’s startup scene has grown dramatically in recent years, taking the city from a tech backwater to a bona fide player on the national map.
According to Automation Alley,