Ann Arbor, Venture Capital
Addie Shrodes
Magazine Staff WriterFebruary 14th, 2010
Devin Chasanoff, a finance and accounting student at the Ross School of Business, graduated from the University last spring, entering one of the toughest job markets for a college graduate in recent history.
At the University he had studied to become an investment banker and had hoped to get a job right out of college. But after multiple interviews with recruiters from investment banks and consulting firms around the country, and not one offer in sight, he took an unpaid internship in New York City at Maxim Group — the investment banking firm he had interned with the previous summer. While the arrangement mirrored that of many of his B-school friends who were also having trouble lining up permanent jobs, Chasanoff was still disappointed.
“It hurt not to be able to find a job after putting in so much work, going to one of the most prestigious business schools in the country,” Chasanoff said
But just a week into the job, sitting in the company’s Chrysler Building office on the east side of Manhattan, Chasanoff thought of an idea that would pull the New York City native back to Ann Arbor.
His vision was to create a website — an event-based social networking site that would consolidate all of the information available to the diverse University of Michigan student body into one simple location.
“Essentially, what I wanted to do was pull all of the vibrant student life and campus community — student groups, student organizations, Greek life — into one place,” he said. “Pretty much everything you’d find at Festifall.”
He launched the site, TheNew2Do.com, in January and chronicled the development on his blog, TheStartupKid.com.
“This experience has been like nothing else in my life,” Chasanoff wrote on his blog. “It’s really the experience of a lifetime, and had I gotten a (job) offer, I never would have pursued this startup.”
Today, Chasanoff no longer considers his inability to find a job a set back. The recession, and the position it put him in, propelled him to innovation.
“I wasn’t happy with what I had,” he explained. “(The recession) presented this really big opportunity for me.”
Chasanoff’s experience isn’t unique. It illustrates a larger pattern of entrepreneurship induced by a failing economy. The company's beginnings sound like the stuff of movies: some space in an office building basement, a communal pot of money in the middle of the room, tables from IKEA thrown together and a BYOC policy — "bring your own chair." Without reliable job prospects, many people, including young college graduates, choose to take a chance with a business venture instead of working in a dead-end job.
According to Tim Faley, managing director of the University’s Zell Lurie Institute for Entrepreneurial Studies, areas now associated with entrepreneurism, like Silicon Valley, went through periods of economic erosion themselves. When these places realized the need for an alternative fiscal base, innovation soon followed and an entrepreneurial economy eventually came to replace their antiquated structures.
“A poor economy makes starting a company look a lot less risky,” Faley said. “If I have an entrepreneurial mindset and the secure corporate job doesn’t look that secure, then maybe I’m more likely to start a company. That’s where the economy really drives people to start new companies.”
Faley said Michigan’s traditional economic base — automotive manufacturing — originated from an entrepreneurial mindset. But following the cycle of innovation, the auto companies began to overlook the importance of continued ingenuity and Michigan’s population concentrated on industry jobs rather than entrepreneurship.
While this deterioration of Michigan’s automotive-based economy has been happening for years, the recent economic crisis has forced Michiganders to look toward a new economic base.
“The problem with Michigan is that the automotive industries would decline and people would say, ‘Oh, we need to do something differently,’ and then it would bounce back, and all of the new programs would get killed,” Faley explained. “We’re at the point now where people are saying there is a fundamental, permanent shift in the auto industry, and we have to develop an economy outside of that.”
Though the state has arguably been hit the worst by the nation-wide recession, Faley believes the downturn may be just the thing to put it at the forefront of the national recovery.
Business junior Lauren Leland, president of MPowered, a student organization that promotes and supports entrepreneurship at the University, noted that in the past, Michigan’s economy has never forced people to innovate because they had “steady, reliable jobs.”
“The economy has obviously brought a lot of hardships, but it’s a brilliant chance for people to innovate,” she said. “Michigan is behind right now, but because it’s being forced to innovate it’s going to put us that much further ahead in the future.”
Amy Klinke, assistant director for small company initiatives at the University’s College of Engineering Center for Entrepreneurship, agrees with Leland, citing the old adage that necessity is the mother of invention.
“In Michigan, we’re a lot scrappier, we’re hungry,” she said. “We’ve had one of the highest unemployment rates for seven years, so people are looking for new ideas.”
Ann Arbor as an entrepreneurial incubator
While the last few years have seen an increase in the amount of startups in Michigan, Ann Arbor is clearly one of the hotbeds of entrepreneurial activity in the state.
Ann Arbor SPARK, an organization created five years ago to serve as an entrepreneurial engine for the region, is the sole economic development entity for Washtenaw County. Combined with the University’s Center for Entrepreneurship, which provides the University community resources to pursue entrepreneurial ventures, Ann Arbor is the ideal incubator for young entrepreneurs.
“Because we are a research University, we spend a tremendous amount of money — over a billion dollars now a year — on research,” CFE Managing Director Doug Neal said in a phone interview. “There’s a tremendous amount of innovation potential and innovation happening. And entrepreneurship is actually permeating the entire University.”
And that is exactly what Paul Kirsch, student programs manager at the Zell Lurie Institute, said needs to happen for Ann Arbor’s startup economy to remain self-sustaining.
Kirsch said the city must establish a solid pool of startups with strong financing mechanisms. That, coupled with a workforce that can provide both innovation and leadership, is what will help Ann Arbor to join the ranks of other entrepreneurial-based cities like Silicon Valley.
But while Michigan has opportunity and an innovative workforce, many say the management-leadership aspect and financial support have yet to completely come to fruition.
“One of the problems that Michigan has suffered with is that there just isn’t enough venture capital,” said Elizabeth Parkinson, director of marketing and public relations for Ann Arbor SPARK. “Some of that is starting to change. It’s not happening to the extent that it is on the West or East Coast, but it’s certainly happening.”
SPARK and the University’s myriad of entrepreneurial support systems are actively working toward establishing Ann Arbor as a hot spot for investment and business creation, however, and the economic crisis has dramatically accelerated that endeavor.
SPARKing innovation
Since its founding in 2005 by local academic and business leaders, SPARK has served to escalate awareness and cooperation with the University’s entrepreneurial organizations. State and local funding has also increased to support SPARK’s steady growth. But recently, entrepreneurial interest from students and members of the community has suddenly skyrocketed.
“The real thing that’s happened this past year is the explosion in the financial markets and the collapse of the Detroit Three — General Motors, Ford and Chrysler,” Parkinson said. “We’ve had a lot of people, students included, turning to entrepreneurship as a career path. It’s almost double the amount of business plans we’ve received.”
Last year, SPARK received close to 150 plans for new businesses, and Parkinson projects that number will top 300 this year. Of those plans, SPARK will choose 50 to 60 to turn into business accelerator engagements, fast-forwarding them through business formation and commercialization, looking to turn a profit.
“The more that we can get to commercialization as quickly as possible, the more that are going to survive,” Parkinson said.
Despite the massive increase in proposals, Parkinson said they are only be scratching the surface of what Ann Arbor has to offer. Parkinson compared SPARK to JumpStart, a Cleveland-based venture development organization that started around the same time as SPARK. JumpStart serves 16 counties with a budget seven times the size of SPARK, but SPARK still manages to work with the same number of companies. Parkinson hopes that with increased funding and awareness, the development in Washtenaw County will soar.
TechArb: a place for creation
Within the University, the CFE and Zell Lurie Institute are the most prominent entrepreneurial supporters. The Zell Lurie Institute manages the Michigan Business Challenge and the Dare to Dream grants, and in the last 10 years it has awarded $700,000 in grants and almost half a million dollars through the Business Challenge.
Along with educational resources, a key component of the CFE is venture creation and acceleration, illustrated most prominently in TechArb, a student venture workspace created in May 2009, that plays host to about 30 employees of nine student startups.
“We started TechArb with a group of students who wanted a space, and we were going to start it in the fall, but they didn’t want to wait for us,” Klinke said. “They just went ahead and found some free space in the basement of the Google building, put money in a pot, bought tables from IKEA and called it BYOC — bring your own chair.”
This semester, TechArb relocated to a fourth-floor space down the hall from SPARK in an office building on Liberty Street. The space is smaller, but the close proximity promotes collaboration between the two organizations.
“We’re all friends and there’s quite a bit of overlap between what we do, so we can bounce ideas off each other, get feedback, get advice. So it’s really just a great collaborative environment,” said Eric Garcia of Phonagle, a startup specializing in mobile social games.
All of the startups in TechArb are technology based, from iPhone application developments to social networking sites. They receive business mentorship from the CFE, but the science behind their projects remains in the students’ hands.
“These guys are on the cutting edge,” CFE's Klinke said. “At TechArb, they are more ahead of what’s happening than people of my generation, so they’re poised to be very successful because they’re really in it and we’re supporting them.”
Klinke said the companies are acutely aware of their participation in creating Ann Arbor’s entrepreneurial ecosystem.
“One of these companies could be the next Dell or the next Google, so we look at how can we support these students to stay here and not go to California,” Klinke added. “Part of what I’m trying to do is help them plug into this entrepreneurial ecosystem.”
MPowered is another critical student-initiated element of Ann Arbor’s entrepreneurial ecosystem. Ashwin Lalendran and Israel Vizars founded the group in 2007 after they went to Stanford University to meet with venture capitalists. While at Stanford, the two realized that Ann Arbor, with its increased entrepreneurial awareness, could develop an entrepreneurial economy similar to that of the Silicon Valley.
“If you look at any of the successful entrepreneurial towns across the country, Ann Arbor has the exact same setup,” Leland said. “The Bay Area, or Boston or Boulder, Colorado, they have large research universities, they have a campus that’s interlaced with commercial business and they have educated, interesting, motivated people. So the University of Michigan is really going to drive this spark for more entrepreneurship.”
MPowered hosts numerous events during the year that bring attention to entrepreneurship, but what it’s most well-known for is the 1,000 Pitches Competition and the Career Fair, which features startups and small companies.
The 1,000 Pitches Competition, which prompts students to proffer business ideas through recorded videos, drew 2,165 pitches this fall — double the number from the year before. The Career Fair also saw record numbers in January with 80 startups showcased at the event and an estimated 2,000 attendees.
Klinke considers this vital to the student entrepreneurial movement on campus.
“The MPowered student group is really key to our success,” she said. “Because if an old person like me talks about entrepreneurship, it’s just, like, ‘What do I know?’ But if one of your peers talks about it, it can make it more exciting.”
The road less travelled
This amplified attention to entrepreneurship has motivated more University students to dive into startups, but the recession continues to be one of the biggest factors drawing student interest. With inherent instability in both career-track jobs and entrepreneurial ventures, students are becoming more willing to take on the risks associated with entrepreneurship, and delve head first into a new project or startup.
University alum Jason Bornhorst started two companies in the last two years and joined a startup company based in TechArb.
The 23-year-old graduated with a bachelor’s degree in computer science engineering from the University in December, but his involvement in startups began long before graduation.
“As I was coming up on graduation, I definitely wasn’t looking forward to searching for a job, and I figured that my prospects would probably be grim,” Bornhorst said. “As a newly graduated university student, you have the ability to take on quite a bit of risk, and in that sense it makes complete sense to go work for a startup or to start your own company.”
Though initial startups often fold, Bornhorst explained that failure is OK. He could always start over, he said, and apply the lessons learned to the next endeavor.
“It’s multitudes more worth it than going to get some entry-level job at some company — and that’s even assuming you can get that job,” he said.
Bornhorst said he draws his knowledge from experience. The summer of 2008, he began his first startup with a $25,000 grant from the University, a social network site called Campus Roost. The startup ultimately failed, but Bornhorst took those lessons, which he said could fill an entire book, and applied them to his subsequent ventures.
After Campus Roost, Bornhurst set off to develop DoGood, a non-profit iPhone application that tracks the daily “good deeds” of its users. Since its creation, the application has been downloaded 70,000 times, generating more than 300,000 "good deeds" to date.
When a Minnesota-based mobile application company, Mobiata, moved to Ann Arbor six months ago, Bornhorst joined the company as an engineer. Mobiata exceeded $1 million in revenue its first year, and its mobile travel apps — including FlightTrack, HotelPal and TripDeck — have been featured in high-profile technology publications, television commercials and have been all been in the top five in the iPhone travel application store at some point.
Now that the company has shown it can be profitable, it will soon need to move out of TechArb. But Bornhorst sees a strong future with Mobiata and Ann Arbor, noting that companies like these are needed for the city.
“Large companies grow and get big, and then because of that they slow down, and it’s a great opportunity for smaller, more agile startups, such as student businesses, to identify a need and extract that and make a business out of it,” Bornhorst said. “In this down economy, it’s the perfect time to start a business.”
Alumnus Emily Weingarten’s attention to entrepreneurship also began at the University. While attending the School of Music, Theater and Dance for a degree in bassoon performance and musicology, Weingarten joined Arts Enterprise, a University group that promotes the interaction between art and business — and especially art and entrepreneurship.
Weingarten emphasized that organizations like Arts Enterprise are vitally important in the recession.
“(The recession) has a huge effect for Arts Enterprise members, because we have a huge supply and demand issue with arts careers in that music and arts schools are producing more and more artists, and with the economy, there are fewer and fewer jobs,” she said.
After she graduated from the University in 2008, Weingarten got a job at The Colburn School’s music conservatory in Los Angeles. But she soon decided it wasn’t for her after realizing it lacked the entrepreneurial aspects she sought in a career. Weingarten then returned to Michigan, joining Arts Enterprise as a chapter development specialist when it became a national non-profit based in Ypsilanti last year.
In addition to promoting entrepreneurial ventures among musicians and artists, Weingarten is helping to develop a venture around creATE, her healthy living blog accessible through AnnArbor.com.
She said she’s not yet sure how to turn the blog into a revenue venture, but said she’s thinking of writing a cookbook or publishing articles. Weingarten said she values her continued ties to Arts Enterprise because it encourages her to think entrepreneurially.
“The great thing about Arts Enterprise is it empowered me to say, ‘Well, I have this idea, and there’s got to be some way that I can develop it,” she said.
Michael Mauskapf, executive director of the University’s Arts Enterprise chapter and musicology graduate student, elaborated on the importance of promoting entrepreneurial thinking.
“Sometimes we take for granted that artists are automatically entrepreneurial,” he said. “But a lot of artists, especially undergrad students, are caught in the middle of schoolwork and practice room, and they just find themselves kind of isolated. So we try to provoke and instigate their entrepreneurial side.”
Though some students were pushed toward entrepreneurship by a blend of University support and personal interest, others began startups from pure necessity.
When Eric Garcia, a graduate student in the School of Information, began looking for an internship required by the Master of Science in Information program for the summer of 2009, he was hesitant about available opportunities.
“Last summer it was really difficult to find a good position at a good company,” Garcia explained. “No one went to Google, we had one person go to Apple — the numbers were really low.”
Garcia, along with three fellow students decided to enter a business idea into RPM10, a 10-week summer internship program — resources and capital included — that RPM Ventures offers to University students with original business ideas.
“We submitted this really vague idea that we would build a mobile social game, and they liked it and we won, so that got us a good chunk of money, office space and basically the whole summer to design a game,” he said.
The internship program fulfilled the requirement at the School of Information, which was “a life saver” for Garcia, and the team lived off the $20,000 grant while developing their startup, Phonagle, and its first game, OutWord — an interactive, geographical word game similar to Scrabble.
Though the company is now trying to decide whether the venture can be profitable, a mobile app that has 10,000 downloads and world-wide users is a long way from where Garcia was when he graduated from the University with a B.A. in Spanish in 2006.
Garcia echoes the sentiments of many University students who ultimately decided to forgo career plans to take the riskier move and start a company. And, like most, he said he wouldn’t change anything about how his life has shaped up after graduation.
“I never thought in my life that I would have started my own company,” he said. “I’ve fallen in love with it.”
Printed from www.michigandaily.com on Fri, 10 Feb 2012 12:26:28 -0500