Startups That Stay

A corporate buyout doesn't always mean a sellout here in Ann Arbor. Just ask HealthMedia, the web-based health coaching company, which will be keeping its Ann Arbor address after its recent acquisition by mega company Johnson & Johnson.

HealthMedia, of course, isn't bucking the trend here by sticking around. It makes sense to stay, for business reasons both large and small, personal reasons, and, of course, city reasons. And HealthMedia is just another company on the list of startups that didn't need moving boxes. A few others on the list include the 2005 acquisition of Arbortext by PTC, the 2006 buyout of T/J Technologies by A123Systems (A123 is in a silent period about the acquisition right now and will not disclose information), and Mircos Retail's 2008 purchase of Fry, Inc. All were startups, all were in Ann Arbor, all were purchased by global companies, and all stayed.

The question of why to stay, when asked to the heads of these former startups, is answered with: "Why leave?"

Yes, it happens, says Amy Cell, Ann Arbor SPARK's director of Talent Enhancement. Big companies have come through and grabbed up intellectual property like cherry pickers in Traverse City and then left Dodge. But a great number of corporations realize that Ann Arbor is uniquely positioned to allow acquired startups to thrive, thereby increasing parent companies' own success, and the city's success as well. It's like Mesopotamia here for startups, if you think about it.

In fact, earlier this year BusinessWeek named Ann Arbor the best city in Michigan to start your startup. And it's pretty safe to say that the cost of living here is cheaper than Boston, Silicon Valley, or San Francisco – the big power hitters in startup cities.

"It's about 20 to 25 percent cheaper here in Ann Arbor than Silicon Valley or Boston," Jim Sterken says. Sterken is one of the three founders of Arbortext, a software company transformed from a $40K investment in 1983 to a $40 million company in 2005 before its sale to PTC, a billion dollar global operation. And that acquired startup is still in Ann Arbor. "There is reliable work here," he says. "Companies can recruit from U of M, Eastern, and Wayne State (University). That's a big draw. It just makes sense."

The decision to stay or leave depends on many things. Entrepreneurs, by nature, are rooted to the areas where their businesses are formed, says Keith Bourne, owner of a local startup, Adaptive Campus, which utilizes social networking capabilities to aggregate one's knowledge base. Adaptive Campus hasn't exited yet.

"Entrepreneurs are tied to their area," he says. "You get attached and you want to give back to the community that supported you.  A big part of startups is creating jobs for the community. If I sell the company and divest, it'll mean a lot more to me to keep it in Ann Arbor, its origin. It would be something I'd push for. There are good people here, good for recruiting, and a lot of startup and entrepreneurial support."

Bourne says he's obviously looking to be successful, but asks, "What is a measure of success?"

"It's good to have some idea of success in mind, obviously," he says. "Whether that is an exit strategy or an I.P.O. – though that isn't all that realistic these days – or acquisition. It's different things." I.P.O., by the way, stands for Initial Public Offering, defined as a company's first presentation of shares for public stock market trading.

For Sterken and the two other founders of Arbortext, the goal was unbridled growth. Acquisition wasn't necessarily a focus, but staying in Ann Arbor was on the radar.

"We were ambitious and competitive," he says. "When we reached $1 million in sales revenue, we wanted to see if we could take it to five. Then to an I.P.O, then to 100 million."

They were successful, to say the least. Sterken says they were contacted two or three times a year for 20 years by companies looking for an acquisition. Nothing seemed to fit, for various reasons. When Arbortext made it to $40 million in sales revenue, the partners decided that they probably had gone just as far as they could go with their product and in this economy. That's when PTC came into the picture.

"Their vision was inline with ours and what we wanted to do," he says. Sterken says they watched PTC acquire Windchill, of Arden Hills, Minn. PTC picked up that company when it employed 40 people,  and 500 people now continue to work in Arden Hills.

"(PTC) had a strong record of investing into an area," he says. "There was potential to build a place and our place was Ann Arbor."
David Fry started Fry, Inc., which stemmed from a family printing business in Pennsylvania and turned into an e-commerce startup that grew from year to year. In August of 2008, Micros Retail acquired Fry, Inc. And again, a former startup stayed at home.

"It was never a question for us," Fry says. "We understand that we impact the work force here. We're an Ann Arbor company. And this is a great town; there is an educated population. The staff lives here. The cost is quite low. This is a good quality of life."

Fry believes that quality of life is just as much part of the business as is product. "Companies need to look at that as an acquired asset when purchasing. There is a stigma about Michigan, about people leaving," Fry says. "But Ann Arbor is a unique area. There's a vibrant community here and we're fighting that stigma."

Reasons to buy and sell, however, vary from startup to startup, entrepreneur to entrepreneur, and, more importantly, investor to investor.

"Every entrepreneur is different," Cell says. "Investors might want to sell. And they really drive the company, since it's their money. Whereas entrepreneurs might be fine with keeping it and growing it."

Johnson & Johnson's acquisition of HealthMedia, for example, was done in part because J&J saw the opportunity to grow into a specific market without having to expand its own branch.

"They wanted to invest in this company because it made sense for them," Cell says. But it also has made sense for the community, too. "And they kept it here, to grow and expand. This will keep the jobs here and the talent. And an acquisition like this is inspiring to other entrepreneurs. Never could this be a negative." HealthMedia currently employs 145 in the Ann Arbor area.

But a little advice for budding entrepreneurs: as both Fry and Sterken point out, if you're thinking sell, acquisition, exit strategy, you might want to change that mindset.

"Don't focus on trying to sell your company in five years. You'll be looking at disappointment," Fry says. "Building a company and running it the best you can should be the goal. Focus should be on the ground, running the business."

"If you're thinking about a larger market or 'I want to sell the company,' you're not going to be happy," Sterken says. "Work on the development of something truly unique, something that's valuable. If you're successful you'll get two or three calls (about acquisition) a year for the 20 years you're in business."

Terry Parris Jr. is the utility infielder for Metromode and its sister pubs  Concentrate and Model D. His last feature for Mode was The High Life.
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