Reinventing Michigan's Economy: A Conversation with Terry Cross



Terry Cross looks, sounds and comes off like your average Michigan businessman. His business casual sports coat with no tie, soft voice and laid back demeanor speak to the fact that this guy's roots go deep into the heartland.

And yet he sees things differently than most local business people.

Cross spent years working Wall Street through the heyday of "Greed is Good" 1980s and more than a decade in the venture capital game in Silicon Valley during the 1990s and early 2000s. He knows what it takes for new businesses to succeed, the many ways they can fail, how they get their start-up capital and where it comes from because he has watched it happen all in the world's most dynamic entrepreneurial ecosystems.

Today the Grosse Pointe native relays that information back in his home state where he serves as Wayne State University's first Entrepreneurial Executive in Residence. He recently say down with Metromode's News Editor Jon Zemke to answer some questions on what can, is and shouldn't be done to help reinvent and supercharge Michigan's economy.

METROMODE:  It's often said that Metro Detroit needs to reinvent its economy and even itself. How radical of a change is necessary and are we on track to make the necessary changes?

TERRY CROSS:  I would say probably a radical change, a very radical change is necessary. Having said that, that is not the way change usually happens. If it's too radical it's a revolution. The Midwest is innately pretty conservative, so I don't see change happening in a big hurry. With Michigan, obviously with a great focus on Detroit, I view them in the 50 states as 48th or 49th or 50th in ranking. If they're going to get back to where they were at the height of the auto boom I think that is going to take five generations.

That long?

Let's just say they're state No. 48 and they want to get up to No. 25. That's going to take five generations and I define a generation as 20 years. From birth through age 20, which is probably when most people get pretty serious about entering the job market. I just think that's how long it's going to take. It's going to be radically different than anything we can expect. I can't see it as a manufacturing economy because I don't see the U.S. is going to  be a manufacturing economy by then. Along the way we can see a lot of very attractive incremental improvements, but if we want to talk about really raising Michigan up so it's sort of in the middle of the pack of the states.

Are we on track to make the necessary changes?

Michigan is partially on track and Wayne County is lagging way behind. And I'll say Wayne County encompassing the tri-county area of Wayne, Oakland and Macomb counties. I think they're beginning to get some pretty good traction, particularly with the defense industry coming into Macomb County and healthcare industry in Oakland County. Wayne County is where the real problem is. If you look at the tri-county area, that's where we need to focus because they're deeper down in the pit. It's going to take them longer to get out. They have, on balance, fewer resources financially and human resources to accomplish that. There is a lot of infrastructure damage that has to be overcome. The factories that have been sitting empty for 25 years. Roads that are for all intents and purpose are cinder heaps. Even if you go down I-75 and get off at the East Grand Boulevard exit near the Russell Street complex the roads there are an atrocity. They're really dangerous to maneuver through and not ruin your car. When you look around that area and see factories and warehouses that have been empty for years. So for Wayne County, it's going to be tougher for them and I think it's going to hold the region back.

What can be done from an education perspective, at any academic level, to encourage more entrepreneurship here?

You need to start at a young level. You need to start in grade school. Kids are naturally entrepreneurial, but they lose their entrepreneurial desires as they get older. There is more to fear and they take on more responsibility. They get married, they have kids and don't want to take on any more risk. There needs to be entrepreneurial education at the 1st, 2nd and 3rd grade level. Those kinds of things can be structured. They can be bake sales or craft fairs or whatever, but the kids have to understand that they have the human resource to produce monetary value in the form of goods and services. A lot of kids have a hard time conceiving of the fact that they can earn money at a young age. It doesn't quite compute for them. Nobody is holding them back. What's really great about doing it at that age is you can devise gaming mechanisms, I don't mean gambling, that they love to play to teach these things to kids. They can be delivered through the computer the same way they are delivered through the classroom. That's really the best place to start. As these kids increment through high school, I'd like to see grade school and high school all have increasing levels of entrepreneurship curriculum. I think it's entirely possible but I am not sure the educational system is mentally attuned to that idea. It's a free enterprise idea and a lot of the education system is highly controlled by people who don't think in terms of the free enterprise. All you have to do is look to the M.E.A. (Michigan Education Association) as an example. They are kind of anti-free enterprise in my view. So you don't get a lot of cooperation from the existing infrastructure. It needs to be driven by the parents. The parents need to go into the school system and demand this for their kids. Until they do, nothing will happen. You can take someone who is in their fourth year of college who has never been entrepreneurial and give them some entrepreneurial skills and knowledge, but at that point of their life they have other things on their mind that are going to throw them a little bit off the track.

It seems like that kind of education is lacking the school system.

It's completely missing. It's gone. I don't think it was ever there really. Look if you go to the business schools in the country, there is hardly a business school that doesn't have some sort of curriculum in entrepreneurship. It does attract a lot of students, but to be a good entrepreneur is a lifelong learning process. It needs to be taught at every level on the way up to business school or engineering school or film school or whatever it is.

Name one no-brainer change Metro Detroit or Michigan could do to encourage more entrepreneurship here?

The biggest no-brainer change, and the easiest one to implement, is if the parents in Metro Detroit got rid of this mentality that there is always going to be someone there to take care of them. This sense of entitlement which they have instilled in their systems and pass onto their kids. There is a disintermediation of the labor system going on in this country right now and they're disintermediating from the unions. The sooner they wake up to the fact, the better off they'll be. It's clear the unions are losing traction nationwide and particularly in this area. This sense that someone is always going to be there to take care of you and you're entitled to this and entitled to that, if you can change that way of thinking then the next default location is to be entrepreneurial. I view that as a barrier to entry for entrepreneurship.

The coastal chattering class often criticizes Metro Detroit's business class for things like being resistant to innovation, creative thinking and adopting new ideas or trends, among other things. Is this a fair criticism and if so what can be done to correct the problem?

To some extent it's a fair criticism. The Midwest is inherently pretty conservative. Let me give you this as an example. I spent a lot of time on the West Coast, 13 years in Silicon Valley. I did three tech transfer start-ups from MIT, so I have looked at both coasts pretty hard. The East Coast and the West Coast, let's say Boston and the Bay Area, when people start companies it's all about revenues. When people start companies in Michigan it's all about product. In California when people start companies it's all about PR. In Michigan when people start companies it's all about IP (Intellectual Property). In the Bay Area business is very collaborative. In Michigan or the Midwest everybody always holds their cards very close to their chest. There is an unwillingness to share and collaborate. It's a different work culture, a different life culture. Here you would never launch a product unless it's 100 percent proven and absolutely perfect. In California they launch products on the fly. Look at the Tesla. What was the first thing you new about the Tesla, really knew about it? They had a tremendous PR machine to tell the public about it. That company was launched on one or two cars they built and showed the press. Can you imagine General Motors doing that or Ford or Chrysler? Is one right or the other wrong? I don't know. If you're launching cars that you're going to sell only a couple thousand of them, the California system probably works better. But if you're going to scale your business to tens of thousands of cars, maybe the better path is to be a little more conservative about those things. Get the product done and make sure it's absolutely perfect. Make sure all of the safety concerns are covered and all these kinds of things.


What is one thing Metro Detroit does better or has going for it that the Silicon Valleys and Research Triangles don’t?
 
The enormous inventory of raw engineering talent here is unmatched anywhere in the country. A lot of people labor under the misconception that these 50-year-old people that are being pushed out of the auto industry can only think about the engineering points of a brake or a steering knuckle or an interior. That's not true. These people are smart, smart engineering technical people. Its not hard for them to shift gears from automotive to aerospace or medical instrumentation or whatever the case might be. I'm not saying you can take a mechanical engineer and rebrand him overnight as an electrical engineer or a circuit designer. The basic raw engineering talent and knowledge is absolutely unmatched. When Tesla started their company where did they do the engineering? In Rochester Hills. They had an engineering center up there. They couldn't do that in Silicon Valley. There is no talent to do that there in Silicon Valley. That's like trying to launch Intel in Grosse Pointe. It's not going to happen.

Do you think we'll still be that engineering hub 10 years from now with Metro Detroit's shrinking population?

That's a really good question because the 50 year-olds are going to be out of the market and the 40 year-olds are going to be around. There is still a huge amount of engineering talent in their 30s and 40s. The real question is will we be able to keep them here? Are you familiar with the Shifting Gears program at Ann Arbor SPARK?

Yes, that's where they retrain automotive engineers for new industries.

If you ever read the resumes at the Shifting Gears program, you would weep at the talent. I get these resumes that are 15 pages long. The first two pages cover their job history. The next 13 pages cover their publications. And they're not academics. They're engineers. You could maybe find that in Boston, some of it. You would never find that in the Bay Area. This raw, basic engineering talent here is astonishing.

Michigan venture capital firms appear to take a more conservative, some would say controlling, approach than their more counterparts on the coasts. Is this a wise strategy?

I don't really view it as wise or unwise. You have to understand that Michigan venture capital firms are much, much smaller than the ones on the coasts. If you had a VC firm around here that raised $100 million fund that would be a highly unusual thing. On Sand Hill Road that doesn't really count. I was in a couple of angel funds out there, one was $100 million and the other was $250 million. Because of that and because they are dealing with other people's money and are to a great extent controlled by fiduciary issues they have to be a little bit more cautious. Let me give you an example, if you take a typical start-up VC fund in Michigan, a fair number would $20-25 million. You go out and start constructing a portfolio that is reasonably diversified. If you're going to go into a venture, you can't just think about the first investment. You have to think about what's coming down the road and you have to reserve that money for whats coming down the road in terms of follow-up rounds. Let's say a good size investment around here would be $15 million. And you're going to break that up amongst three firms. If you get over three firms participating it becomes more cumbersome. That means you have to plan to hold back $5 million in your fund to be in this deal. If you're a $25 million fund that means you have a shot at five investments. That's not the right kind of diversification for a venture capital firm. They're taking pretty significant risks. So they they either have to take smaller pieces, which keeps them out of a lot of syndicates or they have to take greater risks or they have to get more people involved. It's not like they're Seqouia or Benchmark or Excel of Kleiner Perkins who can go out and raise $100 million in an afternoon. They're talking funds that are $1-2 billion per raise and they've raised several of them. That's a whole different dynamic than a series $25 million VC funds.


It surprises me that so little comes from local investors. Metro Detroit, Oakland County in particular, is one of the wealthiest areas in the world. There's a lot of institutional wealth around here but there seems to be a large disconnect between that and the venture capital firms.

There is a lot of institutional wealth around here, but it's locked up in conservative in trust-fund-type investments. It pairs perfectly with the conservative attitude of the Midwest and Michigan. It's not much different in Ohio, Wisconsin or Indiana. It's a little more aggressive in Illinois because of Chicago. National Bank of Detroit, which is long gone, a huge amount of their revenue came from trust funds. Think about how well the Private bank has done here in Michigan. They started out here and in no time at all they had 3-4 branches in Michigan. I think 90 percent of their business was trust-fund management. They could provide you with a checking account, but they did it as courtesy service. Going into their bank was more like going into a law firm. There were a lot of offices. and maybe one desk where you could cash a check. It was a clubby atmosphere. It's wasn't like driving into a branch of 5/3rd. They didn't have a lot of branches or drive-thrus or ATMs and all that kinds of stuff. Look at how well Northern Trust Bank has done. They do well because they run a good trust operation. The point is, the money around here, the investment funds are pretty conservative. You can go to the auto industry, the other industries and pension funds and they'll invest in venture capital, but it's not like going to Calhurst or New York State Investment Fund.

Name an approach, policy or mindset from elsewhere that you would like to see this region adopt?

I can think of a lot of things that fit into those areas that require change here in Michigan. I am not sure they are present elsewhere in many respects. I'll focus on the Bay Area and I have more experience there and it speaks to the question a bit better when comparing to Michigan.

The whole concept of failure really needs to be reformatted and reconsidered in the public mind. If you go out and start a business today and you fail in that business you have to return and face your family with your hand out and your head down. If you fail in the Bay Area it happens everyday and doesn't mean a thing. The way I characterize it is in the Bay Area failure is a merit badge while here failure is a scarlet letter. You are branded for life as a failure. You better get back into the automotive industry where you can hide and keep your head down and make your $60,000 a year and hope to God you can get some benefits and they have some sort of retirement program.

In the Bay Area if you fail, OK, put it on your resume. Take your new resume to Sand Hill Road and say I am looking for a job. What was your last job? Well, it was ABC. What happened? The thing blew up. Here are the reasons. OK, no problem. Good experience. Take a look at this company. Take a look at that company. It's an everyday occurrence. It helps build your resume.

I know VCs in California --by the way VCs in California are quasi employment agencies-- a lot of them have in-house executive recruiters and huge files of resumes. If they want somebody to run a business or put into a business that some start-up guy needs help with, they go into their Rolodex or resume file and pull out handful of potential candidates and begin interviewing them. My guess is at the end of the day the guy that has had the experience and maybe failed and knows what the pitfalls are and has the lash marks on his back is going to get the job. I don't think it's that way in Michigan.

This whole concept of failure needs to be reexamined here. It's a cultural thing, an educational here. I know a kid here who started a pretty interesting Internet company. Didn't make it. The only reason he didn't make it was because he couldn't get the capital. He had an apartment, moved out and moved home with his parents. His dad worked as a garbage man. His dad went and talked to his boss. His boss said, "We're going to hire your son and give your family an elevation in life. We're going to put him in the business office." What a crime. That kind of stuff goes on all the time.


Jon Zemke is the News Editor for Metromode and Concentrate.

Photos:

Campus Martius - Detroit

Terry Cross

Next Energy - Detroit

Learning

On the way to class

Doing Business

Higher learning

Military manufacturing

Manufacturing

Business meeting

All photographs by Marvin Shaouni
Marvin Shaouni is the managing photographer for Metromode & Model D.


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