What does Duo Security's sale mean for the Ann Arbor area and its tech industry?

Ann Arbor-area entrepreneurs and tech industry insiders are still buzzing about the larger implications of Ann Arbor-based cybersecurity company Duo Security's early August sale to San Jose, Calif.-based Cisco for $2.35 billion.


Duo, founded in 2010 by Dug Song and Jon Oberheide, is known for its two-factor authentication app that allows companies to control access by trusted parties to corporate applications and resources. Duo is also known for being the first and only "unicorn" in Michigan, a privately-owned company valued at over $1 billion.


Most local tech companies and entrepreneurial organizations see the deal as wholly positive, with any downsides being quite small. For instance, Duo has had a longtime commitment to keeping its headquarters in Ann Arbor. With Song staying on as general manager of Duo after the buyout, most industry insiders don't think Cisco will move jobs out of the area.


"Dug and Jon are very committed to the community, so I think it would be a surprise to even them if the local campus were relocated," says Joe Malcoun, cofounder of Ann Arbor's Cahoots coworking space and CEO of online sales software firm Nutshell. "They also amassed an incredibly talented team, and I have to imagine their ability to do so was immensely attractive to Cisco."


It's also possible that Ann Arbor's affordable office space problem could intensify as the Duo deal brings more investors and entrepreneurs to the region, but most local tech industry insiders aren't concerned.


"If we have such explosive growth that our biggest problem is having trouble finding office space, most people are willing to accept that for the price of prosperity," says Stewart Thornhill, executive director of the University of Michigan Zell Lurie Institute.


Most local movers and shakers think the deal is good for the region for a variety of reasons, ranging from national recognition of the Midwest's viability in the tech sphere to the prospect that money earned in the deal will likely be invested back into the local tech economy.


Proving the doubters wrong


Emily Heintz, managing director and founder of EntryPoint, an Ann Arbor-based company that promotes entrepreneurship in southeast Michigan, met with Song and a group of venture capitalists shortly after the deal was announced.


Song told the group that when he was fundraising for Duo in 2010, venture capitalists told him and Oberheide they couldn't successfully grow a tech company in Ann Arbor or anywhere else in the Midwest.


"I think that they have successfully proved those early doubters wrong," Heintz says.


Well before the Cisco deal, the largest of its kind in Michigan's history, Duo raised $70 million in its Series D funding round in late 2017, the largest round of venture capital raised by any Michigan company ever.


"Duo’s acquisition is a powerful sign for Ann Arbor," says Jason Mars, CEO and cofounder of Clinc, an Ann Arbor-based company that developed a mobile, voice-activated, artificial intelligence platform. "The multi-billion-dollar deal signifies the health of our startup community and truly solidifies Ann Arbor as a global innovation hub. Duo’s acquisition mirrors a Silicon Valley story and puts Ann Arbor on the watch list of the top venture firms in the world. It is great to have visibility on this national scale."


Thornhill says he thinks the most important aspect of the Duo-Cisco deal may be the role model it provides to other entrepreneurs. The deal proves the value of committing to build a company in Ann Arbor and investing in that community — rather than fleeing to the coasts where startup capital is more readily available.


"Any time there is a strong example set, like by this company, where local investors stuck with (them) and made this possible, that will provide a role model for other entrepreneurs that they don't have to move to Boston, Austin, or Silicon Valley to grow a company," Thornhill says. "They can do it here and take advantage of the lifestyle of a college town with smart, young graduates to work for you and a lower cost of living."


A virtuous cycle


Local businessmen and investors made money from the Duo-Cisco deal, and local business and tech industry leaders are excited about the potential for that money to be reinvested in new Ann Arbor-area startups, creating the opposite of a "vicious cycle."


"Another way to look at the deal is from the economic multiplier point of view," Thornhill says. "All of us in the community are hopeful that will translate into more investments in more companies, and that will become a 'virtuous cycle,' with more cash invested back into the ecosystem. Sometimes one big success story can make a huge difference and get the flywheel moving."


Malcoun says Song and Oberheide made their commitment to the region clear from the start.


"They've always talked about new investment capital and new companies spinning out of Duo as inevitable," says Malcoun. "As a local investor and operator, this is what is most exciting to me. I can't wait to have new co-investors in deals, particularly ones who have operating experience. And I can't wait to see companies take shape because the founders have some financial security to start something new."


Heintz says Ann Arbor already has the pillars of a strong entrepreneurial ecosystem: talent, community, capital, and research. She says she hopes the deal will "jumpstart" even more activity as Duo employees use their success to mentor and work with other companies to achieve similar results.


Heintz says Song, Oberheide, and the rest of their team are all "strong supporters of the entrepreneurial ecosystem across Michigan."


"It's a great thing to have that local talent that's so dedicated to the region being the feet on the street helping the entrepreneurial community grow," Heintz says. "I think we'll see a lot of impact on the entire community far outside Duo's success."


Sarah Rigg is a freelance writer and editor in Ypsilanti Township. You may reach her at sarahrigg1@gmail.com.

All photos by Doug Coombe.
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