In my last post, I discussed how the primary challenge in Michigan is the need for a successful "stochastic" investment model for emerging high-tech businesses. I described how there is a dearth of capital (the egg), but also insufficient "doers," or entrepreneurs and experienced management (the chickens). Unfortunately, we cannot develop one without the other in this Catch-22 so Michigan needs to find solutions to realize both the chicken and the egg, simultaneously.
First, consider the current resources and initiatives in Michigan. There are several competing incubators in Southeast Michigan including the Spark in Ann Arbor, Automation Alley in Oakland County and Techtown in Detroit. Spark has invested $6M in 28 companies. For the sake of argument, assume a uniform distribution of the net investment; that leaves less than $215k per company.Though it's a start, it's simply not nearly enough money so high-tech companies that accept such funding will inevitably need to relocate to properly capitalize their businesses.
Beyond the incubators, several government initiatives exist including the $135M 21st Century Jobs Fund and the nonprofit $95M Venture Michigan Fund, the latter of which is backed by $200M in state tax vouchers from the Michigan Early Stage Venture Investment Act of 2003 - which, by the way, is decent legislation. Nevertheless, these funds barely approach the appropriate size to distribute more reasonable amounts of capital, but awards are tied to funding cycles and specific investment objectives, which is unlike independent venture funds that can invest at any time and in any space. These latter issues are particularly critical in diverse emerging markets where months can mean the difference between the companies that win or lose. The universities have developed resources as well, including offices of technology transfer for licensing academic intellectual property. Additionally, the University of Michigan established the Zell-Lurie Entrepreneurial Institute in 1999 with an endowment from Sam Zell and Ann Lurie.
To put these resources in perspective, consider my first blog entry and the experiences I described in launching a high-tech business based on University research. Mobius touched every single resource within the University; it touched none outside of it, less the High-Tech MEGA tax credit program.
Sufficient, privately-managed, for-profit, risk capital needs to be injected into Michigan’s investment community. Mobius‘ investors in California each manage multi-billion dollar funds while typical fund sizes in Michigan are $100M or less. That's how far off we are quantitatively. What's more, Michigan needs that capital to be managed by professional investors for-profit, not the government or government-like agencies. It should be "free" in the sense that it is not tied to funding cycles or government initiatives. Investment is a business in and of itself. It needs to operate freely to maximize returns to its limited partners and justify further investments in the future.
Risk capital can be increased with incentives. For example, and similar to the Michigan Early Stage Venture Investment Act of 2003, qualified investors could receive tax breaks for taking limited partnership positions in venture capital firms. Additionally, large out-of-state investors could receive incentives to invest in Michigan start-ups. Consistent with that idea, capital is beginning to decentralize in America.
For example, one of Mobius' investors from California holds investments in companies with technologies from seven different universities, only two of which are in California. Similarly, the fastest growing regions for investment last year were New Mexico and Pittsburg according to the National Venture Capital Association. This trend is largely due to the fact that America's corporate research laboratories have scaled back significantly and now universities and national laboratories are the main sources of innovation - thus, justifying the deployment of capital. I personally believe that the concept of an industry-specific high-tech cluster, like Silicon Valley, may well be ending. If investment congregates around centers of innovation, including universities and national laboratories, then a variety of companies with a myriad of technologies will be funded. Consequently, I challenge Michigan's focus on developing clusters specific to life sciences, clean technology, advanced manufacturing and homeland security. After all, where did those initiatives leave Mobius? Answer: With headquarters in California.
Lastly, legislators need to make Michigan the easiest and cheapest place to start a company. That can be accomplished in a variety of ways including developing corporate law similar to Delaware and reducing the tax burden for emerging businesses. Related to that, Michigan needs to make the most of the capital it deploys. I am a strong opponent of so-called "grant mills," or companies that survive based on winning grants and not product revenue. Those companies should be denied money and forced to fend for themselves. Even in my time on Capital Hill, I have overheard very similar talk regarding doing away with the SBIR and STTR programs altogether. In the end, I advocate a balance codified as a "strike-out" law. If your company can't convert a grant to product revenue after a few attempts - you’re out.
If we accept that Michigan requires more start-up management worthy of investment, we simply need to recruit those managers. However, it is very difficult to convince professionals to relocate to Michigan because of the economic climate and the lack of alternative opportunities. (And no, it’s not the weather; professionals make decisions based on opportunities, not climate.)
Consider Mobius again. If we had recruited a CEO who had relocated to Michigan and Mobius failed, what other semiconductor company would he or she join? Further, from what talent pool would that CEO recruit the remainder of the executive team? Clearly funding is required to de-risk such a move and a stopgap solution is required now.
Simple initiatives to consider include developing funding to relocate professional managers to serve in start-ups or "parachute" grants for relocation out of Michigan if the venture fails. Further, consider a model similar to California - maintaining the indigenous entrepreneurial population. One of our investors, Tony Grover of RPM Ventures, once shared this profound and simple concept with me: fund entrepreneurs, let them fail, and fund them again. What better way to develop the resident talent that Michigan needs? But to do so, Michigan will need to embrace its "risk takers" as heroes and not failures when success is not achieved at first pass. That's exactly how California does it.
Next, accept that Michigan does not have the resources to maintain most high-tech business – at least not yet. That is OK and those who say it isn't are dead wrong. Google is an example where a Michigan native leaves the region to pursue education and high-tech entrepreneurship. Then those successes come back to Michigan, at least in some form. There has also emerged a relatively new investment model out of the University of Michigan. Start-ups from the Department of Electrical Engineering and Computer Science, including Mobius, Discera and Arbor Networks, all maintain offices in Ann Arbor and headquarters elsewhere. Such models need to be embraced in Michigan until the requisite resources are established in the state.
Michigan's universities also play a critical role. If you have ever met a faculty member or student from Stanford, then he or she will inevitably tell you about his or her plan to start the next Google. Michigan universities have historically had the opposite culture where commercializing research carried a negative connotation with it. That is changing on several fronts. At the University of Michigan, the Center for Entrepreneurship has been created recently and students can earn a certificate in entrepreneurship. Additionally, the leadership of the University has championed more funding for Michigan’s GAP program, which aims to fund the "gap" between results from basic research and a technology worthy of productization and commercialization.
Michigan needs to invest in both the chicken and the egg to develop a sustainable entrepreneurial culture. A chicken and an egg together can create a much-needed entrepreneurial ecosystem, or nest. It is my hope that with the proper nests in place, Michigan will turn into a veritable chicken coop with the occasional chicken laying a golden egg.