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Dug Song

Start ups, skate parks, hacker culture... these represent the future of Ann Arbor if Dug Song has anything to say about it. The VP of engineering at virtual cable provider Zattoo, Dug will be writing about where we need to go and what we need to do to keep the best and brightest here in Tree Town.

Dug Song - Post 2: Ann Arbor - The Curiously Startup (and Skatepark ;-) Deficient Community

There is a common lament in the community about the lack of local venture capital as the major impediment to the development of Ann Arbor's high-tech industry.

This is an excuse, not a reason, for what's failed to materialize here.

The unfortunate reality is that there simply aren't that many venture-ready or venture-appropriate deals here, which has as much to do with developing teams as technology. As UM's tech transfer guys will tell you, in terms of R&D for venture-backed opportunities, we're rich in R (with literally hundreds of millions backing such activities at the U), but disadvantaged in D (with less experienced, portable startup management here than we could use - or hope to keep).

Even in the midst of a venture liquidity drought reaching the point of crisis, some promising Ann Arbor companies are getting funded. The adage that "money follows innovation" is as true as it ever was, although there is certainly a challenge to keep funded companies here - Arbor and Zattoo, funded by over $50M in non-local VC and private equity, have been headquartered close to the money (Boston and Zurich); similar stories exist for Move (over $60M, and in Utah), Mobius (Sunnyvale), etc.

Our real problem is poor deal flow, the roots of which start much earlier. While there's admittedly a significant gap in pre/seed-stage funding (in Paul Graham's equation, we lack the startup-saavy rich people to pair with nerds), there just aren't that many people even trying. Deal flow to local angels is abysmal. Outside VCs who've spent months here turning over rocks have a hard time finding much, and some years at MGCS have been extremely slim on Michigan-native companies. Local VCs, measured on IRR just like any other, are indeed looking elsewhere or simply waiting for more qualified opportunities - and for some of the few operating funds remaining (but mostly invested), there aren't a lot of deals left to make. In short, there isn't enough to invest in anyway!

To the state's credit, if you're in one of four mostly capital-intensive "magic" sectors (life sciences, alt-energy, advanced manufacturing, or homeland security), there's a good bit of public pre/seed money available to help bridge the gap, as we recently discussed. Lots of carrots on sticks that people don't know about. But not all opportunities in every sector follow a traditional venture-funded growth model - and in particular, software opportunities in ICT (Information and Communication Technology), traditionally the dominant sector for venture capital investment (with hopes of 10x, but realistic averages of 3-4x returns), have been steadily moving toward smaller, more predictable exits, or sustainable cash businesses as the cost structure of software companies drastically improve with technology and market advances. And as a fit for the region, Internet businesses have the distinct advantage of not requiring an ecology of local suppliers and customers in an incumbent (or dying) industry to succeed.

Thanks to cloud computing, open-source software, and search and social marketing, you really don't need all that much to start a successful Internet-based business these days. The dramatic rise of super angels; independent, bootstrapped businesses; and small, mentorship-driven startup acceleration programs around the world is in recognition of this fundamental shift in Internet startup economics. Many cities now host such accelerated micro-incubation programs for lean Internet startups, which have the immediate impact of helping to reverse brain-drain - they typically attract the smartest young (ramen-budget) hackers, who often stay (Paul Graham's curious assertion notwithstanding): YCombinator (Palo Alto, but previously Cambridge), TechStars (Boulder, and now also Boston), Start@Spark, Capital Factory (Austin), Launchbox (DC), DreamIt (Philly), Alphalab (Pittsburgh), Shotput (Atlanta), Bootup Labs (Vancouver), Extreme University (Toronto), iVentures10 (Champaign), and our own Michigan versions, Momentum (Grand Rapids) and RPM-10 (Ann Arbor - or more precisely, UM).

Boulder even goes a step further with innovative recruiting / welcome wagon programs like Boulder.me to import geeks, and folks like Rick DeVos are upping the ante in Grand Rapids with ambitious programs like the ArtPrize to import artists. Coworking incubators like Gangplank (Phoenix) and SparkSpace (NYC) support freelancers as they cultivate new businesses to incubate, and experiments like Sproutbox in Bloomington flip script to in-source new enterprise creation to serial startup teams. (sort of a hyper-IdeaLab)

So what's going on with Ann Arbor? If it's so easy to create cheap Internet companies, where are they? If we have so much commercializable research, where are the spinoffs? If we have the raw elements of a successful tech hub, and venture capital isn't the problem, what are we missing?

I invite your thoughts and feedback about this, and will share my own in my next post on geek / entrepreneurial culture and community...

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