Is the Boulder model tenable for Ann Arbor?

A few days ago, I went to hear a venture capitalist from Boulder, Colorado named Jason Meldelson speak in Ann Arbor on the what he saw as the challenges facing our region relative to entrepreneurship. And, as I often do, I posted my notes here. Since then, I’ve received quite a few emails from folks. Most have been in agreement with Mendelson, who, through his firm, the Foundry Group, funds primarily light-weight, inexpensive software startups, as to what needs to be done. One, however, wasn’t, and I thought, in the spirit of keeping the dialogue going, that it was worth posting here. Here it is, slightly edited to protect the anonymity of the author:

I think a lot of what this speaker says is accurate and consistent with my own musings on the topic – particularly on management. However, I wasn’t terribly impressed with the depth of thought here.

Internet start-ups aren’t going to create an entrepreneurial community in Ann Arbor. On that note, there really isn’t too much going on in Colorado. Austin is a better comparison. The main point is that capital is required (and Colorado actually has about 3x what MI has according to PWC Moneytree). Mendelson down-played that, and is wrong and naïve to do so. If you want to fund a bunch of kids with half-baked internet businesses, then yes, less capital is required. But that didn’t make the Valley, or Austin for that matter. Over 90% of venture investing is in capital intensive businesses with products, revenue, real IP and differentiation. YouTube and other internet companies that “pop” are market anomalies and not real businesses. Focusing on these latter businesses and not the former is a recipe for failure.

In that sense, I’m even more disillusioned with the Ann Arbor entrepreneurial community. This “Web 2.0” and “Internet Cloud” stuff is just revision 2 of the weak business models from the late 1990’s. Yes, some will “pop” and there will be returns, but these are not real businesses because they cannot sustain themselves and there is little differentiation. In 5 years, everyone who did a social networking or cloud computing company will be as shunned just as those who did pets.com and other .coms in the 90s.

This approach is “all wrong” in my opinion. YouTube, Facebook and other Web 2.0 businesses are fun to popularize, but they represent a very very tiny portion of the investments in the Valley. Look at any portfolio and you will see “real” businesses funded, with, at most, 1 web 2.0 business. The point I’m making is that building a community around what is in fact the minority in the Valley is completely backward. Further, it doesn’t push Michigan to create the resources for sustainable business success.

In the end, I think you see my point. I don’t support an internet community as the flagship for local entrepreneurship. It can be a component of the effort, but definitely not the lead. It won’t do anything but be a blip in time and further marginalize our community. The icing is that it is not an impetus to create the real business resources that are required in this region. On that last note, consider this: how are we going to recruit management without several sustainable businesses for executives to join (that is, businesses beyond start-ups and which may have been start-ups are one point in time)? That is what Austin has. It is not what Boulder has.

For what it’s worth, I think he makes a good point. We can’t build a sustainable entrepreneurial infrastructure on Facebook and iPhone aps. I don’t think, however, that pursuing that particular niche would preclude us from addressing others as well. Along those lines – and this probably requires a post all its own – I like what I’m seeing from the State on the advanced battery front. With the launch of Sakti3, the growth of A123, and the recent announcement that Mercedes-Benz will be opening a facility in Ann Arbor, it really seems as though we’re gaining momentum in the area. And it’s encouraging to see the folks in Lansing putting in effort on it (instead of on the film industry). Now, if we could just get the $8 billion that’s in the stimulus bill for advanced battery research and commercialization… Back to this letter, though, I’m curious to know what you think. Is the Boulder model worth pursuing, or is it just a distraction?

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8 Comments

  1. Curt Waugh
    Posted April 9, 2009 at 9:45 am | Permalink

    It must be nice to be from a place with no installed base of heavy industry and no old industrial buildings and no old entrenched interests and a growing population. We have so much to think about just to get to zero right now that this sort of squishy future-think is having a hard time taking hold (if it can at all). I also think your writer is spot-on comparing current start-ups to that same old dotcom bubble mess. It’s 1997 all over again!

    I agree that “The Boulder Model” doesn’t exactly have to take over if it’s tried at all. (This guy seems to want us to drop everything and “follow the gourd”.) Instead of trying to be yet another tech hub – apparently like everybody else, wouldn’t it serve us better to make an assessment of whatever assets we have left and concentrate on that? We have infrastructure. We have water, water everywhere. We have land. Lots of land. We have game to hunt. And don’t we also have SPARK? Isn’t that supposed to do a lot of this already? At least the consultation portion if not the big money?

    Tell ya what, why don’t we first figure out how to keep 50% of our college graduates from leaving the state. We’re just throwing that money down a well. It’s one thing to invest in education. It’s an entirely different thing to do it for everybody else. I don’t see one mention of this in either of your posts about this topic. Unless people just naturally want to stay, I don’t think some little tech hub is going to change that.

    Quite frankly, I think we all have to get used to a smaller, less important Michigan. Probably permanently. The industrial giants aren’t coming back. Ever. No matter what. What can we do with a mostly empty, post-industrial area? If everybody else is tech hubs, what can we be?

  2. Paw
    Posted April 10, 2009 at 9:29 am | Permalink

    I know this might be a bit off topic, but is Boulder where Mork and Mindy lived, or did they live inn Ft. Collins?

  3. Posted April 10, 2009 at 10:08 am | Permalink

    Differentiation is the key here. You cannot predict beforehand what is going to be sustainable, that is the nature of entrepreneurship, but if you are investing in something unique, your region will get the notice of venture capitalists. In that sense, just creating iPhone apps or another social networking site, will not bring any prominence to Ann Arbor.
    In my opinion, Michigan due to its natural resources and the fact that the future of its main industry is so tied to energy, can be a big player in alternative energy technology innovation.

  4. Posted April 10, 2009 at 11:53 am | Permalink

    It’s easy to invoke the spectre of the dot-com bubble as a strawman argument against any kind of Internet-enabled software businesses. But this is a specious argument against the form – not function – of such companies. Web 2.0 is just a buzzword – not a vertical market, industry, or business opportunity. There are local, early-stage Internet software startups in more traditional Michigan sectors – manufacturing (Speedraft), healthcare informatics (Cielo MedSolutions), pharmaceutical research (Torrey Path), enterprise software (VeoProject), etc. – all of which have nothing, really, to do with the cited YouTube, Facebook, and iPhone examples. Even as alt-energy, life sciences, etc. opportunities abound, ICT will continue to be one of the biggest drivers for sustainable economic growth.

    The “Boulder model” is really about the shape of a community that supports entrepreneurial economic activity through mentorship, fellowship, and engendering a positive culture of entrepreneurial risk. It has nothing to do with the portfolio strategy of any given investment committee, or the lack of local investment – we’re down to literally a handful of operating VC funds in MI now, and at any rate, good companies can find major funding elsewhere if they need it. Many ICT companies don’t ever need to, unlike the capital-intensive, big-bet life sciences, manufacturing, etc. plays.

    The activities related to http://a2geeks.org and http://meetup.com/a2newtech are based on ad-hoc, personal win/loss analyses of software companies and entrepreneurs that have left. We’re reluctant to share our findings broadly for fear of encouraging others to follow their path – but there’s no time for fear now, just action. The general idea, though, is simply to fix what’s broke, upstream:

    Culture of business – inspiring people to take risks, mentoring the next crop of entrepreneurs, etc.
    Culture of innovation – spawning and supporting new technology initiatives, priming the pump for real deal flow
    Retention – young, innovative people and companies are simply leaving – and with them, literally, our future

    The question about recruiting and retaining management isn’t all that different. The kind of portable, executive startup talent you need to launch companies don’t go and sit at a huge, bureaucratic anchor employer, not if they have options to lead interesting startups with high growth potential. But they need those options. Our group of Ann Arbor Startup Execs on LinkedIn is one example, 50 current and former VP/C-level execs of funded (angel or institutional) startups, many split between Ann Arbor and elsewhere (Boston, Bay Area, San Diego, Europe, etc.).

    It’s easy to be negative and self-sure about what will work here. But the only real way to know is by trying.

  5. Posted April 12, 2009 at 12:00 pm | Permalink

    Having lived in Detroit, D.C., Portland, Madison, and now Denver, I have to take exception with some of what’s been said. I’m sure Austin is great, but I can’t really comment on it. I can comment on Denver, and say that unlike the comment, a lot is going on in Denver. The community is incredibly strong in Denver, and is constantly attracting interest from Silicon Valley. Entrepreneurs constantly move here and companies such as MapQuest, Local Matters, and Brite Kite, are all based here.

    Denver may be small in comparison to Silicon Valley, but other than D.C., New York, and one or two other places, who isn’t? It’s easy to poo-poo such ideas as funding lightweight software start ups, but is in conflict with what many others are finding to be the case. If this same argument had been held in years past there would be no Google. Who thought search could make money?

    Several months ago there was an interview on NPR with a former Google exec, who now heads a venture capitalist group. He saw plenty of opportunities for lightweight software start ups. His made his case by pointing out several success stories involving very small firms that made products of value. Size is not of importance. Value is. Value draws investment. Investment allows development and experimentation, and hiring of creative workers who will occasionally leave and start their own company. This is exactly what Michigan needs. If Metro Detroit could be half as creative and entrepreneurial as Denver/Boulder, it wouldn’t be in the shape it’s in.

  6. Posted April 15, 2009 at 11:57 am | Permalink

    Kevin, Kevin, Kevin,

    I am originally from Detroit, live in Boulder, started a real internet business with a real sales model in Boulder, and moved it to Ann Arbor. I made more progress in Ann Arbor in six months than Boulder in six years.

    Bright Kite? Are you kidding me? Yes, I know the boys exited after less than two years of work for $9 million. They should count their blessings like every other social networking so-called web 2.0 “company”.

    I am surprised you did not mention JSquared Media – you know, the Facebook post-it notes company from TechStars.

    Granted, Boulder kicks ass as a place to live (love the Flatirons), and there is an entrepreneurial buzz there – but it is all centered on the social networking / semantic web bubble.

    Detroit has its problems, but the people are real and they are real tough. I would not count these folks out.

  7. Posted April 20, 2009 at 6:54 am | Permalink

    If you’re goimg to start a startup you want to do it somewhere there’s a surplus of something that’s relatively rare somewhere else. That gives you a differential advantage, and it also makes the networks behave so that you get growth by osmosis.

    What I see around Ann Arbor in abundance right now is crumbling concrete, college students of all ages, and a city government stuck at the command prompt. I don’t see an easy way to make the city a better place for tech companies to work without a change in the municipal regime.

  8. rodneyn
    Posted April 20, 2009 at 1:22 pm | Permalink

    “What I see around Ann Arbor in abundance right now is(:)
    (1) crumbling concrete,
    (2) college students of all ages, and
    (3) a city government stuck at the command prompt. ”

    Wow. The first two also describe the City of Ypsilanti perfectly, but I’m proud to say that OUR city government has moved well beyond “the command prompt” – they are experts at Windows 98, and using email too. :)

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