Grand Rapids doesn’t need to spawn the next Elon Musk to create a bustling technology sector in West Michigan.
The PayPal co-founder used funds gained from his exit to start some of the world’s most innovative companies, and while Grand Rapids entrepreneurs and technology employees might be able to use a similar strategy to start more companies, the focus of the companies can be to make industries, such as farming, medical and manufacturing, more efficient.
Musk is a serial entrepreneur, starting Tesla, Solar City and Space X with funds gained from successful exits in his past, including PayPal for which he earned nearly $200 million.
“We don’t have to strive for that, we just need to innovate for the industries we know through and through,” said Maitlan Cramer, principal at recently launched Grand Rapids venture capital firm Grand Ventures. Cramer grew up in Grand Rapids but spent the past 10 years working in tech and banking in Denver and San Francisco.
“It’s a long game, and we’re in the second inning.”
West Michigan is gaining traction as a technological hub, and it’s done so largely without venture capital, which has traditionally been the way believed to foster the industry.
According to a study by Toronto-based Martin Prosperity Institute, more than 80 percent of all venture capital investment is centered on three clusters: San Francisco Bay Area, Boston-New York-Washington, D.C. and Southern California.
Investment in West Michigan largely has gone to other verticals, such as pharmaceuticals, health care and automotive, all with different expectation of returns, said Mike Lomonaco, director of marketing and communications at Open Systems Technologies. Lomonaco believes there’s value in the Midwestern philosophy of “grit and determination” that has been used to create tech companies like OST without venture funds.
“I would like to see our region be who we are and not distracted by what’s going on on the coasts,” he said. “We can learn from their accomplishments, but we have a lot of resources, so let’s be true to ourselves and make it what we want it to be.”
Fostering a tech culture in Grand Rapids is much more than injecting money into a few startups and calling it a day, said Mike Morin, Start Garden CEO. Before there’s an ecosystem of bustling technology businesses, there has to be a community that believes and understands the needs to build it.
The realization the entire population needs to understand entrepreneurialism and risk-taking is among the reasons Start Garden recruited Darel Ross II and Jorge Gonzalez to the company.
“There has to be a culture fostering entrepreneurism and risk-taking across all spectrums,” Morin said. “Once people start taking risks, the high tech and high-growth businesses will come. But you can’t do that overnight.”
All of that is not to say having one blockbuster startup wouldn’t help ignite the fire. Blue Medora CEO Nathan Owen said when groups like Start Garden and Grand Angels started, there was very little tech activity in Grand Rapids, and they planted the seeds.
If one of those seeds makes it through and successfully exits following an acquisition or IPO, the founders and employees who do well in the exit can do more.
Like Musk’s burst of activity following his windfall from PayPal, a large buyout for a company in Grand Rapids could lead to multiple more startups. Owen said the snowball is rolling in Indianapolis right now, where Salesforce acquired ExactTarget for $2.5 billion in 2013. Angie’s List and NextRx in Indianapolis also had recent successful exits.
“The way this typically works is success begets success,” Owen said. “A couple good exits spawn another 10 companies, and a couple of those do well and that’s how it gets going.”
The domino effect is in full motion in the Midwest, with 52 companies going public or being acquired for more than $1 billion between 2008 and 2013, according to Cramer.
Blue Medora is through its Series B funding, a round which included Louis & Clark Ventures from St. Louis. Owen said there are many financial firms looking at the Midwest for untapped gems.
“There’s incredible competition on the coasts,” Owen said. “New startups, you can talk to 100 VC firms in a week and a ton of competition for talent.”
The Midwest, which encompasses Michigan, Pennsylvania, Ohio, Illinois, Indiana, Wisconsin, Minnesota, Iowa and Missouri, is a prime location for technology talent.
If the Midwest were to stand on its own, it would have the fifth-largest GDP in the world at $3.5 trillion, according to 2013 GDP data. The region receives 25 percent of the research dollars in the U.S. and graduates more computer science degrees than any other region or nation.
“The biggest problem here is people chasing dollars,” Cramer said. “A kid can work for IBM or Facebook and make $150K as a 22-year-old. Now, we’re starting to see a boomerang.”
Midwest companies generally are a safer bet for venture capitalists, Cramer said. A report by the Kauffman Foundation found California residents start companies 50 percent more often than in the Midwest, but five-year survival rates are higher in the Midwest, with six of the top 10 survival rates located in the Midwest; California landed at 19th.
“You need individuals to make debt-defying risks to disrupt,” Cramer said. “That’s why Silicon Valley and New York have taken off; people who want to change the world and are willing to take the risk.
“But on the flip side, I think that’s a positive here. Entrepreneurs start here and go to the ends of the world to make sure they succeed. They don’t just have an idea and raise $2 million.”
Money goes further in the Midwest as well, with companies going for 30 to 50 percent lower values in Seed or Series A funding and much lower cost of living and housing, all with comparable exit values. Cramer said Midwest companies are 50-plus percent more capital efficient.
Also helpful is a large concentration of large companies — 150 Fortune 500 businesses are in the Midwest — that need to adapt and innovate. Cramer pointed toward companies such as Kellogg creating a $100-million venture fund and Meijer partnering with Shipt for home delivery.
“Focusing on West Michigan, we need buy-in from Haworth, Steelcase, Bissell … all those teams are starting to invest in software companies,” Cramer said. “A key ingredient is big corporations adapting and innovating but also be the first customer for startups.”
The Midwest, particularly West Michigan, also has the benefit of being a traditional hub of makers and designers, and those skill sets will be particularly useful in transitioning industries into the future, Lomonaco said.
“Inherently, we have skills here and, more importantly, a Midwest sensibility of what we do make,” he said. “The East Coast is very academic research-focused, West Coast is this ‘startup, do, fail, startup, do, fail’ emotion. That’s great. In the Midwest, we have a little bit of best of both worlds.”
Owen said Grand Rapids is fortunate there were several groups, like the DeVos family and manufacturing CEOs, who took the risk to lay seeds to make sure the region develops a technology ecosystem.
The way Grand Rapids adapts with evolving industries will be key to its continued growth, Morin said.
“If you look at the role small and new businesses play in an economy, they provide most of the job creation and revenue,” Morin said. “And new and emerging industries give us a more diverse economy.”
Morin said he’s optimistic Grand Rapids has made progress with technology businesses in the past three to five years, with some startup tech companies, such as Sportsman Tracker, Varsity News Network and Blue Medora, growing.
The days of venture capital solely fueling a technology sector in a region likely are over, which is probably a good thing when you look at Silicon Valley’s “take big swings and miss 80 percent of the time” approach, Morin said.
“It’s a hangover, that’s how Silicon Valley was built, but it’s not the only way,” he said. “We don’t need to do it the way Silicon Valley did it. Grand Rapids and the Midwest can find our own way to build this and stop trying to be the next Silicon Valley.”