In the startup scene, money speaks

Blue Medora is a Grand Rapids-based IT monitoring firm that relied on hometown support to get off the ground, but only grew its wings thanks to capital investment from outside Michigan.

Started in 2007 by Nathan Owen, Blue Medora embarked as a startup providing innovative enterprise-grade integration of IT monitoring.

Six years after launching, the fledgling company sought financial backing. Enter Grand Rapids-based seed accelerator Start Garden and Wakestream Ventures, an early stage fund that backs entrepreneur founders working with physical products converging with the internet, and Grand Angels, a Holland consultancy service. The initial seed round raised a tidy $1.3 million, according to Crunchbase.

By 2015, Blue Medora was stable enough to seek what is known as Series A financing, which means the business model was likely generating revenue, but the overall operation was not yet seeing a net profit.

To observers, though, all the signs were there. In the previous year, Blue Medora quadrupled product sales and doubled staff to nearly 50 people, including software developers, quality assurance engineers, sales and marketing professionals.

Ann Arbor’s eLab Ventures, Wakestream and Grand Angels joined well-known Palo Alto, California, computer virtualization giant VMware in raising $4.6 million.

A round of Series B funding ensued, which means that Blue Medora was on solid ground and drawing interest from national investors. Correspondingly, St. Louis-based Lewis & Clark Ventures and Chicago’s First Analysis jumped in with eLab and Wakestream to provide an $8 million injection in October 2017.

The largest capital infusion outside of Michigan, though, came this September when Princeton, N.J.-based Edison Partners splashed $10 million into the Grand Rapids IT company, an amount nearly 10 times the initial funding go-around and bringing the company’s investment to $32.5 million.

In a public-private deal reached last year with Start Garden, the city of Grand Rapids pitched in $250,000 to deploy a small fleet of self-driving shuttles built by May Mobility, which is based in Ann Arbor.

The trend illustrates an overall pattern underpinning entrepreneurial endeavors in the state, according to the 2018 report by the Michigan Venture Capital Association. For every dollar invested in a Michigan startup by a state-based venture capital firm, another $3.83 of investment comes from outside sources.

“I think the venture community in general has done a great job of attracting outside capital,” said Mike Morin, CEO of Start Garden, which assists West Michigan startups. “Given the limited amount of capital that actually exists here in the state, that is a critical component if we are going to grow these companies into later stages.”

Start Garden, launched by Rick DeVos in 2012 as a seed accelerator with the goal of launching 100 new business ideas a year, plunked $500,000 into Blue Medora in 2013 as its first major investment.

Morin is also CEO of Seamless IoT, a Grand Rapids-based accelerator, and heads up portfolio relations at Wakestream Ventures, also founded by DeVos. West Michigan is prime for investment, as the entrepreneurial spirit is alive and well, he said.

Or versus And
If plastics was the buzzword of the late 1960s, then convergence is mot du jour among aspiring business pioneers.

“I don’t know that any ecosystem is generically good for any and all entrepreneurs, but I think how we have talked about it is that historic ecosystems have been built for what we would refer to as an ‘or world,’” Morin said. “They were built in a world when something was either digital or physical, it was either a service or a product. It was enterprise or it was startup; it was public or it was private.

“And now we live in this world that’s an ‘and world’—both of those are ‘and’ right? I mean it’s hard to say whether the phone you carry is either a product or a service. So that’s what we’ve been building the ecosystem in Grand Rapids around, which again aligns very well with this notion of what you read about—how everything is becoming computational … everything from chairs and tables to walls to sensors, everything’s becoming smart.

“Somehow that technology has to make its way into all of these things, and many of those things come from here. Then you start dealing with the implications of the data that’s coming off of those things. What you do with that and how you use that to build businesses and change behavior. What we say is that we’re building the lowest friction sandbox in the world for companies that are working in that space.”

Where public-private entities can tag-team to make things happen, the process can exceed expectations.

Last March, Start Garden met officials from Ann Arbor-based May Mobility at South by Southwest. A resulting deal is now seeing the city deploying four, six-seat electronic self-driving shuttles on its routes.

The city pitched in $250,000 toward the one-year pilot program with $400,000 coming from the private sector, Morin said.

“This is what we believe the new sandbox for innovation looks like, the ability to pull off those types of public-private engagements and partnerships,” said Morin, noting that Seamless also played a pivotal role behind the deal. “We don’t think there’s a lot of ecosystems in the country that have the capacity to do that and to deliver on that in a rapid, cost effective manner for startups.”

Morin adds, “The funny part is we’re not working with May just because they’re from Michigan. We’re working with May because we believe they are nationally—and maybe globally—the leading provider of the type of solution that they’re doing. These vehicles aren’t going to be used in a private parking lot or a (private) shuttle. They’re literally going to be integrated into our public transit system in Grand Rapids. So when you ask if this a good time for entrepreneurs, I think in certain spaces and places they really leverage the native assets we have here, that a lot of other ecosystems don’t have. I think it’s a great time.”

Entrepreneurial engine
Detroit’s revving entrepreneurial engine is also luring capital investment from outside the state, said Emily Heintz, founder and managing director of Ann Arbor-based EntryPoint, which forges entrepreneurship and capital investment in the region and beyond.

The agency’s 2018 Detroit Entrepreneurial Ecosystem Report, released in October, found the city is becoming a burgeoning tech hub with 56 percent of venture capital being invested in information technology startups in the Motor City during the past year.

In the past four years, there has been a 54 percent jump in the number of Detroit venture-backed startups, with $41 million in venture capital poured into 18 startups in 2017 alone.

Another example of an early adoption of self-driving shuttles is happening with the deployment by Quicken Loans for its employees in downtown Detroit.

While the typical funding trajectory for startups is to go local before seeking outside investment, the phenomenon in Detroit transcends that model, Heintz said.

For one, it is less expensive to live in Detroit and in Michigan, which makes it easier to attract talent. The cost of living is 97 percent more in San Francisco and 96 percent higher in New York than it is in Detroit, Heintz said.

“A lot of investors are finding that it’s really expensive to invest in those cities, as well, and are looking outside of the coasts for investment opportunities, and I think Detroit is a really natural spot for them to be investing,” she said. “I definitely think that people’s perception of Detroit is that Michigan as a whole is a real investment opportunity for them.”

The movement is catching on. Revolution, a Washington-based group, created “Rise of the Rest,” a campaign to focus on creating startups in flyover country instead of saturated hubs like Silicon Valley, New York and Boston.

Ryan Waddington, founding partner of Ann Arbor-based Huron River Ventures, says the greater investment community has taken notice at success stories like Duo Security, which was bought by Cisco in August 2018 for $2.4 billion. The Ann Arbor software security company started in 2009 and raised $1 million in seed money in 2010.

FarmLog, an Ann Arbor-based agricultural software company that’s part of Huron River Ventures, saw a $1 million seed turn into a $37 million investment.

“A lot of it was small funds, early stage,” Waddington said. “So, naturally two to three years against that, you start to see that leverage start to build up.”

Another factor fueling the startup spike is a wealth of engineering talent. There are about 1,400 engineers per 100,000 residents, and Detroit is in close proximity to eight of the top 25 entrepreneurial colleges, Heintz said.

The legions of those with slide rules and pocket protectors have shed their dependence on the automotive Big Three.

“We definitely do see an increasing trend of automotive executives, automotive talent engineers that are coming out of universities starting their companies rather than working within these large institutions,” Heintz said. “I think that’s partially because people are looking to create their own opportunities, partially because the shift in mentality between millennials really wanting to make their mark as something that’s important to them, wanting to have a culture that’s a little bit different than you would find at a large established organization.

“We are seeing what I think is a really healthy thing for Michigan’s economy. Those of us that have lived in Michigan for a long time have seen friends and family members of ours during the economic downturn be laid off due to a downturn in the automotive industry and I think that Michigan in the past has put a lot of our eggs in the automotive basket. So diversifying the economy is something that I think a lot of us focus on as part of making a more stable economy, so that we’re able to weather economic downturns in the future.”

When it comes to venture capital, Adrian Fortino has been on both sides. As managing director of Mercury Fund, which has an Ann Arbor office and about $270 million under management, he focuses on industrial software.

Among the companies under his purview is Sight Machine, a San Francisco-based manufacturing analytics firm that has raised $30.5 million in early round capital investment, according to Crunchbase. He was also involved in DeepField, an Ann Arbor data analytics company that was started on $1.5 million seed funding and was sold to Nokia two years ago.

Prior to joining Mercury Fund more than four years ago, Fortino was managing director of Detroit Innovate, an early stage venture capital fund focused on Michigan high-tech companies.

On that front, Fortino started three software companies before he entered the investment field.

“I tried to raise money in 2009 to 2012, and it was very difficult then with very little capital,” said Fortino, who has a bachelor’s degree in mechanical engineering from the University of Michigan and a master’s from U-M’s Ross School of Business. “But there’s a number of funds that were created and developed and launched in Michigan since around the 2011 timeframe. Then you’ve had funds that have been taking a stronger presence in Michigan—Mercury certainly being one of a number of others—whether through the VMF ($95 million Venture Michigan Fund) the MEDC had or just the organic outgrowth that we’ve seen.

“So now I think we have a pretty robust ecosystem. I think there’s one I would call out. I think we have a gap at the pre-seed and the seed stage. We really only have one or two really strong funds in that world, Invest Detroit’s First Capital Fund … but other than them there aren’t really very many folks that are really active.”