Silicon Valley, meet Ann Arbor, Michigan. Yes, Michigan.
I’ve been spending time in Ann Arbor for several years. It was one of the first cities beyond Chicago we went to source deals when we started Hyde Park Venture Partners. Why? Lots of ideas, talent and willingness to take risk, but very little capital. We invested in two deals there – FarmLogs and Stratos Card – in our first 18 months.
Then a funny thing happened: on every visit, I’d meet another VC opening up an office there. Sometimes a new fund and sometimes an out-of-state fund seeing what we saw. There is now even a shared space just for VCs across from my favorite lunch join, No Tai! (exclamation point part of the name… it’s that good)
A few months ago, I thought “you know, I bet this is the highest concentration of venture capital in the country”. Yup. Here’s how the math stacks up between Ann Arbor and the seemingly more likely Bay Area. Wow!
For nerds: Active capital for Ann Arbor based on size of active current funds with an office in the city. Active capital for Bay Area based on $30B (source: SFgate) of US venture capital deployed in 2013 multiplied by portion deployed in Bay Area of 50% (source: CBinsight) multiplied by investing life cycle of venture funds of about three years. Not exact math but close. Populations from US Census Bureau via Google.
This is not to say every startup in SF should up and move to Ann Arbor. Entrepreneurs raising capital have to kiss a lot of frogs. There are still a lot more frogs to kiss in the Bay Area. With the outcome of each kiss being very very low probability, the more kisses, the better. But these stats are still a very positive sign for Midwest entrepreneurs and investors. It would be hard for an Ann Arbor entrepreneur looking at these stats to point at capital as the scarce resource keeping them from growing their business in Ann Arbor. Of course some of this is stage dependent. Some of the capital in the Ann Arbor figures is mid-stage venture capital – one of the reasons the market is still attractive for my Seed and Series A fund despite the crowds.
What is so special about Ann Arbor?
Ann Arbor is one of the most concentrated pockets of talent, thought leadership and willingness to take risk in the country. This is what happens when a world renowned university draws talented students and their spouses/partners into its gravity… and then often retains graduates locally who love the smart but quaint college town life. Four of the five most active venture markets outside of the Bay Area are college towns:
Source: Martin Prosperity Institute, Startup City, 2013
There is more to the story in Ann Arbor than just being a college town, however. With Michigan’s factory and union labor economy past its prime, a number of public and private initiatives are working to draw technology and innovation to the state. Many of the firms in the chart below were seeded, partially funded or attracted to Michigan by a set of State of Michigan backed funds of funds. The private backed Renaissance Venture Fund has also played a huge part in attracting out-of-town venture funds to setup shop in Michigan and Ann Arbor.
Source: VentureSource, public articles. Data labels represent values for recent active funds.
Now compare the above chart with the same for Chicago, a city almost 100x Ann Arbor’s size. Ann Arbor is clearly doing a great job bringing in capital.
Source: VentureSource, public articles. Data labels represent values for recent active funds.
So, has Ann Arbor cracked the recipe to success outside of the Valley?
Not quite. Capital is an important input to growth – as is raw talent. But so are customers, acquirers, experienced talent, “critical mass”, and (early on) community leadership.
Customers and acquirers: For B2B startups, college towns will always be light on customers, though proximity to a major airport helps. For B2C startups, college towns can actually be a viral petri dish to test a new product. You’d also think college towns would be light on acquirers, and 15 years ago this was true, but no more. Many large tech companies like Google, Yahoo and others have college town campuses for the same reasons startups do – access to raw talent. Startups and VCs can take better advantage of these relationships and work to bring companies’ corp dev reps into town to see the local tech startup offerings.
Experienced talent: Startups can seed with raw talent but need experienced talent to add to management and leadership layers to scale. Finding these people in or attracting them to Ann Arbor is tough, though not impossible. This is the biggest challenge to growing a startup in Ann Arbor and many other college towns.
Critical mass: Startups are fissile material. You need to get enough startups close enough together for the chain reaction to take place. I am amazed at how many of the startups I know in Ann Arbor don’t know each other. Normalized for size, we don’t see that in Chicago, where founders and employees are well connected and exchange information much faster. This leads to faster failure (a good thing), faster formation of new startups and better exchange and utilization of talent.
Critical mass is created offline and online. In Chicago, 1871 and Builtinchicago have respectively acted as launch pads for the Chicago ecosystem to take off. I haven’t seen this in Ann Arbor yet. Tech Brewery is an amazing and affordable location for startups to seed, but it is not quite a community centerpiece, partly because it’s not downtown. I’m hopeful that the recently launched MadeInA2 will be the much needed digital hub and would love to see an 1871-like facility built downtown.
Leadership: Fledgling startup communities need strong leaders to get off the ground. Fortunately, there is a lot of organic community leadership in Ann Arbor working on the challenges above. Dug Song, CEO of DuoSecurity, Guy Suter, formerly of Barracuda Networks, and Jesse Vollmar, CEO of FarmLogs – as well as a number of VCs – are scheming more and more (the positive English version of the word). Keep it up and let me know how I can help!