Wednesday, January 31, 2018 // The Statement
4B
Wednesday, January 31, 2018 // The Statement 
5B

Tech takes a seat in Ann Arbor

I

n October 2017, Duo Security 
— an Ann Arbor-based com-
pany, launched by two Uni-
versity of Michigan alumni in 

2009 — made national headlines when 
it secured a $70 million round of fund-
ing that brought it to be valued at over 
$1 billion dollars; the information tech-
nology startup is known for producing 
two-factor authentication systems.

“Ann Arbor is our home,” Dug Song, 

one of Duo Security’s founders, said in 
an October interview with TechCrunch. 
“With more than 350 employees based 
here, we’re proud of our Michigan roots 
and our heritage of global cybersecurity 
innovation in Southeastern Michigan. 
The region has a wellspring of talent 
that we will continue to invest in and 
hire from, and attract talent from out-
side the state as well.”

Duo is at the forefront of a fledgling 

wave of early-stage technology startups 
that have chosen to take root not in the 
San Francisco and East Coast technol-
ogy hubs, but within Metro Detroit.

As of 2016, there were 49 active 

venture-based startups in Ann Arbor, 
according to the Michigan Venture 
Capital Association Annual Research 
Report. These companies represent 35 
percent of startups in the state, and are 
are primarily split between information 
technology and life sciences sectors, 
with the remainder scattered across 
advanced manufacturing and energy.

In 
December 
2017, 
VentureBeat 

described Ann Arbor as one of four 
emerging national tech hubs, alongside 
much-larger Pittsburgh, Indianapolis 
and Raleigh, N.C.

“Given that there are currently 112 pri-

vately held unicorn companies in the U.S., 
it’s impressive that Ann Arbor — with a 
population of just 120,000 — managed to 
cultivate one,” VentureBeat wrote.

What draws entrepreneurs to Ann 

Arbor are elements of a strong entre-
preneurial community, a large research 
institution and the fact that more than 
half of the venture capital firms in the 
state are located in the area, according 
to Emily Heintz, associate director at 
the Michigan Venture Capital Associa-
tion.

“We 
believe 
the 
entrepreneurial 

investment community is made up of 
four things — research, capital, commu-

nity and talent,” Heintz said.

These elements, combined with the 

city’s accessible Midwestern culture 
and relatively lower cost of living, have 
begun to make Ann Arbor an appealing 
alternative to the crowded Bay Area for 
some entrepreneurs, despite a regional 
dearth in capital.
A

nn 
Arbor’s 
college-town 

atmosphere makes it easy 
for entrepreneurs to con-
nect with potential partners 

due to the educated local population, 
according to Bill Mayer, SPARK’s vice 
president for entrepreneurial services.

SPARK is the county’s publicly-

funded economic development asso-
ciation, which has taken a keen interest 
in curating the local high-tech sector. 
Its downtown Liberty Street office — 
despite a simplistic interior — serves as 
an incubator housing early-stage tech-
based startups.

In terms of what draws entrepre-

neurs to the area, Mayer explained the 
coasts are far more populated than the 
Midwest. As a result, he believes it can 
be very difficult to raise capital due to 
competition on the dense coasts. Ann 
Arbor, contrarily, is a “nice size” — a 
smaller city with 120,000 people.

“If you’re in New York or San Francis-

co, you can go to meetups and meet peo-
ple but it’s really hard to get a meeting 
on Sand Hill Road,” Mayer said, refer-
ring to Silicon Valley’s arterial road 
known for housing the world’s marquee 
venture capital funds. “It sounds like 
everything gets funded out there, but 
it’s actually quite challenging to get on 
the radar of investors out there.”

Investors know they can hire employ-

ees in Ann Arbor that won’t get stolen 
by Google or Facebook, he said. They 
can also pay these employees a compa-
rably lower wage than they would have 
to in San Francisco due to lower costs 
of living (although Ann Arbor is still 
expensive relative to its region), making 
Ann Arbor startups far more “capital 
efficient.”

Ann Arbor is also a place executives 

know their employees can thrive in, 
unlike San Francisco or Boulder, Colo.

“From an employer’s standpoint, the 

fact that your employees can actually 
buy a house is pretty amazing,” Mayer 
said.

Cash Butler, an Ann Arbor native, is 

one of many SPARK-based innovators. 
After spending several years in Boston, 
he relocated his company, ClariLegal, 
to Ann Arbor, drawn by the University 
community and lower costs. ClariLe-
gal matches corporations and law firms 
with the vendors they need to ensure 
they get the best value for their work.

“I came back because there was a 

vibrant community of innovative think-
ers and a wonderful level of talent at 
(the University of) Michigan, East-
ern Michigan, Washtenaw Community 
College that I could staff my company 
with,” he said.

Butler said he has taken advantage 

of hiring University students as interns 
and been extremely happy with the 
results. He also pointed to the relatively 
lower cost of living in addition to easier 
travel compared to the coasts.

In the future, he hopes to collaborate 

more with the University, particularly 
with alumni, to bring in people who are 
interested in software innovation for 
the legal industry.

“My biggest marketing thing is flying 

people in and taking them to a Universi-
ty of Michigan football game,” he joked.
H

owever, the Midwest still 
lacks the critical entre-
preneurial infrastructure 
that coastal tech hubs 

have, namely venture capital to fund 
early-stage companies. 

Michigan startups in particular face a 

“capital gap” in raising their necessary 
investors, according to Heintz. Most of 
the country’s venture capital funds are 
based around San Francisco and the 
financial hubs of New York and Bos-
ton. As a result, many new Midwestern 
tech companies need to leave their geo-
graphic home to raise funding.

As associate director of the MVCA, 

Heintz represents the 33 venture capi-
tal funds in Michigan, 18 of which are 
based in Ann Arbor as of 2016, accord-
ing to the MVCA report.

Of the 49 active venture-backed start-

ups in Ann Arbor in 2016, 25 received 
more than $101 million from venture 
capital firms in 2016, according to the 
MVCA report. Of course, this is a tiny 
slice compared to the $69 billion raised 
in funding across the U.S. in 2016.

Midwestern investors also tend to be 

more conservative than those on the 
West Coast, according to Mayer. This 
makes it more difficult for an early-
stage company to raise funds; however, 
this means the Midwestern startups 
that ultimately receive a vote of con-
fidence are generally lower-risk than 
something that would get funded in 
California.

“The good news about that is that the 

companies that do get funded here tend 
to have a higher survival rate,” Mayer 
said. “On the other hand, from an entre-
preneur’s standpoint, sometimes it can 
be harder to raise capital, because inves-
tors typically look for more achieved 
milestones, more business results, ver-
sus just kind of pitching a concept.”

Heintz said it is crucial to have a 

robust foundation of capital in Michi-
gan — which currently the overwhelm-
ing majority comes from out-of-state 
— in order to fund new companies. 
According to the MVCA report, every 
dollar invested in a Michigan startup by 
a Michigan venture capital firm attracts 
$4.61 of investment from outside of 
Michigan.

“On one hand that’s good because it’s 

more money coming into the state, but 
on the other hand it’s something that 
you do want to worry about because you 
want CEOs and founders to be able to 
focus on their companies and not have 
to always fly around the country look-
ing for capital,” Heintz said.

Recently, more startups are choosing 

to remain in the area, Mayer explained. 
He said 15 years ago, people would be 
able to raise money in Ann Arbor, but 
then when it was time for them to raise 
follow-on capital, they would find an 
out-of-state investor that would often 
stipulate they would need to relocate to 
California.

Today, this doesn’t happen as much, 

largely because San Francisco has 
become so costly, competitive and over-
crowded.

“There’s so much competition for all 

of the employees (in San Francisco),” 
he said. “There are people paying over 
$100 per square foot for office space. 
You can pay $15 or $20 per square foot 
here. So investors do the math.”

T

he University of Michigan’s 
research and human capital 
contribute heavily to the 
entreprenurial 
appeal 
of 

Ann Arbor. When Mayer began work-
ing at SPARK, he was surprised to learn 
only about 20 to 30 percent of the com-
panies SPARK works with originate 
from the University of Michigan.

Nonetheless, he said the University 

serves as a key catalyst to successful 
entrepreneurial activity — conducting 
$1.5 billion of federally-funded research 
each year, the largest research funding 
budget of any public university in the 
nation. Some of this research translates 
into commercial application and can be 
licensed directly to industry — that, or a 
startup can sometimes spin off.

“The good news about the Univer-

sity companies is that the potential 
of those companies tends to be very 
high, because almost always they have 
some kind of high (intellectual prop-
erty), they have patents, they have mil-
lions and millions of dollars of federal 
research already done,” he said.

In the private sector, startups launch 

outside of large research institutions 
and depend on competitions and grants; 
student startups often fall into this cate-
gory. In general, one advantage to start-
ing up in Ann Arbor, Mayer explained, 
is the close proximity to University 
experts and departments available for 
collaboration.

Clinc, located in downtown Ann 

Arbor, builds conversational AI soft-
ware that was based on the work of the 
University’s Clarity Lab. Their work 
builds on the research conducted in 
Clarity Lab, directed by Jason Mars 
and Lingjia Tang, assistant professor 
of computer science at the University. 
Hauswald and alum Michael Lorenzano 
worked with Mars and Tang as doctoral 
students, and all four are co-founders of 
the company. Clinc raised at least $7.5 
million in a funding round as of early 
2017, according to Crain’s Detroit Busi-
ness.

The dark interior of the Clinc office 

compliments the view of downtown 
Ann Arbor in the winter. On a Friday 
afternoon, instead of already leaving 
for the weekend, they were hard at work 
— in meetings in a glass-walled confer-
ence room and scrutinizing code while 
hunched over their desktops.

Johann Hauswald, co-founder and 

chief architect at the company, is a 
three-time University graduate. Haus-
wald is the perfect representation of 
his company — laid back and casual, but 
extremely astute — a description deno-
tative of Silicon Valley.

One of the team’s objectives was to 

examine intelligent personal assistants 
like Siri — to find out how the technol-
ogy was built and then insert it into cus-
tomer-facing apps.

The team ultimately created their own 

intelligent personal assistant software. 
Now, companies can adopt the technolo-
gy and personalize it to their domain so 
their customers can communicate with 
a more customized assistant.

One area the software is particularly 

helpful in is banking, demonstrated by 
Hauswald as he opened his banking app 
and asked his phone how much money 
he had spent on food in Ann Arbor in 
the past month. The virtual assistant 
responded with an amount and the 
screen presented a report.

Hauswald explained Mars and Tang 

could have moved their entire research 
lab to Stanford University to take advan-
tage of the nearby investors.

“It sounds attractive, but from our 

perspective, we had this tight connec-
tion to the University, there’s this whole 
research lab of Ph.D. students that are 
at the University,” he said. “Ann Arbor 
is an awesome city, it’s cheaper. There 
is a lot of tech in downtown Ann Arbor, 
and also in Michigan in general.”
S

tartup ventures are a risky 
business and not all of them 
are met with success, and this 
is no different in Michigan.

Cribspot began as a class project by 

University of Michigan Business under-
graduates, but ultimately launched as 
a property management startup in late 
2013. By summer 2014, the company had 
raised $660,000 in investment, primar-
ily from Michigan-based venture capi-
talists. 

Cribspot compiles and crowdsources 

off-campus housing options for stu-
dents, and grew to include over 100,000 
users at 175 schools as of early 2018.

“It’s actually a really growing com-

munity of startups in Ann Arbor and 
Detroit,” Cribspot co-founder Jason 
Okrasinski told The Daily in 2014. 
“There’s maybe a handful of startups, 
so it’s a tightknit community and all 
together, it’s just a really great place to 
start a business and really start to grow 
it.”

Yet four years later, The Daily report-

ed Cribspot is expected to quietly shut-
ter its Ann Arbor operations.

A former Cribspot employee, who 

asked to remain anonymous, told The 
Daily in early January the company 
leaders couldn’t agree upon a direction 
for the company, suggesting this caused 
its operations to be economically unsus-
tainable. 

“Essentially what happened — to the 

best of my knowledge — is that the com-
pany was kind of going in two differ-
ent directions, one more tech-oriented 
and the other more concerned with the 
physical business of Ann Arbor hous-
ing management,” he said. “With this in 
mind, it was starting to look less feasi-
ble for the latter to continue functioning 
if the company was to follow these two 
separate paths.”

Meanwhile, back at the Clinc offic-

es, Hauswald said the company has no 
desire to relocate from Michigan.

“Never at any point did we think we 

have to move to California in order to 
make this work,” Hauswald said. “We 
did get sort of hints from investors — 
like, ‘If you want to be a successful 
startup, you have to go the Valley.’”

According to Hauswald, finding talent 

and engineers has never been a problem 
for Clinc. He added, however, business 
executives don’t necessarily live in the 
area. To overcome this issue, companies 
needs to be able to have people working 
remotely, and be able to pay them.

Like Butler, Hauswald noted Clinc 

hires many student interns, many of 
whom come from West Coast schools 
like Stanford University and the Univer-
sity of California, Berkeley.

“They are coming and applying to us 

for internships,” he said. “They don’t 
necessarily think of location, they think, 
‘What are the interesting problems?’”

Connor Borrego, a serial entrepreneur 

and 2017 LSA graduate that currently 
works in product marketing at a local 
startup, said the geographic expansion 
of the tech industry would be a socially 
beneficial long-term trend.

“I think there’s a lot of concentration 

of wealth and talent and education on 
the coasts of this country, and I think it 
has lead to a silo of communities across 
the country,” Borrego said. “By spread-
ing the talent, spreading the wealth out 
across the country, I think you’ll do a 
much better service to democracy as a 
whole.” 

Amelia Cacchione/Daily

Inside of Clinc’s office in downtown Ann Arbor.

by Jennifer Meer, Deputy Statement Editor

