The Building Blocks of Innovation: Part 2 of Our Q&A with David Egner of the New Economy Initiative

5/3/10Follow @wroush

Last week I wrote up Part 1 of my interview with David Egner, president of the Detroit-based Hudson-Webber Foundation and executive director of the New Economy Initiative for Southeast Michigan. The coalition of 10 community and philanthropic organizations is working to support economic diversification efforts in the Detroit region. Egner talked about the attitude of complacency and entitlement that left the region ill-prepared to recover from the auto industry’s decline, and about the political divides that have long held back cooperative efforts to develop promising sectors such as advanced manufacturing and logistics.

In our conversation, Egner described how the organizations behind the New Economy Initiative realized that were all working to solve parts of the same big puzzle, and how they might accomplish more if they worked together. (The foundations have pooled $100 million in grant funds for projects that support entrepreneurship, retooling, and workforce development and education.)

In the second half of the interview, which appears below, we talked about the need for better bridges between the region’s high-tech innovators and potential funders such as venture capital firms. We also discussed the future of the automotive business—still Detroit’s anchor industry—and ran through the New Economy Initiative grants and projects that Egner considers the most promising.

One intriguing subject running through my talk with Egner was the fine line that the initiative is trying to walk between making bets on specific industry sectors that may help to define Detroit’s future—areas like alternative fuels, life sciences, manufacturing, and logistics—and merely clearing the way for the marketplace to make those bets. Egner talked over and over about the need for stronger “connecting institutions” in Detroit: groups that could get researchers at Michigan’s top universities talking more often with venture capital partners, creating more opportunities for ideas to blossom into companies. These conversations are so frequent and continuous in Xconomy’s other home cities of Boston, San Diego, and Seattle that it’s easy to take them for granted. But in Detroit, such basic parts of the ecosystem seem to be withered or altogether missing.

Xconomy: We’ve been talking so far about the need for the government, non-profit, educational, and corporate sectors to work more closely together to solve Detroit’s problems. What role does high-tech entrepreneurship play in all that?

David Egner: That’s a crucial component. I think how you do it becomes an interesting discussion. You’ve got within 70 miles of each other, three tier-1 research institutions taking in hundreds of millions of research dollars that are producing tremendous ideas. How we get those three to play in this space becomes, I think, one of the most important issues. The infrastructure already exists inside those institutions. The New Economy Initiative has to help determine how we can develop an infrastructure outside those institutions to aid tech transfer and speed it along. That includes accessing capital.

Having said that, looking at economic development efforts across the last several decades in the United States, it seems that those who have picked specific sectors [to develop] have really struggled, because you can’t guess what tomorrow’s economy is going to be about. NEI is making an investment in a general infrastructure and trying not to get in the way of the marketplace. Ultimately, the market needs to drive innovation, and we need to make sure the building blocks are in place.

X: What types of building blocks are you talking about?

DE: We’re finding that the infrastructure that should naturally exist here, because of the years of neglect, and because we have become so entitled, needs to be rebuilt and repositioned. For example, if you talk about the life sciences—other than the universities, there is still not a natural institution working in the area to push a high-tech life sciences strategy. There is a lot of talk about it, but not a single entity trying to cherry-pick the best ideas and connect them to capital. We are looking at that issue. Do we need to replicate something like BioEnterprise, which has done so well in Cleveland? That is not picking a sector as much as picking a crucial institution and making sure that it’s one of the building blocks. You do have Next Energy doing work, and we are working with them to do an analysis of what the potential is. We are not going to make a sector bet on alternative energy, but we will look at what are the needs for an institution to make the central connections inside the ecosystem.

X: I guess that because I mainly cover Boston, which has such a strong network of innovators and financial backers, I don’t even have a good picture of what you’re talking about when you mention these “connecting institutions.”

DE: It’s a hard concept to grasp from outside when you’re used to seeing it work from the inside. In the Detroit region right now, there is not a group acting as an intermediary between venture capital and the life sciences, for example. In the Boston corridor, the venture capital firms play that role. They are ready and robust and looking for opportunities. In Southeast Michigan, because we have not nurtured the connections, the venture capital community is not paying attention to what is coming out of the institutions here. So the market has not naturally filled in that gap. In manufacturing, you have a number of associations that have done work, but the challenge is that they are going one industry at a time. In my opinion, it can be the philanthropic community’s job to seed the marketplace with these key building block components. Once the market is in place, these institutions should be self-supporting.

BioEnterprise in Cleveland has positioned themselves as an intermediary and it’s launched 80 companies in the life sciences that are all on track to being second- or third-tier enterprises. You’ve got the potential for that here with Next Energy. In the areas of homeland security and defense, you have tremendous manufacturing need, but there is currently not an intermediary working with manufacturers or the Department of Defense to make those marriages. Wouldn’t you think that the most active center of cross-border commerce in North America should be a center of the homeland security industry?

But our political structures for economic development have not caught up with this notion. It’s still “Let’s talk about attracting big employers,” and the reality is those days are over. Once in a blue moon, you may get a big employer to move in. But Detroit is still behaving as if these were the expansion years, when the auto industry would open a plant employing 20,000 people and it would barely make the front page. These days it’s going to be 1,000 plants with 20 people each. The entire system is built around watching this huge bonfire burn, and the reality is that the world is now supporting, instead, thousands of brush fires.

X: Speaking of the auto industry—in many of my talks with Detroit-area entrepreneurs it seems that there’s almost an aversion to talking about cars and auto technology. Yet if the United States is going to have an indigenous auto industry, doesn’t it make sense that it would be focused around Detroit? Why isn’t there more discussion about how to make Detroit the world’s leading center for transportation innovation?

DE: I think what happened is that we’ve been so consumed by that industry for so long that if you are from here, you now err on the side of talking about everything else but automobiles. Part of this is the notion of changing our culture to one that’s more innovative, and it seems like when we talk about autos we are talking about our past. But the reality is that the auto industry is also a huge part of our future. This is not your father’s Oldsmobile—this is a leaner, meaner, more nimble auto industry. And hopefully a green one.

I think the technology centers that are here, particularly those inside Ford and GM, are well on their way to pushing those innovations. They have the manufacturing capacity in place, and the supplier network has the ability to produce virtually anything. So yeah, I think we are well on our way to being able to do that. But we haven’t got it right yet. For example, the suppliers have not fully figured out how to work in this new world, and the auto companies have not figured out how to work with suppliers. Before, everything was so interconnected that folks new each other by their first name and you could just get on the phone to Frank and place an order. Today you have to go through a system. There’s a lot of adjustments that have to be made.

It’s also going to be important to look at the services that need to surround the auto industry moving forward, like design and communications. You’ve got one of the largest concentrations of creatives in North America here because of the auto industry—designers and advertising people and architects, et cetera. You have one of the top schools of design in the world. The College for Creative Studies is here because of the auto industry. We’ve got to continue to use those assets in a way that is connected to the automakers, but also in a way that is looking to other industries.

X: You mentioned that the auto suppliers, obviously a huge sector in Detroit, is having trouble adjusting to the new way of doing business. Do you think that industry is going to continue to see downsizing and business failures?

DE: I think we are going through a natural weeding process right now. The suppliers who are not able to make those adjustments won’t be here a few years from now. The suppliers that are expecting their grandfathers’ auto industry to come back won’t be here a couple of years from now. Which is why I don’t think we have hit bottom yet in the area of the supplier market. I think 2010 will be a shakeout year for tier-two and tier-three suppliers in the auto industry. The ones who that are saying “For 40 years have been pulling 10 percent out of their revenues to sustain my lifestyle and I’m not about to stop doing that,” some of those folks have forgotten how to be entrepreneurs. We’re back to that issue of complacency and entitlement.

I think the shakeout will happen over the next several months. I’m basing that on what I’m hearing from our friends at the Urban Entrepreneur Partnership, who are working with minority suppliers right now. It comes down to the nimbleness of the institutions.

X: I’d like you to walk me through the three main funding areas for the New Economy Initiative—promoting a successful entrepreneurial ecosystem, capitalizing on existing regional assets, and building a more skilled and educated workforce—and give me an example in each area of a grant that you feel best exemplifies what you’re trying to accomplish.

DE: In the entrepreneurial ecosystem area, it’s obviously TechTown, which is getting $5 million from NEI over three years. About a year ago, they were helping about 60 businesses. Randal Charlton just sent me a PowerPoint, and in that time, according to the slide, they have had 2,580 people who attended intake events for entrepreneurs, and 1,444 of those people have enrolled in FastTrac programs, and 713 have graduated. TechTown now has 201 tenants who have created more than 400 new jobs in their Tech One space, and they are expanding into a second location. It’s still too early to get good evaluation data around all this; the question is, 713 graduates—so what? How many companies will they start, and how many jobs will those companies create? But so far, we are encouraged by the demand. And they purposely did not filter this to be only about high-tech companies. In this first round, we wanted this to be part of the intention of changing the culture and letting folks know that anybody can take charge of their own destiny. So there is a mix of lifestyle and high-tech companies and an incredible diversity in the people graduating, ethnically and culturally and in terms of college attainment.

We’re also throwing $5 million into a microloan fund for accelerators in the region, including TechTown. We’re trying to fund some of these businesses. No loan will be for over $50,000. I refer to this as “nudge money.” It’s pre-funding, in many cases. It’s just giving people the money to make a prototype or a proof-of-concept.

X: What about in the area of capitalizing on existing regional assets?

DE: The thing I’m watching with the greatest anticipation there is a series of grants we made to Michigan State University and the Detroit Regional Chamber [of Commerce], looking at transportation, distribution, and logistics, with the Canadian border as a key component. We’re asking what are the opportunities to increase logistics employment, which is currently over 300,000 in the region, and how to take advantage of the border relationship with Canada to move Detroit in the direction of being the largest inland port in North America. Right now the inland port that handles the volume is Kansas City, because of the rail connections, which blows my mind, and for overseas shipping it’s Long Beach, CA. But anything that’s large and expensive, we can move better than anyone else. They will be developing a broad strategy for how to truly make this the smartest, largest inland port, and if we find there are elements of that strategy that we can help with, we will talk with the Chamber and with MSU about what resources that will take.

X: And the workforce development area?

DE: We are just getting started in that space. In this region last year, there was just shy of $1 billion in public dollars put into the workforce system. You have to ask the question, if you spent a billion dollars, how many jobs did you create and how many jobs were replaced or retained? The numbers are confusing and difficult to track, but one thing is clear—the system is broken. It doesn’t work. We are taking a cut at this from three perspectives. NEI’s money can’t change the system, but we do think we can help align it through some incentives and policy work. So we are working through the workforce boards and community colleges to talk about creating a hub where they can exchange information and become more nimble and more quickly adjust the system. We are playing a convening role here. We have also set aside some money to try to leverage existing federal dollars available in this space.

But the thing that has the great potential is that we have developed a sector strategy around five sectors in the region, where we are gathering employers to talk about their current entry-level needs and how to best meet those needs. The sectors are healthcare, advanced manufacturing, alternative energy, homeland security and defense, and transportation and logistics. If you think of the workforce as a pipeline from the entry level to the higher levels, it gets clogged up. You can get trained for one position, but there’s no talk about what’s next. So we are seeing entry-level people who are not prepared to move up, so the clog stops people from moving up and new people from moving in. I have some hope that the groups meeting in these five sectors will look at how to unclog those pipelines.

X: How much money does the New Economy Initiative have left to spend? Is there some possibility that the collaboration will be extended beyond its original five-year lifespan?

DE: We just opened that discussion with the governing council. If you look at how the current dollars are committed versus what is being spent, we will be virtually out of money by the end of 2012. If the initiative does indeed sunset, then our strategy in 2011 and 2012 will be supercharging those things that we know are already working and getting them to be self-sustaining. If there is a thought by the foundations that we need to refuel this thing, whether that means another $100 million or $50 million, then that will allow us in 2011 and 2012 to keep talking about new strategies.

X: Are there any big, unanswered questions about Detroit’s future that keep you up at night?

DE: Which one? The quick answer is yes, there are hundreds of unanswered questions. The uncertainty will eat you alive if you let it. We have to strike a balance between the comfortable certainty of going in a known direction, even if it is wrong—which is what Detroit has been doing for the last couple of decades—and the fear and uncertainty of limitless possibilities.

We are trying to strike that balance. And there is not a night that I don’t lay awake wondering about some of those things we are doing incorrectly, or something that we have not thought about. But the bottom line is that if we don’t do something, if we don’t make these efforts to be more entrepreneurial and more innovative, we will continue to stagnate as a city and a region. I could go into a full list of questions—there are tons and you could probably spit out a dozen yourself right now. But we can’t let that scare us away from making decisions and moving forward.

Wade Roush is a contributing editor at Xconomy. Follow @wroush