Countdown to Michigan 2031: Release The Hackers!

4/4/11Follow @xconomy

Something is brewing in Southeastern Michigan, and it smells more like innovation than beer.

Inside a former brewery in Ann Arbor, MI just northeast of Kerrytown, a group of techies and recent college graduates stare at computer screens, sustained by a copious supply of Diet Coke and fruit juice boxes.

There are no leases or assigned workstations in the Tech Brewery, a co-op for tech startups. Just drop $50 a month via PayPal, and grab any available desk.

In downtown Detroit, the mostly empty David Madison Theater Building awaits its first tenants. The building’s upper floors will host incubation space for Internet startups, the centerpiece of an ambitious plan to transform Woodward Avenue into a high tech corridor.

The entrepreneurs moving into these rehabbed buildings are nourishing dreams to launch new companies in digital media, software, and IT but they are nevertheless building on a strong foundation.

From casual college town co-ops to ambitious big city real estate projects, there is no shortage of efforts to build a vibrant cluster of Internet-based startups here.

And why not? The University of Michigan boasts a world class computer science program that attracts recruiters from Google, Hewlett Packard, and Facebook. Google co-founder Larry Page and Groupon founder Eric Lefkofsky are Michigan natives.

And thanks to its auto industry, Michigan enjoys plenty of talent in manufacturing-based information technology, including cloud computing and mobile software applications.

The region also recently witnessed a couple of nice exits: Expedia’s purchase of mobile travel app maker Mobiata and TekTronix’s acquisition of Internet security firm Arbor Networks, a U-M startup, for hundreds of millions of dollars.

“We have a tremendous amount of young talent going into this space,” says Marc Weiser, managing partner of RPM Ventures in Ann Arbor, which invests in tech startups. “There’s a younger generation of software engineers building into other verticals,” starting with security and gradually moving into social media and mobile devices.

Michigan, however, lacks the resourceful “hacker” culture of Silicon Valley, where programmers often collaborate on open source platforms to upend industries, says Dug Song, a prominent local entrepreneur and co-founder of Arbor Networks.

Song, who now runs Duo Security, is a featured panelist for Xconomy’s Michigan 2031 event. The forum, on April 14, brings together some of the state’s best minds to brainstorm what the state’s high tech economy will look like in 20 years.

With the U-M and a stable of venture firms, Ann Arbor is the closest thing Michigan has to Silicon Valley, even though Austin, TX and Boulder, CO, might offer better comparisons.

When a friend first suggested to Ben Kazez that he move his startup from Minnesota to Ann Arbor, the Mobiata founder’s immediate reaction was “Why?”

To his pleasant surprise, Kazez says Ann Arbor had a wealth of resources to support cash-strapped startups, including cheap office space.

However, he thinks finding talent can be tough since the U-M’s best grads often leave the state. That’s a big problem for Mobiata since the company, now owned by Expedia, is expanding rapidly and aggressively hiring local software engineers.

Michigan has struggled to staunch the exodus of local talent. The state lags behind its neighbors in the percentage of college-educated workers it retains, according to a 2008 report from Michigan Future Inc.—a non-profit organization that aims to push for a knowledge-based economy in the state.

The study, called “Young Talent in the Great Lakes: How Michigan is Faring,” found that 11.2 percent of Michigan households are young professionals compared to 16.6 percent in nearby Illinois and 15.6 percent in Minnesota.

Michigan needs to create the kind of Web 2.0 startups that helps keep young talent in the state, says Josh Linkner, CEO of Detroit Venture Partners, the new tech fund founded by Quicken Loans CEO Dan Gilbert.

But local techies are not programmed to start their own firms, preferring instead to work for big companies, Song says, especially in Michigan where the tradition among multiple generations of families is to work for Big Auto.

More importantly, Song says, the local tech community lacks Silicon Valley’s informal networks of hackers, who gather in coffee shops to work on projects for the sheer fun of it. In other words, spontaneous creativity born from informal collaboration.

By hacker, Song doesn’t mean illegally breaking into computer systems, but rather deconstructing software code and figuring out ways to find new uses for existing products. Hackers helped turn Apple’s iPhone into a multibillion platform for third party applications.

Hackers also turned the technology behind Microsoft’s motion-controlled Kinect video game system into a wireless vacuum cleaner, 3D holograms, and animated puppet shows. These things probably won’t make money but that’s not necessarily the point of hacking.

Michiganders tend to work in silos, worried more about competitors swiping ideas than collaborating for the larger good of innovation, says Terry Cross, a prominent local tech investor.

Another big problem, Cross says, is the lack of state support for Internet startups. Cross notes Michigan’s 21st Century Jobs Fund provides money only to companies developing “competitive edge technologies” like advanced manufacturing, clean energy, life sciences, and homeland security/defense.

“If you’re not in one of those areas, then sorry, you’re not going to get any financial support,” Cross says. “The system has fixed the game. The biggest thing they can do is get their minds out of these competitive edge technologies Michigan is stuck in. That’s the kind of stuff that scares away the next Facebook.”

Weiser of RPM Ventures is confident that Michigan is on the brink of something great. All it takes is another big exit or two, he says.

“We’re on a good trajectory,” Weiser says. “It’s just a matter of time. We need a center of gravity, [a big tech company] to put a stake in the ground. We need that big one. We’re sitting on the verge of it.”

I expect a lively discussion on this issue so join me for Michigan 2031 on April 14. To register, click here.

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