How 3 Detroit Founders Built Tech Startups Despite City’s Bankruptcy
On July 18th, 2013, the city of Detroit filed for Chapter 9 bankruptcy, becoming the largest city in American history to do so. Just four years earlier, Chrysler and General Motors—automobile companies that were long a staple of the Detroit economy—had filed for Chapter 11 bankruptcy.
“You hear stories about the Great Depression in the ‘30s, I can only imagine what we experienced here in Detroit matched that. It was a scary time with so many negatives. There was no credit, the auto companies were on the brink, and when the auto companies here go on the fritz, it reverberates throughout the community,” says Carol Cain, a Detroit native and reporter for the Detroit Free Press.
While the nationwide unemployment rate had fallen to 7.3 percent by July 2013, Detroit’s remained well above 20 percent.
“Detroit’s decline is a distinctively capitalist failure,” asserted The Guardian following Detroit’s bankruptcy. Vice magazine called Detroit “a striking and large-scale instance of something that has become persuasively wrong in America.”
Once a beacon of American innovation and ingenuity, Detroit had turned from the industrial heartland to an industrial wasteland. The future looked bleak for a city that had built itself on automotive manufacturing.
Yet over the past five years, Detroit has experienced a quiet resurgence, turning itself into a burgeoning tech hub that has attracted the likes of Microsoft, Google, and Twitter. According to EntryPoint’s 2018 Detroit Entrepreneurial Ecosystem Report, over a quarter of high-tech companies in Michigan are now located in Detroit, and 37 venture-backed startups in the city have raised nearly $200 million in venture funding in total. High-tech jobs in Detroit have experienced a 26 percent growth in the last three years, the report found.
Many attribute Detroit’s tech transformation to the right combination of talent, culture, and cost of living. The state of Michigan has the highest density of engineers in the US —1,400 per 100,000 residents, according to EntryPoint. The city of Detroit itself is within a 100-mile radius of six of the top 20 engineering schools. A culture of entrepreneurship reverberates through the city—once home to Henry Ford, founder of the Ford Motor Company, Detroit has given rise to the personal car, the assembly line, the traffic light, and has innovated just about every genre of music, from punk rock to hip-hop and beyond. Native Detroiter Dan Gilbert, founder and chairman of Quicken Loans, has poured billions of dollars into the city’s downtown core, boosting real estate, renovating the landscape, and revitalizing nightlife. And cost of living in Detroit remains relatively low, allowing employees to live comfortably and companies to generate higher returns for less capital to scale.
Below are the stories of three Detroit entrepreneurs who chose to build their startups in the Motor City.
It was 2012, and Nathan Labenz was struggling to make it in the Bay Area with his startup, Stik.com. That was when a TechCrunch article about Twitter opening a new office in Detroit caught his eye.
“I knew a lot about Twitter, but I didn’t know a lot about Detroit. It had been ten years since I left home for college. This article prompted me to delve deeper into Detroit,” he says.
Labenz had grown up 30-minutes from Detroit but never seriously considered it the place to build his career. After graduating from Harvard University, where he lived in the same house as Mark Zuckerberg, Labenz had pursued a career in consulting at Oliver Wyman before leaving to found Stik.com, a social review tool for local businesses and individual professionals.
Intrigued by the idea of moving his company to the heartland, Labenz reached out to a startup that had moved from the Bay Area to Austin for advice. What he got back was plain encouragement.
“What we heard from the founder was, ‘If you are considering leaving the Bay Area, you should absolutely do it.’ The guy basically said, ‘Small business is everywhere around the country. It doesn’t make a whole lot of sense to be in the most expensive area when you’re trying to serve pretty budget-conscious customers,’” he says.
While Labenz worried about the distance between Detroit and Silicon Valley, the nation’s tech epicenter, he figured proximity didn’t matter much in the 21st century. A car ride from San Francisco’s Marina District to Sand Hill Road in Palo Alto, after all, could take 175 minutes in traffic—the same amount of time as a plane ride from Detroit to San Francisco.
After deciding to relocate operations to Detroit, however, Labenz and his co-founder, Jay Gierak, found themselves dealing with a new problem: Investors were pulling out of their Series A investment round. Despite soft-circling a million dollars, Labenz found that Bay Area investors were unwilling to support in a Detroit-based startup.
“Most of them said some version of, ‘I only invest in companies I can help. And I’m not going to be able to help in Detroit. So I can’t invest in you.’ Some of them also said, ‘I’ve never heard of a successful startup being built in Detroit. Therefore I’m not going to invest in this one.’ So we lost of most of those California guys,” Labenz recalls.
One legendary Bay Area venture capitalist, Tim Draper, however, maintained a more expansive view. Draper was fine with Stik’s move and agreed to back the company under one condition: they find two Detroit-area investors.
Stik eventually closed a $2.3 million Series A round co-led by Detroit Venture Partners (the venture arm of billionaire Dan Gilbert) and North Coast Technology … Next Page »