Startup tech companies struggle here

July 6, 2009
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What is needed to create and nurture a technology industry? Daniel Estrada summed it up in two words: money and mentorship.

Estrada is the founder and owner of D.C. Estrada, a consulting firm that specializes in legal technology intelligence, electronic discovery and litigation preparedness.

“A lot of technology companies need money, but the other thing they need is mentorship,” said Estrada.

“A lot of times, technology companies are started by technologists. They’re people who are good at implementing a piece of technology or using a piece of technology to influence the way someone works, but they’re not good at selling; they’re not good at pitching investors; they’re not good at marketing their product or service.

“More than money, what we need is a sense of community around entrepreneurship and a sense of community around technology.”

Estrada said there tends to be some difficulty when is comes to accessing the people who want to help.

“I think part of it is that there isn’t a structure where people who want mentorship can go and get it. West Michigan is very selfless. … There’s not a lack of people who want to help; there’s a lack of structure for those people who are available to help to be connected to those who need help.”

Estrada noted that the tech industry is gaining momentum here, but often companies that originate in West Michigan leave or fail due to a lack of support.

“I hear stories all the time, and it leaves me sad to hear about startup companies that are here. They want to build a product or provide a service here, but they can’t get any investments,” said Estrada.

Jason Sosa is founder and owner of Immersive Labs. The company’s most notable product is an interactive advertising screen. As someone approaches, the screen registers whether the person is passing by or coming closer. It identifies the sex of the person and imports pictures of that person into the advertisement. The screen is touch sensitive, so users can move or customize ads with their fingertips.

Sosa also has noted the exodus of tech entrepreneurs.

“A lot of people are thinking, ‘Hey, I can’t get the support I need here, or I can’t build enough momentum or find enough collaborative partners to work with to even be sustainable, so how do you survive?’”

Sosa said that one of West Michigan’s well-known strengths may also be a weakness.

“I think this is a great area — there’s great potential in this area, but the paradigm of thinking has become one dimensional. It’s really a cultural issue,” said Sosa.

“For a long time there’s been a way of thinking, which is manufacturing. We make something and we sell it. We’re experiencing a really dramatic downturn in that type of thinking.

“I think we need to look at other ways, other methods, and the challenge with that is investors in this area may have a harder time understanding intellectual property. It’s so intangible; it’s very abstract.”

While funding may take a back seat to building a supportive tech culture, both Estrada and Sosa agreed investment is a large motivator. Technology, especially software technology, can have a difficult time finding funding in West Michigan, which would not seem to be the case in California’s Silicon Valley where tech startups abound.

Jack Ahrens, general partner at TGap Ventures, a Kalamazoo-based venture capital firm, said it’s a matter of looking at the numbers.

“It’s hard for all companies. We look at probably 500 and 600 deals a year, and we do three — and that’s not far off the industry average,” he said.

“In California, you see a lot more technology deals done, but believe me, there’s 10 times as many coming to the venture capitalists. The absolute number might be higher, but the percentage stays the same.”

Ahrens also noted that the abundance of technology has created more competition within the industry. The speed at which software now can be created makes it more difficult for one company to differentiate itself from the next one, making it a riskier and possibly less profitable investment.

Jody Vanderwel, president of the Grand Angels, a Grand Rapids-based angel investment group, also pointed to a lack of capital.

“Michigan does a huge amount of R&D work and we’re in the 20s (of the 50 states) in terms of available capital to fund that. It’s not hard to understand the frustrations of a lot of early stage companies to find capital,” she said. “There are just so many opportunities to invest.”

Vanderwel said some of the factors tech companies struggle with when approaching potential investors are: knowing how fast the company can grow; having an exit strategy; knowing the market; and being able to clearly communicate about their product.

“We’re looking for (the company) to scale pretty quickly and have an exit in five to seven years,” she said. “That’s a tough field to get funding in because investors just don’t see the scalability and the exit at the end of the road.”

Despite the challenges, there are some solid reasons to stay and start a company in Michigan.

“There are some tangible reasons to stay and start a business here,” said Estrada. “The cost of living is relatively low here. There are a lot of resources for business that are just starting out.” But, he added, “I don’t know if they are the right resources for really innovative companies.”

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