Magic Time

Can Magic Johnson and Dozens of other venture capitalists seed and mentor enough entrepreneurs to fill downtown Detroit?


Published:

 Detroit was the Silicon Valley of its day. The automotive, aviation, film, and medical industries complemented a landscape rich with engineers, scientists, inventors, and researchers. There seemingly was nothing the city couldn’t manufacture on a global scale.

Prior to V-E Day, Detroit produced more cars, planes, parts, machinery, film, and drugs than any other place on the planet. But in the summer of 1945, with the official end of World War II, the city’s mercurial growth streak succumbed to the economic laws of supply and demand.

Detroit, the “Arsenal of Democracy,” was left with too many factories, too many workers, and not enough jobs. Compounding the problem was the fact that the plants that had generated hundreds of thousands of planes, tanks, trucks, weapons, and ammunition occupied large swaths of land within residential neighborhoods. During the war, smart urban planning had taken a backseat to arming soldiers on the front line.   

After the war ended, Ford Motor Co., the world’s largest producer of aircraft, quickly withdrew from the aviation sector. The automaker was nearly on life support, due to mismanagement — Henry Ford’s security chief, Harry Bennett, was effectively running the company, while the patriarch’s grandson, Henry Ford II, had yet to prove he could assemble a team to realign the conglomerate’s prodigious manufacturing operations to the production of cars and trucks.

General Motors, Chrysler, Packard, and the other automakers quickly followed suit. The aviation industry soon consolidated on the West Coast. The pattern was repeated with the film industry (automakers no longer sought to create their own commercials) and drug manufacturers (bigger players took over). Parke Davis in Detroit, which developed the modern medical laboratory and produced millions of pills and medications, was eventually folded into Pfizer Inc.  

In hindsight, the city and region should have done more to maintain economic diversity, but demand for consumer goods didn’t perk up until the 1950s. As time went on, rising family wealth, combined with racial tensions exaggerated by real estate agents, saw the great migration of Detroit residents to the suburbs. Left behind were empty factories, empty homes, empty stores, and a fairly unskilled workforce. Some say Detroit went from 1.0 to 0.0.

 

“Detroit really led as a city to show how people go to work every day, how to build incredible cars, and on, and on, and on — and we’ve got to get back to being that leader once again,” says Lansing native Earvin “Magic” Johnson, chairman and CEO of Magic Johnson Enterprises, and a general partner of Detroit Venture Partners in downtown Detroit. The latter group is investing heavily in an innovative business incubation laboratory that seeks to generate enough high-paying jobs to fill 1 million square feet of downtown office space in the next 10 years.

Setting the stage for a comeback in the mid-’70s, city and business leaders embarked on an urban transformation that is now entering its fourth — and perhaps most exciting — phase. In 1977, Henry Ford II, along with numerous corporate partners, opened the Renaissance Center. A decade later, Mike and Marian Ilitch were the harbingers of an entertainment revival. And in 1996, GM traded its corporate home in Detroit’s New Center for an address at the RenCen.

“The city had been in an economic freefall for years, and it wasn’t a question of when things were going to get better, but rather how bad it was going to get,” says Matt Cullen, president and COO of Rock Ventures, part of the Quicken Loans empire now centered in downtown Detroit. Cullen, GM’s former manager of economic development, was the catalyst of the automaker’s $500-million acquisition and development of the RenCen for its international headquarters.

“Detroit will never be what it once was — the global epicenter of design, manufacturing, and production — due to changing economic conditions. But we’ve been witness to enormous progress over the last 15 years,” Cullen says. “The GM move created the confidence for many other things to occur, like Compuware Corp. (moving from Farmington Hills to a signature downtown commercial center), the stadiums, the revitalization of the riverfront, the Book Cadillac hotel, and the casinos.”

Incentivize This

In August 2010, Tim Smith was in a sour mood. He had recently acquired a majority stake in Skidmore Studio and was anxious to move the creative design group from Royal Oak to Detroit. He was tired of the resistance and of experiencing what has become a common practice among real estate brokers (and has been verified by businesses and residents, especially transplants) since the 1967 riots: purposely bypassing Detroit. Low property values, after all, lead to low commissions.

“The common refrain was: ‘Do you really want to do that?’ ” Smith, president and CEO of Skidmore Studio, recalls from a conversation with a broker. “That kind of attitude just made me more determined to do something.”      

Walking around downtown, he noticed a “For Lease” sign on the Madison Theatre Building, situated across Broadway Street from the Detroit Opera House and a short walk from Comerica Park. Dan Gilbert, founder and chairman of Quicken Loans Inc., was in the process of acquiring the ornate, five-story structure. Built in 1917, the commercial building and a neighboring movie palace were the forerunner to the central business district’s entertainment industry.

 

The 1,800-seat classical revival theater was torn down in mid-2000 as the adjoining office building, complete with a marquee, underwent a slow, yet steady, renovation. The challenge with the Madison — like most every property downtown — was that the city and its nonprofit development agency, Detroit Economic Growth Corp., were required to contribute funding to every restoration. Without financial incentives, high renovation costs couldn’t be overcome.

“Before I knew of any incentives, I was already looking to move downtown,” Smith says from his corner office overlooking Grand Circus Park. “The incentives made it easier for me to justify the move, but I would have been downtown regardless. There’s a vibe here, a sort of raw energy, that’s contagious. In downtown Royal Oak, we were at the back end of the whole hipness and cool thing.”

Moving 24 employees into the fourth floor of the Madison last September, Smith set out to preserve everything. That means exposed steel beams, brick walls, and terra cotta tiles in the ceiling. A 700-pound Cinema Scope camera that was bolted to the floor is being refurbished. The slate surface of a table in the kitchen came from a pool table. There’s even a metal staircase that once led to the fifth floor (the opening was covered over for privacy reasons). “It was cool, so we kept it,” Smith says.

If downtown Detroit is ever to become a thriving urban metropolis, incentives such as those provided by the New Economy Initiative for Southeast Michigan to lure businesses like Skidmore Studio must eventually subside. “You can never [completely] eliminate incentives, as they are needed whether you’re in Paris or London. But once you see them reduced, it will show that the downtown district is a success,” says George Jackson, president and CEO of Detroit Economic Growth Corp. “It means we’ve turned the corner on revitalizing the urban core.”

Property values will steadily rise, as well. In a twist of irony, one of the primary reasons Gilbert purchased the Madison, along with six other downtown office structures — including the First National, Chase, and Dime buildings — was because of their cost. Real estate values have dropped to such low levels that vacant buildings are now becoming less expensive to renovate and lease than more modern commercial centers in the suburbs (as long as the city of Detroit and others offer incentives).

The other factor driving Gilbert, Smith, and dozens of other businesses and residents to locate downtown is changing tastes. Authenticity is in, especially among creative and younger office workers, entrepreneurs, and people simply tired of a suburban environment.

According to a commercial office market forecast by PwC US and the Urban Land Institute, urban employment is driven by energy, high-tech, and health-care-related industries, as well as nearby universities. Downtown Detroit, along with the Midtown District to the immediate north, has a solid footing in those three business sectors, while Wayne State University has more than 32,000 undergraduate and graduate students. Wayne County Community College operates a Detroit campus, as do the University of Michigan and Michigan State University. Grand Valley State University, meanwhile, is looking to open a scholastic center downtown.

 

 

VC in the “D”

One of Josh Linkner’s favorite places is the original Menlo Park laboratory where Thomas Edison and his team of inventors created the incandescent electric lamp, the phonograph, the printing telegraph, photographic film, and numerous other innovations. The lab, which Henry Ford purchased in the 1920s and relocated to Greenfield Village in Dearborn from New Jersey, resonates with Linkner, a serial CEO.        

Linkner, founder and chairman of ePrize, a fast-growing interactive promotions and loyalty solutions company in Pleasant Ridge, spends most of his professional time as CEO and managing partner of Detroit Venture Partners. The concern is one of a dozen venture capital firms in downtown Detroit, including Compuware Ventures, Ludlow Ventures, and Huron Capital Partners (most have set up shop in the last two years).  

Leading the way through sleek blue-and-green workstations framed by large windows, a 150-seat auditorium, a spacious reception area, and a rooftop patio equipped with multimedia offerings and a catering kitchen, Linkner says the Madison is the epicenter of Detroit 2.0. While tenants like Stub Hub, Angelina Italian Bistro, and Skidmore Studio occupy the first and fourth floors of the Madison, the remaining levels house Detroit Venture Partners and its budding portfolio of startup firms (the interior space was designed by Gilbert’s wife, Jennifer, an entrepreneur in her own right).

One such concern is Detroit Labs, a Quicken Loans company that creates Web, iOS, and Android applications for a range of businesses. At Detroit Labs, patterned after Edison’s laboratory, a team of software developers and engineers spend 20 percent of their time “tinkering” on side projects that hopefully will become full-time companies. Detroit Labs also supplies apps and other technology needs to Detroit Venture Partners’ portfolio of startups.

“We’re generating creative energy in a hub of entrepreneurial fire,” Linkner says. “As the startups grow, they will move to other places downtown so that we can bring in new startups. The incubation process will take six months or less, and then we want the (entrepreneurs and their businesses) to grow as quickly as possible.”

If the startups have one thing in common, they are all centered on technology. For example, HiredMyWay.com offers a payment model that people use to post their resume — sort of a digital version of a career coach. Other groups include Gumshoe, a digital game patterned after the popular board game “Clue”; UpTo, which allows users to share social events with their circle of friends; and Own, an online point of sales system.

 

Linkner, along with his general partners — Gilbert, Johnson, and Brian Hermelin — say they are picking up where Detroit left off in 1945. In their bid to diversify Detroit’s economy, they’re leaving investments in manufacturing to others. Their new enterprise seeks to generate, in a decade’s time, 3,000 high-paying jobs and $1 billion in combined revenue, and to fill 1 million square feet of office space.     

The competition is fierce. While Detroit Venture Partners works with similar groups in the region such as TechTown and Next Energy, both in Midtown, along with Automation Alley in Troy, Spark in Ann Arbor, and various state and local agencies, the rest of the world isn’t sitting idly by.

New York Mayor Michael Bloomberg, for example, has announced plans to create a large applied sciences and engineering campus, either on Roosevelt Island or at the Brooklyn Navy Yard. Currently, proposals from 17 universities and research institutions, including a team from Stanford and Cornell, are being reviewed. The city is offering up to $100 million in capital, along with a large swath of land, to establish the campus. Meanwhile, Silicon Valley, Boston’s Route 128, and North Carolina’s Research Triangle Park have long offered entrepreneurial assistance and development services.

“Name any prosperous region in the world, and they will have business incubation centers,” says Ray Waters, president of Detroit Development Fund, which in 2011 closed on $6 million in commercial and residential loans in the city. “The great thing about our venture capital firms and incubation centers is that everyone is talking [about us]. Detroit Venture Partners will refer a smaller company to us, while we will refer a company that has larger capital needs. It’s that kind of synergy that will bring Detroit back.”

There’s nothing quite like star power. Detroit Venture Partners attracted its fair share of budding entrepreneurs eager for financial and management guidance after it formed in 2010. But when Magic Johnson became a general partner last spring, after a splashy news conference held on a basketball court inside Quicken Loans’ headquarters, more than 500 separate business opportunities came forward.

Get in the Game

“We’re bringing our business expertise to the table, and people are responding,” Johnson says. “It’s not only going to be good for us, but think about all the mom-and-pop businesses downtown and all of the restaurants that will be affected. All of the new workers downtown will have to spend their disposable income somewhere. Then you have new housing opportunities coming downtown, and now people will be in a position to buy a home or rent an apartment.”

Hermelin, a partner of Rockbridge Growth Equity, a Quicken Loans company that invests in and helps operate later-stage companies, says a technology ecosystem is starting to take root. “You’ve got Compuware, Quicken Loans, GalaxE.Solutions, Strategic Staffing Solutions, General Motors, GM Ventures, and on it goes,” he says. “When you have that kind of synergy, technology people get together to share ideas and resources. It attracts other companies that want to be part of the ecosystem. Add in world-class colleges and universities, and companies from the outside want to tap into that synergy rather than be alone somewhere else.”

 

Tim Bryan, chairman and CEO of New Jersey-based GalaxE.Solutions, says he established a health care IT center in downtown Detroit’s 1001 Woodward building, across from Compuware’s headquarters, because the cost of doing business in Motown was nearly competitive with traditional outsourcing markets like India. More than 100 people have been hired, with a goal of hiring another 200 people by 2014. To highlight the movement, Bryan draped a large mesh sign on the north side of 1001 Woodward. The message: “Outsource To Detroit.”

In similar fashion, Cindy Pasky, president and CEO of Strategic Staffing Solutions, an information technology-staffing firm inside the Penobscot Building, established an IT application development office called the Detroit Development Center. The effort, which seeks to retain work that could go overseas, supports organizations like Blue Cross Blue Shield of Michigan, which recently moved 3,000 workers to the RenCen and to its campus near Greektown.   

“Manufacturing, as we once knew it, is not coming back,” says Larry Gardner, president of Lawrence Gardner Associates, a managerial financial consulting firm in Troy, “so it’s critically important that we keep as many college graduates in our state as possible. Downtown Detroit is becoming a mini-Silicon Valley. We need to keep investing in the restoration of historic buildings because that’s where young people, especially those in the technology sector, want to live, work, and play.”

If there’s a challenge downtown and in Midtown, it’s that the demand for historic lofts has nearly outpaced the supply, says Matt Clayson, director of the Detroit Creative Corridor Center, which works with the College for Creative Studies and Business Leaders for Michigan, among other organizations, to accelerate the growth of creative talent and entrepreneurs via mentorship programs, partnerships, and networking events.

“What you’re seeing is digital, media, and marketing people centered largely in the downtown district between Grand Circus Park and Capitol Park,” Clayson says. “The Midtown District is mostly drawing designers, architects, artists, and people who work with their hands. To the outsider, it can be hard to navigate because Detroit has all of these little warrens you have to discover. But once you learn how to tap into that energy, you don’t really have to look far for resources.”

To boost the supply of historic-style offices and residences, the past is catching up with the present. For more than three decades, Michael Higgins, president of Witherell Corp., the controlling entity of the David Broderick Tower, a 34-story neoclassical structure that opened in 1927 at Woodward and Witherell, has tried to renovate the Detroit landmark. The long-vacant structure, adorned with painted whales by local artist Robert Wyland, finally turned the corner toward revitalization in 2006, when Higgins and Fred J. Beal, president of J.C. Beal Construction Inc. in Ann Arbor, assembled a complicated financing plan to make it feasible. The effort included Bank of America, Chase, Invest Detroit (a nonprofit financial entity set to occupy three floors in the Broderick in fall 2012), the Michigan Historic Preservation Network, and more than 20 other partners.

 

The $53-million renovation, now more than halfway completed, includes 125 apartments (25 percent have been pre-leased), office space, and three commercial projects: Sportstown Grill, a 175-seat restaurant on the main floor; The Cave, a wine bar on the lower level; and a yet-to-be-named German-style beer garden that will feature more than 30 draft beers, also to be located in the lower level.

To the south, at Woodward and Grand River, Higgins is moving forward on a renovation of the six-story Elliott Building, where Stanley S. Kresge started his retail discount empire in 1899. The plan is to add retail space and 25 loft-style apartments by 2013. “There’s incredible demand for apartments,” Higgins says. “Nearly all of our expensive units are leased ($3,500 to $5,000 per month).”

Other projects are in the works, as well. Across Woodward from the Broderick, Detroit-based Roxbury Group has partnered with Trans Inns Management Inc. in Farmington Hills to renovate the neo-Renaissance David Whitney Building, designed by famed Chicago architect Daniel Burnham. The effort will include 108 apartments, an Aloft  brand hotel, and commercial space.

In Capitol Park, an urban district located at State and Griswold east of the Westin Book Cad-illac Hotel, Detroit Economic Growth Corp. and other agencies are marketing three historic office structures to residential and commercial developers. Framing the recently renovated triangular park, Jackson says the buildings had no shortage of qualified offers. Even the most challenging structure, the Farwell Building — the interior was designed by Louis Tiffany — will be restored, despite years of weather damage.

“When you assess the future development landscape of downtown Detroit, Dan Gilbert will be the first to point out how quickly e-commerce and Internet-based companies can grow into huge operations,” says Larry McLaughlin, chair of the real estate department at Honigman — one of the state’s largest law firms — in Detroit. “If I had to speculate, given Dan’s commitment and staying power, he will not fail. He doesn’t have a short-term mentality. He’s in it for the long haul, and that’s where you drive value.” db

(Paul W. Smith contributed to this report.)

 

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