Mike Lazaridis was a senior at the University of Waterloo in Ontario when he landed a $600,000 IT contract from General Motors. For more than two years, no vendor had been able to meet GM’s needs: build a local area network suitable for the most demanding shop floor environment, where welding sparks fly.
Lazaridis dropped out of college to fulfill the contract and, in 1984, Research In Motion (RIM) — the maker of BlackBerry — was born. In fiscal year 2012, the company had $18.4 billion in revenue and employed more than 19,000 people. While RIM may be past its prime, this example teaches a simple lesson: The buying power of our auto companies — and their demanding needs — can create enormous opportunities. But can Michigan harness this power to spur our regional growth?
Consider that the state has 20 companies on the Fortune 500 list, each boasting billions of dollars in revenue. But what percentage, if any, of their purchases are from startups? If you take a step back and look at a map of the United States, nearly 75 percent of the Fortune 500 companies are within a two-hour flight from Detroit.
So why don’t we see more examples like RIM in our backyard? Because, as a general rule, we don’t know how to nurture startups. In a Kauffman Foundation study released last September, Ann Arbor ranked No. 1 in the country for losing entrepreneurs. To arrest this migration, here are a few suggestions (some crazy and bold, and none for the timid).
1) 1 percent of purchasing power should support local startups: People are flocking to Eastern Market in Detroit for healthy produce and other goods. The “Buy Local” movement is picking up steam. Such demand is driving Walmart, Whole Foods, and nearly every grocer to buy local (and even charge a premium for it). On the other hand, the automotive companies will spend $3.7 billion this year in online advertising, yet only a few large companies — like Quicken Loans — are purchasing goods and services from startups.
2) Seek them out, take some risk, and make decisions quickly: Ask any startup CEO and they will tell you: “We don’t wish to sell to a large company because the decision-makers are notoriously inaccessible.” Many a startup has died trying to reach the right person. And for those that managed to make a connection, any purchasing manager worth his or her year-end bonus would promptly point out that startups could not deliver or meet the rigorous needs of a mature company. They are neither stable nor predictable.
This is called the IBM Syndrome, because no purchasing manager was ever fired for buying a brand-name product. Yet innovation comes from the new upstarts. They offer nimble-footed, creative approaches to age-old problems. And yes, if you like their offerings, please don’t take 11 months to issue the purchase order. Most investors cringe when their portfolio startups try to sell to large companies. The sales cycle is long, and even after you get to a purchase order, the margins are thin.
3) For once, don’t beat them on price: Most startup CEOs live on two packets of Ramen noodles a day and they don’t take home fancy, six-figure salaries. So set aside what you learned in that negotiation-skills class and pay a fair price.
4) Share your global and technical acumen: Large companies are reservoirs of talent — deep technical and business acumen and resources that can make entrepreneurs smarter. Global market development, product launches, technical know-how, and access to thought leaders make any startup’s journey easier.
5) Believe: By far, this is the one battle every founder struggles with. No one believes in their potential! In fact, others are quick to criticize their ideas. But the region can be a magnet for new entrepreneurs only if we believe. To get somewhere, these startups need access to customers, investors, and new hires. Which of these are you?
It will take leadership and trust to shift the paradigm in Michigan. Gov. Rick Snyder is leading the charge with initiatives like “economic gardening” and the “first customer” program. As Snyder once said of startups, “Forget an exit strategy, a lot of these startups need an entry strategy.”
Next time you see a CEO from a startup, ask how you might help them — and watch their face light up. Maybe the next smartphone company could get launched with a $600,000 contract from one of Michigan’s Fortune 500 companies. And maybe some of the new seeds of economic recovery will be planted with the help of a few college dropouts. They need our help as much as we need theirs. db