Michigan's investment culture must adapt to help new businesses grow
Michigan’s economy is changing, and our state’s investment culture must change along with it. As we work to diversify by stimulating entrepreneurship, innovation and talent attraction, among many other things, more Michigan residents with money to invest must learn to see that betting on new local businesses is worthwhile, even if the potential for them to fail is high.
As an investor myself, I can see how that might seem like a big ask – no one wants to lose money – but I would suggest that the risk and downside is not quite as big as it seems. In fact, we need only to look at how we make charitable donations for a glimpse of what a robust investment culture could look like here.
Michigan is a generous state. Kent County, in particular, consistently ranks among the highest in the nation in per-capita giving. Our tradition of generosity has made, and continues to make, our community a great place to live because individuals work to identify challenges or opportunities, organize responses to them, and give resources of time and money to support them. It leads to things as monumental as sports arenas, and as human-scale as connecting kids in schools with mentors.
This valuable culture of giving has developed over a long period of time. It is the combined work of individuals making quiet, ongoing decisions to set time and money aside in order to invest in organizations dedicated to causes in which they believe. People are able and willing to make these philanthropic investments because they plan for them, building allocations into their budgets and projections. This support becomes an expression of who they are as community members and where their priorities lie.
Through all of this, philanthropic investments are often speculative – with no guarantees that the investment will work as desired, that impact will be achieved, and that there will be any "return" beyond the initial feeling of satisfaction in giving the support. Indeed, there is risk when giving philanthropically, but most people don't usually think of it as risk because the donations are not a threat to their financial security. They have planned for it. In doing so, they are able to invest year after year. This ongoing commitment accumulates and compounds, allowing a diverse ecosystem of organizations and approaches to flourish.
So what’s the Next Idea?
What if we took that same type of giving – rooted in generosity and seeking impact that isn't always completely quantifiable at the outset – and applied it to how we invest in new Michigan businesses? I would suggest that building a culture of early-stage business investment that was even a fraction as deep and meaningful as our culture of giving would have an immense impact.
If we are going to create new generations of for-profit businesses, we must be willing to set a portion of our resources aside for the speculative, the messy, and the unknown. These new businesses will require seeds of generosity because the impact that they are seeking, much like philanthropic efforts, is very seldom quantifiable at the outset.
If we are going to create new generations of for-profit businesses, we must be willing to set a portion of our resources aside for the speculative, the messy, and the unknown.
For decades, most discussions about startup investment have begun with lamenting access to financial capital. And while money is a crucial ingredient, there are several other ingredients that are just as important. For the past several years, I have been working through an early stage investment entity in Grand Rapids called Start Garden. We have come to think of the ingredients in these simple ways, and we work to invest and develop programming that creates and unlocks them:
Financial capital: If you have investable resources, try allocating a relatively small amount to participating in the financing of local, early-stage startups that have good plans but much to prove. Seek out a couple of local product startups to support on crowd-funding sites like Kickstarter and IndieGoGo every year, and help spread the word about them. Sign up to be the first customer of a new business.
Social capital: Attend Startup Weekends, incubator open houses and new business competitions to meet entrepreneurs. Introduce them to other people in your industry and network. Help them meet others who also have the ability to invest time or money into their startup.
Intellectual capital: Mentor an entrepreneur who is looking for knowledge about how your industry functions. Host entrepreneurs who want to learn more about what you do. Help to teach your business and industry the value of startups and a startup ecosystem.
The key behind developing this investment culture is to understand that startups are different. In Michigan and the Midwest, our default assumption is that business is primarily about process, efficiency, and discipline, and this is absolutely true for operating established businesses with clearly defined customers and business models.
Launching and growing new businesses, on the other hand, can’t be approached the same way. Startups require continuous testing and trials of ideas that might seem foolish at the outset. Starting a new business is fraught with unknown challenges. The same processes and discipline that are valuable in operating more established businesses can strangle the relatively wilder experimentation that is often a crucial part of a startup finding a good, scalable business model. To the inexperienced eye, however, these startup experiments look like wastes of time and money. But given the time, resources, and a low-friction ecosystem to work within, startups will find their business models and their way to create value, revenue and profit.
We can see outlines of this culture in our state’s own history. The early days of the automotive industry were chaotic and freewheeling. There were significant doubts about the practicality of replacing the horse. The automobile was seen as a rich man’s plaything, an impractical waste of time and money. Business models were not clearly defined. Auto entrepreneurs and their investors met in the bar at Hotel Pontchartrain to swap ideas and plans, and form partnerships and rivalries. Not all of the businesses made it. Many of the plans that were made ended up as losses. But bit by bit, the entrepreneurs and investors found the way to build the industry that has defined our state for more than 100 years.
This is why a culture change is necessary. We must accept the messy process and short-term losses that are inevitably a part of it. If we approach early stage businesses from a posture of discreet generosity, Michigan communities will develop more vibrant and low-friction business ecosystems and new generations of businesses will flourish, to all of our benefit.
Share Your Ideas:
- For those of you with money to invest, what holds you back from investing in more Michigan businesses and startups?
Rick DeVos is founder and CEO of Start Garden, a $15 million seed fund that works to build the startup ecosystem in Grand Rapids and West Michigan.