Ann Arbor entices entrepreneurs

That charming college town feel hasn't disappeared, but these days Ann Arbor is evolving into something much more important for the future of Michigan.

Forces long in the making are transforming the city and its surrounding area into a hub for start-up companies and venture capital. If trends continue, experts predict Ann Arbor could become a key economic driver for the state.

"Ann Arbor is the poster child for the Michigan of the future," Charles Ballard, an economics professor at Michigan State University, said this year.

The changes have been subtle. The area contains more than 150 innovation-related start-up companies. Each month, entrepreneurs and would-be entrepreneurs flock to dozens of seminars and meetings geared toward them. And venture capitalists congregate each weekday morning at Café Zola for business meetings.

Of the 540 companies in Michigan's biosciences industry, 142 are in the Ann Arbor area, the highest concentration in the state. The city is home to 10 of Michigan's 17 venture capital firms. And when the state's economic development agency awarded $30 million in loans to 17 technology companies last fall, 11 of them hailed from Ann Arbor.

"I expect us to become a much more high-value, knowledge-based community," said Michael Finney, head of Ann Arbor SPARK, the local economic development organization. "That will lead to opportunities for the rest of the state."

The city already has a number of well-funded start-up firms that could become large employers, said Tim Petersen, managing director of Ann Arbor-based Arboretum Ventures, one of the state's leading venture capital firms.

"The numbers are starting to work in our favor," he added.

Ann Arbor has not yet achieved the status of entrepreneurial hotbeds like Austin, Texas, and Madison, Wis. The city lags far behind Madison in attracting young professionals, said Lou Glazer, president of Michigan Future Inc., an Ann Arbor think tank.

"If Madison can do it, Ann Arbor can do it," he said. "There are encouraging signs."

So far, Ann Arbor has weathered the downturn better than other cities in Michigan, though it too has struggled with mounting job losses. Its unemployment rate jumped to 7.4% in February, but that's still the lowest in the state and below the 8.5% national jobless rate.

Ask most entrepreneurs and venture capitalists why they set up shop in Ann Arbor and you will repeatedly hear two reasons: the University of Michigan and Ann Arbor SPARK.

An expanding array of fledgling companies in the area trace their roots to research done at U-M, which ranked fifth among all academic institutions for research and development spending in 2007. In the 2007-08 academic year, the school's research budget soared to a record $876 million.

Many of the school's spin-off companies use the university's resources. For example, Xoran Technologies Inc., a specialty CT scanner company with 60 employees, collaborates with U-M's department of radiology and hires graduate electrical engineering students.

"It makes a huge difference," said Neal Clinthorne, Xoran's vice president and cofounder who is also a U-M research professor in radiology. "It's really a win-win situation."

Even non-spinoff companies have benefited. Ann Arbor-based Terumo Cardiovascular Systems gets feedback on new medical device concepts from surgeons at U-M's hospital and uses the hospital's labs for testing devices.

"We do a tremendous amount with the university," said Mark Sutter, Terumo Cardiovascular's CEO.

U-M works closely with the 3-year-old Ann Arbor SPARK. The economic development organization has attracted new businesses to the area and assisted entrepreneurs with everything from low-cost office space to financing help.

SPARK's efforts have proven so successful that other economic development groups in the state have taken notice, calling for advice.

Longer-term, SPARK hopes to provide small firms in the area with resources that could enable them to grow more quickly into larger companies. Like other cities in Michigan, Ann Arbor suffers from a shortage of experienced executive-level talent and its start-ups need more capital.

But Finney is optimistic that these hurdles can be overcome. "We are going to be very different from our past," he predicted.

The environment for start-up companies wasn't always so encouraging. Clinthorne recently recalled how not too long ago, local banks didn't understand what it took to develop a new business.

"The climate is getting better," he said, noting that Ann Arbor is nearing the point where if a job at one start-up firm doesn't work out, then you can find employment at another one. "Over the years, there's been a lot that's been put in for support."