Start-ups surge in Detroit, across U.S. despite sluggish economy

Posted on August 31, 2016

At TechTown Detroit — a business innovation incubator — the interest is so intense from start-ups seeking space there that the organization may need to find more to squeeze them all in.

It’s also a sign that while the economy isn’t booming now, start-up activity nationally — and in Detroit — is gaining strength.

“I think it’s a shift of culture in cities in general across the United States, but primarily here,” said Jonathan Colo, the community coordinator of Junction 440, the co-working space at TechTown. “We’re seeing it because companies have the ability to have affordable space and a network and ecosystem that supports not just a single entrepreneur, but all of them.”

The co-working space, Colo said, is nearly full at 67 companies;  many are start-ups. At this rate, it could eventually overflow.

On average, about 550,000 businesses were launched nationally each month last year, up from 466,000 in 2013, according to figures released this month by the Kauffman Foundation based on an analysis of Census Bureau and Labor Department data. That’s the highest level since 2009 and 2010. But the totals in those years were inflated by the economic downturn, which forced many laid-off workers to start their own consulting firms or other enterprises to generate income.

Ironically, the moderately improving economy may be helping to create just the right amount of tension that start-up entrepreneurs need: Enough confidence to take risks, but not so much confidence that workers feel they can count on the jobs they already have to sustain them for the rest of their careers.

“Leaving my full-time job to do my business full time was a risk,” said Taylor Bolleber, 24, who worked for an advertising firm before starting the online clothing business, Bird Bee, in late 2015. “But I knew it wasn’t going to grow unless I took that risk.”

Seizing opportunities

The start-up surge seems to be driven partly by rising home values, which is giving small-business owners more access to capital through loans. The Affordable Care Act also is making it easier for entrepreneurs to get health insurance, along with the generational attitude of millennials, who, like Bolleber, tend to be more enterprising and want to create their own destiny, experts say.

But unlike during the depths of the recession, when entrepreneurs were starting companies based out of desperation, entrepreneurs now are more likely to form a business based on a viable idea, increasing the chances the ventures will be successful and longer-lasting, said Dane Stangler, Kauffman’s vice president of research and policy.

The national unemployment rate has fallen — to 4.9% from 10% in 2009 — and the motivation to start businesses is to pursue an opportunity that’s better than staying at their organization and at salaried jobs. The share of entrepreneurs nationally motivated by opportunity now rather than necessity reached 84% last year, up from 79% in 2014 and 74% in 2009, a Kauffman report said.

“We’re seeing a lot of entrepreneurial activity because it’s easier now than it ever has been,” said Alex Southern, an organizer with nonprofit Grow Detroit. “This area — Detroit — is not an area that has really fostered entrepreneurial activity in decades prior because the middle class was thriving because of the automotive industry. I think that’s changing. Native Michiganders are having to be more innovative about what industries they invest into, where they put their money.”

Home equity piggy bank

As home values rise, small-business owners also are able to tap into their houses as collateral to take out loans.

A Free Press analysis of home sales data for existing homes in metro Detroit from 2009 through most of 2015 showed housing prices are back to what they were in 2007, before the recession, across much of southeast Michigan. Even the city of Detroit saw huge percentage increases.

Nationally, lenders originated home equity lines of credit with limits of $146.1 billion last year, up 20% from 2014, according to Equifax.

And consumers, including entrepreneurs, also have begun using credit cards more freely, said Diane Swonk, head of DS Economics.

On top of that, young entrepreneurs like Bolleber, who don’t have homes or other collateral, are often living at home with their parents, using readily available technology to start businesses at a low cost, and reinvesting whatever profits they earn back into the enterprise.

“Millennials, especially, are tired of having to sit a desk and follow someone else’s orders,” Bolleber said. “I felt like I wasn’t able to do what I wanted to do enough, and I wasn’t really contributing that much to the company I was working for. I wanted to do something much bigger, but also do something for myself.”

She said she initially invested about $1,500, kept her costs low and used free social media services, such as Instagram and Facebook, to promote her company — and develop a loyal following.

The next step, she said, is to open a brick-and-mortar shop.

Creating jobs

The number of business start-ups with at least one employee — a subset that captures firms that contribute significantly to economic growth — also is rising. There were 398,000 additional employer businesses that were a year old or younger last year, up 7% from 2014 and the most since 2008, according to the Labor Department.

As a result, organizations backed by public dollars are seeking more ways to promote small-business start-ups to drive economic development and create jobs.

In Michigan and metro Detroit, where the recession cut deep, entrepreneur support groups and networks also have emerged.

In 2011, Nick Gorga, a lawyer seeking to revitalize the city, founded Hatch Detroit, a nonprofit organization that, among other efforts, puts on an annual pitch contest to encourage retail start-ups and provide them with publicity and money. It awards the winner $50,000 — along with other prizes.

“I think that there is a group of ‘all of us’ that work together to push forward the initiatives of small entrepreneurs,” said Vittoria Katanski, executive director of Hatch Detroit. “We try not to step on each others’ toes. But, try to make sure our contestants are ready for the next big thing that we’re trying to allow our people to take advantage of — and all the options for them.”

Following a dream

Lester Gouvia of Royal Oak, the owner of Norma G’s, started a food truck business about two years ago.

He said the uncertainty — and stress — of his corporate job working in technical sales for a wireless phone provider was too much for him.

So he went into business for himself. He named the company after his mother, as a tribute to her, and now sells Caribbean food.

“It was time to realize a dream I had,” Gouvia said.

Now he plans to open a fine-dining restaurant in Detroit with the same name.

“Detroit is coming back from such a place that it was in a few years ago that I think the excitement level and opportunity, while it’s similar to the rest of the country, is even greater,” he said. “There’s so much to be done. There’s a lot of opportunity here.”