BUSINESS

Menlo Innovations Shows A New Kind Of Michigan

10/14/2011 07:37 pm ET | Updated Dec 14, 2011

ANN ARBOR, Mich. -- When Rich Sheridan lost his job in the dot-com bubble about a decade ago and decided to start his own company, he had some trouble explaining the idea to his wife.

"I came home and told Carol I had lost my job and she went, 'So you're unemployed,'" he said. "And I said, 'No, I'm an entrepreneur now.'"

Even after weeks of working in his basement with friends on the business plan, when it came time to invest some $15,000 of the family's money in the nascent firm, Carol was confused.

"I was just thinking, what business?" she recalled, adding that she thought her husband and his friends had been applying for jobs together in the basement.

What they had been plotting instead was Menlo Innovations, a software-design outfit that now has 42 employees and that Sheridan and his partners expect will bring in about $5 million in revenue this year. And they weren't alone. While Michigan's economy is distressed overall, the emergence of countless small technology start-ups here in recent years gives some hope that there are better days ahead.

But even as a report issued this month showed that, for all the state's challenges, Michigan gained more tech jobs than any other state in 2010, there is still some lingering uncertainty about a brand of business that is much different from automobile manufacturing. Take Carol Sheridan's father, for one. He worked for Chrysler for 10 years and was later a tool and die maker for an auto parts manufacturer. When Rich Sheridan wanted to start Menlo, his father-in-law "looked at him funny," as James Goebel, another of the founders, remembered.

The state as a whole has had to wrap its mind around these new kinds of companies, which are among the fastest growing in Michigan. Even as GDP growth struggles here, the high concentrations of students and engineers have made it an attractive place to start new companies. Many of these have been founded by graduates of the University of Michigan, which recently announced that it would begin investing in companies that begin on its campus.

Still, Goebel said that Michigan investors in general are more risk-averse than venture capitalists in other states.

"People here only want to start the next HP or Apple," he said. "But you have to start 10,000 firms to end up with HP and Apple. It's a new idea here that you would start companies knowing so many would fail."

Menlo certainly hasn't failed, and nobody is looking at its founders with anything except admiration anymore. The company has been named a "Michigan Economic Bright Spot" and one of the fastest-growing private companies in America. Software they developed for a cytometer manufacturer helps count cells in fluid and has been one of the firm's biggest successes.

Now they're ready to branch out into even riskier territory. Nontraditional business arrangements, such as deferring design fees in exchange for an equity stake or royalties in the final product, have always been central to what Menlo does, and was central to getting the firm off its feet in its earliest days. Now the founders are considering making this kind of "leveraged play" almost their entire business.

"It's a completely new model," as Goebel put it, "and that's true for us and also for the state in general."

This post is part of Patch: The Road Trip. Read Arianna Huffington's introduction to the project, and be sure to follow Paul on Twitter and MapQuest.

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