Crain's Detroit Business, Jan. 25, 2016 issue by Crain's Detroit Business

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Chef Zack Sklar plans down-home chicken joint in Midtown, PAGE 3

JANUARY 25-31, 2016

SPECIAL REPORT

The Flint water crisis: What’s next? Moving beyond blame game to look at solutions – and the city’s future health, economy Last week was the week the Flint water crisis became impossible to ignore. Gov. Rick Snyder’s State of the State address INSIDE brought a storm of Editorial: Not enough tough questions, Page 8. national media scrutiny After raising first red flags, that made Flint and health care community Michigan symbols of buckles in for the long haul, government dysfunction. Page 23. Much of that scrutiny Range of technologies could consisted of assigning help ease water system problems, Page 24. blame. In long term, money for fixes Less prominent was could boost Flint economy, attention to what’s next, Page 24. what is being done, and what could to be done to fix the problems with the city’s lead-contaminated water. In this week’s edition, we look at those questions in three broad themes: 䡲 What needs to be done to fix Flint’s water system 䡲 The health needs of the city’s residents 䡲 The impact on Flint’s beleaguered economy Turn to Pages 23-25 for coverage.

Work to hook Flint’s water supply to the Karegnondi system from Lake Huron is ongoing. SEAN PROCTOR, THE ASSOCIATED PRESS

Packard Plant’s owner says project moving forward despite loss of $80M in financing By Kirk Pinho kpinho@crain.com

MICHAEL LEWIS II

Packard plant developer Fernando Palazuelo says fears of a global financial slowdown prompted an investor to pull out of its funding deal. © Entire contents copyright 2016 by Crain Communications Inc. All rights reserved.

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Fernando Palazuelo has had to make a course correction on the financing of his Packard Plant redevelopment project after a collapse in a key financing agreement. Palazuelo, who owns the sprawling plant at I-94 and East Grand Boulevard and plans a hodgepodge of uses there, says a large but undisclosed Peruvian private equity firm has backed out of an agreement to

provide $80 million in financing for the Packard project. But Palazuelo says he’s still following his original business plan, with no need to scale back on the 3.5 million-square-foot Packard, the redevelopment of which is expected to take hundreds of millions of dollars over the next seven to 15 years. Invariably, Palazuelo and his team are undeterred. “It’s not going to affect the Packard,” Palazuelo said while wait-

ing for a bowl of soup along with the project manager, Kari Smith, at the Seva vegetarian restaurant on Forest Avenue in Midtown. He even said another large Detroit industrial property project is in the works (see related story, Page 22). “It’s business as usual,” Smith said in agreement, a salad on the way. Palazuelo said the private equity firm’s concerns over the broader

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SEE PACKARD, PAGE 22

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MICHIGAN

BRIEFS Traverse City tech scene finds a home of sorts Traverse City geologist and entrepreneur Russell Schindler became sick and tired of driving nearly four hours to Ann Arbor for tech meetups, so he began a new group to provide a strong central point for his area’s tech industry. Schindler started TC New Tech last summer, and the response so far has been tremendous, he recently told Michigan Radio. “I just happened upon a big need, and people are lined up to present and to come to the meeting,” he said of the group’s monthly gatherings, which usually include between 50 and 70 people from all over the tech spectrum. Schindler said he’s been talking with investors about creating a tech incubator that would help new and startup companies get off the ground in Traverse City. He said having that physical location where people can come together is a huge step toward fostering a successful and productive tech scene. “People can share ideas, and they can share concepts (and) business

ideas online and over the phone, but when you get together in the same room … there’s some magic that happens,” Schindler said. More information about TC New Tech can be found at tcnewtech.org.

Dow Chemical expands paid leave for birth parents Dow Chemical Co. is fattening the paid leave it gives employees after the birth of a child as it becomes the latest major U.S. employer to rethink how it treats parents, The Associated Press reported. The Midland-based company said last week that mothers will receive a minimum of 12 weeks of paid leave, while non-birthing parents can get two weeks. That’s up from six to eight weeks and one week, respectively. The leave can be taken in the 12 months after a child’s birth. As before, adoptive parents get four weeks of paid time off and reimbursement for some expenses. More U.S. companies have started expanding the leave they give to new parents, especially in Silicon

Valley, where competition for workers can be intense. Netflix Inc., for instance, said last year that some of its employees will be able to take up to a year of paid leave following the birth or adoption of a child. Overall, paid maternity and paternity leave in the U.S. lags behind standards elsewhere; many European countries mandate several months of paid leave after a birth or adoption.

MICH-CELLANEOUS 䡲 Wyoming, Mich.-based Gordon Food Service has opened a new $58 million distribution center in North Carolina, The Grand Rapids Press reported. The 300,000-square-foot facility is in Kannapolis, 27 miles northeast of Charlotte. The distribution center, which will begin shipping in April, is the company’s first facility in the Southern state; its current force of 75 employees is expected to grow to 300 within five years. 䡲 The boom in Grand Rapids is expected to continue, if Forbes.com is to be believed. The West Michigan locale was ranked No. 18 by Forbes among U.S. cities most likely to prosper in the next decade. Forbes looked at the 53 largest metropolitan statistical areas and ranked them on social, educational and economic factors including birth date, migration and job growth. Detroit ranked No. 31. Topping the list was Austin, Texas. 䡲 The Michigan Public Service

Commission said it’s investigating estimated billing practices by Jackson-based Consumers Energy Co. that have prompted customer complaints, The Associated Press reported. The agency said “problems have persisted for several years despite repeated meetings” with the utility. A Consumers spokesman said the utility is working with the commission. Consumers must file a report by Feb. 18; the commission plans recommendations by May 18. 䡲 And now for some good news about Flint: The Sloan Museum there has received a major donation from Lawrence Gustin, noted automotive and city historian, including many personal papers of General Motors founder William Durant. Gustin, a longtime Flint Journal writer and editor and later assistant public relations director of Buick, authored three books on Durant, Buick and Flint. His donated collection includes copies of Durant’s autobiographical notes, audiotapes of Gustin’s interviews with auto-related and Flint figures, and videos of auto pioneers and city events. 䡲 The U.S. and Canada have done well at preventing Great Lakes water from being overused or raided by outsiders but should take additional steps to strengthen their legal protection against future grabs, an advisory organization said via The Associated Press. The report by the International Joint Commission updated an assessment

INSIDE THIS ISSUE BANKRUPTCIES . . . . . . . . . . . . . . . . . . 6 CALENDAR . . . . . . . . . . . . . . . . . . . . . . . 19 CLASSIFIED ADS . . . . . . . . . . . . . . . . 21 DEALS & DETAILS . . . . . . . . . . . . . . . 19 OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . 8 OTHER VOICES . . . . . . . . . . . . . . . . . . . 8 PEOPLE . . . . . . . . . . . . . . . . . . . . . . . . . 20 RUMBLINGS . . . . . . . . . . . . . . . . . . . . 26 WEEK ON THE WEB . . . . . . . . . . . . . . 26

COMPANY INDEX: SEE PAGE 25 made in 2000, amid concern that Sun Belt states or even foreign powers might use interstate commerce law or trade pacts to justify piping water from the Great Lakes, especially if pressure intensifies as climate change worsens problems such as droughts and algae pollution. 䡲 Michigan’s annual average unemployment rate fell in 2015, the state Department of Technology, Management & Budget said, marking the sixth consecutive yearly decline, The Associated Press reported. The agency said the preliminary annual average unemployment rate was 5.4 percent last year, down from the 2014 rate of 7.3 percent. The 2015 measure was slightly above the 5.3 percent national annual rate. The state said its annual unemployment rate has fallen each year since hitting a recent annual high of 13.7 percent in 2009. 䡲

Thank you for promoting the health of children in Michigan! Children’s Hospital of Michigan Foundation would like to thank Barton Malow and Brinker Construction for sponsoring Big Shots, Little Stars afterglow reception the evening of the 2016 NAIAS Charity Preview.

Your support is helping children have more days to play, nights to dream, and time — to just be kids.

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JACOB LEWKOW

Local Chef Zack Sklar on the Midtown site of a planned Gus’s World Famous Fried Chicken, a 60-year-old Memphis classic.

A craving for comfort food Sklar targets Midtown for Memphis chicken chain By Sherri Welch swelch@crain.com

The owners of some of the trendiest restaurants in Birmingham and Bloomfield Hills are going from eclectic dishes to plastic foam plates with the opening of a 60year-old Memphis classic, Gus’s World Famous Fried Chicken , in Detroit’s Midtown this summer. Led by local chef Zack Sklar, a member of the 2015 Crain’s 20 in their 20s class, Peas and Carrots Hospitality is noted for some of the region’s most popular restaurants — Social Kitchen & Bar in Birmingham and Beau’s Grillery and Mex in Bloomfield Hills. As part of $5 million in invest-

ments, Sklar and the minority partners in the venture, Joshua Humphrey and Jim Bellinson, last year opened three more restaurants: Bernie’s Lunch & Supper in the River North area of Chicago in August and Au Cochon and Arthur Av enue in Birmingham later in the year. Peas and Carrots is also taking refined comfort food to Grand Rapids with a second Social Kitchen set to open in the spring in the Downtown Market, near Detroit-based Slows Bar BQ ’s west-side restaurant, said Sklar, 30. So what whetted their appetites for spicy fried chicken served on SEE GUS, PAGE 21

365 Retail grows with fresh angle on the self-service biz By Marti Benedetti mbenedetti@crain.com

Joe Hessling thinks dusty vending machines tucked away in dark corners of corporate offices are doomed. The founder and CEO of 365 Re tail Markets and Verii, Troy-based micromarket technology companies, cites the speedy growth of the minimarkets and self-checkout kiosks his company manufactures and sells, which let customers touch the products and can feature more fresh food. “We are quickly turning into a self-service society,” said Hessling. 365 Retail Markets has a 40 percent share of the U.S. micromarket industry. It provides corporate offices, hotels and large retailers with two kinds of customized micromarkets: a sort of ministore with multi-

ple shelves and refrigerators with a self-checkout kiosk, or the company’s new Verii unit, which has a few shelves and a small refrigerator that allows customers to choose merchandise and cash out using a mobile phone app. Users draw over time from the cash they load the app with. Hessling, who calls himself a product manager and entrepreneur, has had seven previous companies in the Detroit area. All were related to the food industry — from a wholesale restaurant supply company to prepared food and catering operations. None are still in business. With 365, he is experiencing explosive growth. The growth of 365 Retail Markets has been rampant since it was founded in 2009. The company had SEE 365, PAGE 23

MUST READS OF THE WEEK The state of Michigan venture capital

GM’s RenCen facelift

Millendo Therapeutics’ big deal helped set the pace for a recordbreaking year. Finance section,

Newfacade,interior improvements highlight big renovation.

Page 11.

Rumblings, Page 26.

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Verlander’s veterans charity plans pitches to big donors By Bill Shea bshea@crain.com

Justin Verlander plans to leverage his celebrity and that of other star athletes elsewhere to raise money for veterans of the wars in Iraq and Afghanistan. The six-time All-Star Detroit Tigers pitcher, known beyond baseball for dating supermodel Kate Upton, is reorganizing his nonprofit charity, Wins for War riors, to target wealthy donors — and he’s Justin Verlander: going to offer Charity would offer his fundraising model to popuaccess to All-Star. lar pro athletes in other sports and markets. To attract big donors, Wins for Warriors will offer varying levels of access to Verlander, such as dinner or golf outings, in return for annual donations that begin at $25,000 and top out at $500,000. “It will resonate with folks in a position to write larger checks,” said Sandy Hudson, executive director and CEO of the Wins for Warriors Foundation. Previously, the charity was funded by $1 million from Verlander, and it sought donations via crowdfunding and other grassroots-level fundraising, which netted about $100,000, Hudson said. Under the new model, Wins for Warriors could raise as much as $2.7 million annually, Hudson said. Verlander, 32, launched Wins for Warriors as a donor-advised fund, rather than a public charity or foundation, in 2013. It’s now being reorganized into a public charity (which is different than a foundation legally, but can call itself a foundation), and the remaining cash will be transferred to the new endeavor. Foundations can be used for soliciting donations, while donoradvised funds are a tool for donors to have their giving managed by third-party professionals. Once established locally, Verlander’s foundation team will pitch the model to celebrity athletes in other markets and sports who want to aid veterans organizations. Wins for Warriors would handle their fundraising efforts on their behalf, and tailor them to their preferred veterans causes, Hudson said. Wins for Warriors is starting to identify high-profile athletes who aid such causes, and by June will begin talks with them, Hudson said. “It has to be an athlete that has celebrity status and can draw high-net-worth individuals,” he said. “The model is built in lever-

aging celebrity experiences that team members want to engage.” In the meantime, the foundation is organizing itself, preparing its marketing effort, and getting ready to approach local businesses and individuals that may be interested in buying into the effort. The model is to assemble a team of high-net-worth donors by leveraging the desire to access Verlander’s celebrity and the desire to aid veterans. Donation levels are being marketed under baseball position/job names. The least expensive donation is $25,000 to be an “outfielder,” while the top level, the “CEO/general manager” level is $500,000. There are five levels of donation and about 25 spots. The larger the donation, the more exclusive the access to Verlander. The $500,000 level is for a single individual or company. Ken Tyrrell, senior vice president of wealth management with UBS Financial Services in suburban Washington, D.C., handles all of Verlander’s non-baseball activities and investments. He stressed that the philanthropy model under construction is a way to leverage fame in a way to create more dollars for veterans organizations by creating something that allows collaboration and idea-sharing by participants. Specifically, those who donate for a spot on Verlander’s “team” get not only access to him, but the opportunity to talk to other investors interested in doing things for veterans, such as one-off events or projects. “The goal isn’t to sell access to Justin for a price,” Tyrrell said. “What we’re trying to do is say there are a lot of successful people who care about the veteran community, who understand there is value in partnering with this brand. This gives Justin the opportunity to share time and experiences with people he’s going to want to meet and do other things with.” Hudson said about 60 percent of the money would go to veterans organizations in the first year, and the amount would increase in subsequent years as the organization matures. Philanthropy industry standards are that 65 to 75 cents of every dollar raised should go to the cause, and the rest to administrative or other costs. “We’re looking at the right percentage,” Hudson said. “We’re very sensitive to expenses for the foundation. We’re in the formative stage, and expenses might be a bit high in first year.” The only salaries for the organization are for Hudson and Christine Galasso, a former Crain’s De-

“It will resonate with folks in a position to write larger checks.” Sandy Hudson, executive director and CEO, Wins forWarriors Foundation

troit Business advertising executive who joined the foundation this month as development director. Verlander and his team are aware of the media scrutiny athlete philanthropy occasionally comes under, and want to avoid negative publicity. For example, an investigation of 115 athlete charities published in March 2013 by ESPN’s “Outside the Lines” program showed that 74 percent of the nonprofits fell short of one or more acceptable nonprofit operating standards, the network said. Verlander’s nonprofit granted 74 percent, or $267,000, of its firstyear revenue, its director said. The revenue comes from his $1 million donation, and some small-scale fundraising. Wins for Warriors is awaiting Internal Revenue Service approval to transition from the donor-advised fund to a nonprofit foundation. “Wins for Warriors has filed for 501(c)(3), status and we are awaiting the determination letter, which we are told by our legal counsel should be in hand by end of the first quarter,” Hudson said. Because the foundation still is being organized and awaiting approvals, and because the donoradvised fund wasn’t required to file financial disclosure paperwork, no IRS forms are yet available to independently scrutinize the organization. Verlander also continues to do charity work for veterans outside of the money for the organizations. For example, he and his team created a benefit race last spring, funded a Christmas dinner for 1,000 ex-service members and their families, and will send three veteran families to Disney World this spring. “We think those kind of initiatives are equally important,” Hudson said. Verlander had made Iraq and Afghanistan military veterans mental health his specific cause of choice during his career. The $1 million also funded a Rand Corp. study to identify gaps and barriers in services for veterans. Wins for Warriors recently gave the study to the Michigan Veterans Affairs Agency and will have talks in coming months to see where new fundraising can be best applied for future donation decisions. 䡲 Bill Shea: (313) 446-1626 Twitter: @Bill_Shea19

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Microsoft’s Fikany to join Quicken Loans as VP By Kirk Pinho kpinho@crain.com

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John Fikany will join Quicken Loans Inc. next month after about a dozen years as a sales chief for the local office of Microsoft Corp. Fikany, 53, will become Quicken’s vice president of strategy development. He was previously vice president of the Enterprise Sales and Partner Group for the Redmond, Wash.-based software maker. Jay Farner, president and chief marketing officer of Quicken Loans, said he and Fikany had casual conversaJohn Fikany: To tions the last sevjoin Quicken Loans eral months as VP of strategy. about building company culture and business, and eventually those conversations became more serious as they discussed “how he might be helpful in a lot of the ideas and focuses that we have at Quicken and our family of companies.” Fikany will focus on business development strategies for Quicken and other affiliated companies, Farner said. Fikany, a Central Michigan University graduate, said he hadn’t planned on leaving Microsoft but saw a professional opportunity he couldn’t pass up and that he’ll be working on “some very cool things” soon after starting. “Everything they (the Quicken Loans leadership team) stand for aligns very well with what I want to be a part of, how they take care of their people and the company culture over there,” he said. “They have a sense of humility but also a confidence and grit that’s almost startup-like,” he said. For Microsoft, Fikany was responsible for leading sales in 18 states and generated $3.6 billion in software and service sales revenue, according to his LinkedIn profile. He oversaw a team of about 1,000 employees. Before that, he was vice president of North American sales strategy for Oracle. He is also active with the Detroit Economic Club, the Detroit Regional Chamber, the Boys & Girls Club of Southeastern Michigan and Focus: Hope. 䡲 Kirk Pinho: (313) 446-0412 Twitter: @kirkpinhoCDB

As of January 19, 2016: Dow Jones: -7.96%, Nasdaq: -10.59%, S&P 500: -8.09%

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CRAIN’S DETROIT BUSINESS

OPINION Flint crisis: Need to ask tough questions T

he Flint water debacle is a lesson in healthy skepticism. None of the principal players who signed off on the city’s water treatment plan or handled questions that arose over the past 18 months about the quality of Flint’s water would have passed Journalism 101. They didn’t ask tough questions. Neither, in fact, did news media — initially. The blame is especially onerous within the state Department of Environmental Quality, which signed off on Flint’s river water treatment plan in There will be the first place then stubbornly held to its contention that the plenty of time testing numbers didn’t suggest to point fingers a problem. And that’s despite a federal Environmental Protecand assign tion Agency study to the conblame. The trary. The bureaucrats were woefully too bureaucratic. issue now is to There will be plenty of time to fix the point fingers and assign blame. The issue now is to fix the probproblem. lem. Our package of stories suggests ways on how that might be done, from innovations in pipe linings to continued vigilance on lead levels in children and other vulnerable groups, and follow-up care and monitoring for those who test high. Meanwhile, national media in particular are contributing to a blame-game focus while ignoring significant issues. Fact: Not every building in the city of Flint has poisonous water flowing from the tap. Some neighborhoods and institutions — such as Kettering University — have undergone testing of water at the tap and found no issue with lead. Fact: Adding phosphate to the water and installing new liners and/or new pipes in portions of the city’s water system will rectify the water quality problems. (See our story on Page 24 for a briefing on the options.) Fact: At this point, the extent of lead affecting children is unknown. Testing will reveal the extent of the health issues — and smart, caring people are on the case. Fact: No matter how this is resolved, the Flint water mess will be a blot on the legacy of Gov. Rick Snyder, but that legacy also includes taking on Detroit’s insolvency and giving Detroit a chance at becoming a sustainable and even thriving city again.

Detroit must keep an eye on building design recently designated U NESCO Detroit as the first American “City of Design.” Home to buildings built by the 20th century’s most influential architects — Albert Kahn, Mies van der Rohe, Minoru Yamasaki, Frank Lloyd Wright, and others — it is one of the most important design cities in America. The chances it once took are now the foundation on which it will grow. Or will it? This is a question that occupies my mind as I witness the banal, stark redevelopment of a city that deserves so much more. Architecture and design’s functional role in society is clear: It is to shelter and protect us. Its role in the city serves a different purpose. It is to evoke feelings of surprise, awe and inspiration. For centuries, cities have thrived on having diverse buildings in both aesthetics and function. As hubs of culture and commerce, and increasingly nature, the centers of our universe require a dynamic mix to drive innovation, advancement and, ultimately, economic growth. Detroit is at an interesting tipping point; its comeback is constantly in the news, with everyone from entrepreneurs to artists moving here to be a part of it. When the

OTHER VOICES John Patrick John Patrick is founder of “Above the Fold,” a talent agency with a focus on the built environment. comeback is said and done, though, will the developers, city agencies and small-business owners have made the right design choices to inspire even more waves of growth in five, 10, 20 years and beyond? Learning from history, author Joel Kotkins writes in The City: A Global History, “in the world of antiquity, a metropolis designed for business was no match ultimately for a city built for conquest. An ideology based on profit and narrow self-interest could not stand up to the imperial vision that would dominate urban history until the dawn of the modern era.” In contemporary Detroit, are those in charge of redeveloping the buildings, streetscapes and large

swaths of land thinking about global cities and what makes those rise above others? Will the current developments in planning and design spur sustainable attraction? Reclaimed wood and industrial reuse design can take things only so far, and it’s the kind of design trend that the latest corporate rollout is implementing nationwide. To further America’s city of design in the 21st century, Detroit needs contemporary, emerging architects and designers to create destinations for gays, singles, young creatives, Bohemians, artists and tech geeks, fueling the diversity that is vital for communities to thrive socially, financially, politically and culturally. Berlin is a prime example for Detroit. Taking the opportunity to commission innovators for a wide range of building projects — from coffee shops and retail outlets to largescale developments — has the potential to propel Detroit forward in unexpected ways. More important, the subsequent diversity and urban life will ensure a sustained wave of interest from insiders and outsiders and give them more reasons to visit again, open a business or tell their friends about it.

TALK ON THE WEB Re: Obama pledges $80 million to help Michigan water systems

zens to become ill from this water.

Now that money is committed to fixing Flint’s water crisis, when will we see shovels in the ground changing those corroded water pipes and making the other much-needed changes? Or will they still be talking about the problem two years from now? Each day that passes is another opportunity for more of the citi-

Patterson: Wrong to say ‘Flint’s been poisoned’

Willie White

L Brooks Patterson’s calling the Flint disaster “a negative story,” is like calling the Civil War “the present unpleasantness,” as some people did at one time. 303425

Reader responses to stories and blogs that appeared on Crain’s website. Comments may be edited for length and clarity. Submit letters to the editor to jhsmith@crain.com.

Re: Young talent continues to flee Michigan Part of this problem can be linked to the fact that millennials do

not want to work in bland suburban office parks. Unfortunately, however, that is where the vast majority of metro Detroit jobs are located. This trend will not reverse until business leaders understand that the best way to attract young talent is to relocate to vibrant urban settings, like what is being built downtown Detroit. We need to double down on Detroit. Tom Kelly

I have been saying metro Detroit needs mass transit and a walkable urban core for over a decade now. I am heartened to see so many people support urban living today. BrewPubNate

Re: Kuzzo’s at 1 year: You’ll all see big things happening in Detroit soon. Scott Mitchell

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Flint’s politicians deserve blame for water problems Here’s my admittedly biased take on the Flint water crisis and who’s mostly responsible. It’s not the state. It’s not Rick Snyder, who has become everybody’s whipping boy. And it’s not Flint’s emergency managers. Yes, the state should have responded sooner about lead in the drinking water and residents’ complaints, but if you really want to point the finger, point it at politicians in Flint and Genesee County. Snyder’s involvement and the state’s involvement came very, very late in a push that began decades earlier to stop paying the city of Detroit for water. If Detroit could have a water system, well, why shouldn’t Flint and Genesee and Lapeer? Why should they have to send money to Detroit — Detroit, of all places — if they didn’t have to? It was 1963 when Flint first took steps to build a water pipeline from Lake Huron, but a profiteering scandal hit the headlines and killed the project. In 2006, the Genesee County Drain Commission ordered a feasibility study of a pipeline from Flint to Lake Huron, which concluded it would be cheaper than continuing to buy water from Detroit. Another study recommended using Flint River water until the pipeline, now under construction, was finished. In 2006, Rick Snyder was still a venture capitalist, mulling over whether to raise a second fund for his Ann Arbor-based Ardesta LLC. By way of full disclosure, I must admit my fondness and respect for Snyder. From 2000 to 2002, I was an employee of Ardesta, writing profiles of tech companies for one of his portfolio companies, Small Times Media, which had a website, smalltimes.com, and a print magazine, Small Times Magazine. Snyder was always the smartest guy in the room, and usually the nicest, too. As smart as he was, he delegated authority as a matter of course. Maybe he expected folks to be almost as smart and as competent as he was. But when he hired people, he expected them to do their jobs, and there wasn’t much interference or second-guessing. Snyder had hired Jon Pepper, the former Detroit News columnist, to run Small Times Media, and Pepper aggressively marketed the brand. Too aggressively, in hindsight. He organized trade shows that flopped. He took the staff on expensive brandbuilding trips. My opinion? Snyder would have been well-served to slow down Pepper, and it ultimately cost him a fair amount of money, but he was willing to let Jon have his lead. What seems a strength of a top leader — allowing managers to manage freely — would later seem a weakness of leadership as those below Snyder on the flow chart clearly didn’t do their jobs when it came to Flint. On my way to a lunchtime walk at Belle Isle, I heard a rant on the

TOM HENDERSON Tom Henderson covers venture capital, banking, private equity and tech startups for Crain’s Detroit Business. radio, with an angry guest attacking the state and Snyder, that this is all a result of top-down management by a white, Republican bu-

reaucracy in Lansing of the poor, black, Democratic citizenry of Flint. And that it was Emergency Manager Ed Kurtz’s decision, alone, to replace Detroit water with Flint River water. Hogwash. Kurtz didn’t make every decision at every level of governance or management in the city of Flint. The move to replace Detroit water had been underway for years before he got the job. What Kurtz — and his replacement, Darnell Earley — did was sign off on various requests by the Flint

City Council and Mayor Dayne Walling regarding replacing Detroit water. They let the council and mayor do as they wished. Had they overruled them, the same angry voice accusing them now of having a heavy hand in Flint affairs would have been in an uproar then, too, accusing them of having a heavy hand in not letting the elected representatives of the city make important decisions. Certainly, the state, including the Department of Environmental Quality, bears ultimate responsibil-

ity for making sure all Michigan residents have safe water. But what seems to have gotten overlooked in the recent frenzy is that Flint has a water department, with employees who are supposed to make sure water is fit to drink, and who are supposed to respond to complaints. Who should have known to treat the river water’s corrosiveness. And it’s not Snyder’s fault they failed miserably at their jobs. For an expanded version of this column, see Tom Henderson’s blog at CrainsDetroit.com.

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SPECIAL REPORT: TOM HENDERSON Senior reporter thenderson@crain.com Twitter: @TomHenderson2

Broe Group manager likes Ann Arbor flow

FINANCE

he Broe Group of Denver has more than 1,000 employees in North America in real estate management, logistics and transportation. It also funds Three Leaf Ventures, a venture capital firm focused on tech-based health care companies. In June, it opened an office in Ann Arbor. Crain’s reporter Tom Henderson talked to Sean Kearney, who runs the local office. Kearney

What’s your background?

I got my undergrad in finance from Miami of Ohio and traded on the hedge desk in Cleveland for four years for Aleris International, hedging all their commodity and currency positions. Then I got my MBA in finance from Ohio State and joined The Broe Group in 2013. How is it going here?

We’re in the same building on Detroit Street as Arboretum Ventures, the Mercury Fund, Arsenal Ventures and Huron River Ventures. For deal flow, this is so convenient. I’ve had great deal flow. Some of it is just the new guy in town catching up to what’s going around. But the community is so welcoming. It didn’t take long to be part of other funds’ pipelines. They very quickly started sending deals my way. Most of my investing has been in Silicon Valley, and it’s a very different environment there.

SETTING THE PACE 2015 VC deals set record; 2016 takes the baton

Why did you choose Ann Arbor?

I looked at communities outside Denver and outside Silicon Valley. I’d been in touch with Jim Adox of Venture Investors (who runs the Wisconsin firm’s Ann Arbor office), and this seemed to be a great place to set up shop. We’ve got a great pipeline to the University of Michigan. What are your investment parameters?

We’ll go up to $250,000 for a seed round, and up to $5 million for Series A and beyond. Most commonly we’ll put in $1 million or $2 million. We’re geographically agnostic. We’ve invested in California, Colorado, Arizona, New York and now Michigan. You announced this month you made your first local investment, joining a $1 mil lion seed round for Genomenon Inc.

Genomenon’s technology stands out as a superior solution for genetic data interpretation. We saw (founder and CEO) Mark Kiel as a rare talent. These are precisely the opportunities we are excited to see coming out of UM, Ann Arbor and Southeast Michigan.

By Tom Henderson thenderson@crain.com

t was a record-breaking year for venture capital in Michigan in 2015, with 2016 starting up where last year left off. Industry veterans point to robust deal flow, record-breaking funding rounds and notable product licensing deals for locally owned innovation as positive signs of the times. “As we look back, 2015 was the best year ever for venture capital in Michigan. It’s what we’ve all been waiting for,” said Chris Rizik, CEO and fund manager at Ann Arborbased Renaissance Venture Capital Fund , which is affiliated with Busi ness Leaders for Michigan. On Jan. 5, Ann Arbor-based Mil -

lendo Therapeutics Inc. announced it had raised a venture capital round of $62 million, the largest VC round for a drug development company in Michigan history. It is testing a drug to fight adrenal cancer. Interestingly, the previous record for the largest VC round in the state was held by another cancer drug company, the $59.5 million raised by Plymouth Township-based ProNAi Therapeutics Inc. in April 2014. ProNAi, whose drug has shown remarkable results in human trials at fighting non-Hodgkin’s lymphoma, made a very nice return for its VC investors this past July when it SEE DEALS, PAGE 12

SOURCE: THOMSON REUTERS

Inside: Angel Fund flies high Ann Arbor-based fund has busy final quarter, Page 13

Booking progress Content seller turns a page in funding, Page 14

Incubating ideas New MSU program taking applications, Page 14

Not so fast VC patience pays off for Web-based company, Page 15

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SPECIAL REPORT: FINANCE

ROBERT CHASE

Millendo Therapeutics co-founder Gary Hammer and CEO Julia Owens with co-founder Raili Kerppola (inset, top right), who lived with

adrenal cancer before her death in 2013. Millendo’s record-breaking deal led the way for VC activity in Southeast Michigan last year.

DEALS FROM PAGE 11

raised $158.4 million in its initial public offering. The investment in Millendo shows just how far the state has come in shedding its reputation as a fly-over state. The deal included exclusive licensing agreement with London-based pharmaceutical giant AstraZeneca plc to continue human trials and commercialization of a drug it had developed to fight polycystic ovary syndrome, the most common endocrine disease in women. Then there was the broad national base to Millendo’s funding. The financing was led by Chevy Chase, Md.-based New Enterprise Associates and joined by investors in San Francisco, Chicago, Seattle, Boston and Bala Cynwyd, Pa. Its sole Michigan investor was Renaissance Venture Capital Fund, a fund-of-funds that normally only invests in other VC firms but made an exception this time to invest in an individual company. “That capital is coming here from all around the country shows that this is a good place to invest,” said Rizik. The record-breaking deal for Millendo, a spinoff from the University of Michigan in 2012 when it was named Atterocor Inc., followed on a string of record-breaking deals for Michigan companies: In September, Ann Arborbased Llamasoft Inc., a maker of supply-chain software, announced it had received an investment of $50 million from affiliates of New York-based Goldman, Sachs & Co. It was the largest single investment ever in a Michigan IT company. In September, Plymouth Township-based Delphinus Medical Technologies Inc. , which uses ultrasound to make 3-D images for improved detection of breast cancer, raised a VC round of $39.5 million, a state record for a medical device

company. Also in September, Ann Arborbased Arboretum Ventures LLC finished raising the largest venture capital fund in state history, closing Arboretum Ventures IV LP at $220 million, above the target of $215 million the firm had listed in filings with the U.S. Securities and Exchange Commission. The previous largest fund in state history was the $180 million Michigan Growth Capital Partners II, raised in 2013 by Farmington Hillsbased Beringea LLC. Charlie Rothstein, Beringea’s senior managing director, credited successful exits in recent years for showing Michigan was a place investors could make money — including the sale of Sakti3 ; of Ann Arbor-based Foresee Results Inc. in 2013 for more than $200 million; of Ann Arbor-based HandyLab Inc. in 2009 for $275 million; of Ann Arborbased HealthMedia Inc. in 2008 for $200 million; and of Ann Arborbased Accuri Cytometers Inc. for $205 million in 2011. “We’re kicking out returns that draw national attention,” said Rothstein, who was one of just a handful of venture capitalists in the state when he began investing in 1988. Rizik said that as those companies were sold, their CEOs and other C-suite executives for the most part remained in the state, joining other small companies and growing

“We’ve shown we have the kind of CEOs who can run growing companies. For a long time, we had an executive problem. Not any more.” Chris Rizik, Renaissance Venture Capital Fund

them, too. “We’ve shown we have the kind of CEOs who can run growing companies,” he said. “For a long time, we had an executive problem. Not any more. And it’s not just the CEOs we’ve developed, but the executives they’re now training. … It’s a spider effect.”

Bellwether deals It isn’t just the record-breakers that made for a strong 2015. There were a handful of other large investment rounds or licensing deals for state companies, too. In March, James Dyson, the British inventor who built the vacuum that bears his name, invested $15 million in Sakti3 Inc., part of a $20 million round that was joined by a heavyweight roster of previous investors, including Detroit-based General Motors Ventures , Beringea and the iconic Silicon Valley VC firm Khosla Ventures. In October, Dyson’s company, UK-based Dyson Ltd., bought Sakti3, a maker of lithium-ion batteries, for $90 million. In April, Ann Arbor-based Duo Security Inc. , a provider of cloudbased network security, announced it had raised a funding round of $30 million from a handful of Silicon Valley investors, including Google Ventures. In April, it was announced that Xenith LLC , a maker of concussionfighting football helmets, was moving its headquarters from Lowell, Mass., to Detroit, with front office staff taking space in the former Kresge building downtown and production and warehouse operations moving into a building on West Fort Street in Detroit. The announcements followed what was reported to be an investment of more than $20 million by Dan Gilbert. In June, Ann Arbor-based Lyc era Corp., a UM spinoff that is developing drugs to fight immune-related diseases, announced that CONTINUED ON NEXT PAGE

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Angel Fund ends 2015 flying high It was a busy final quarter in 2015 for the Ann Arbor-based Michigan Angel Fund, which was launched in 2011 by Ann Arbor Spark and the Michigan Economic Development Corp. The for-profit organization has two funds. The fund kicked off in 2011, Michigan Angel Fund I, eventually raised $2.1 million from 72 accredited investors. In 2014, the Michigan Angel Fund II raised $2.05 million from 62 accredited investors, including $500,000 from the MEDC. According to Skip Simms, a senior vice president at Spark and managing member of the MAF, the funds invested a total of $2.91 million last year in 14 deals, including $1.6 million in six deals in the fourth quarter alone. The local companies that received investments range from consumer service-focused software and apps to makers of drones and fuel injectors. In the quarter, the MAF invested:

$240,000 ... to lead an investment of $750,000 in Detroit-based BoostUp, a socialmedia platform that helps people raise down payments for such things as cars and home purchases and to help pay for other large expenses like weddings. In 2013, the company raised a round of $1 million, led by Detroit Venture Partners.

SPECIAL REPORT: FINANCE FROM PAGE 12

for Venture Capital and Private Equity

Celgene Corp. , a company based in Summit, N.J., was paying it $82.5 million for an exclusive option to license a compound in phaseone testing against inflammatory bowel disease.

at the Ross School of Business at UM. Said Maureen Miller Brosnan, executive director of the Ann Arborbased Michigan Venture Capital Asso ciation : “We are on an upward trajectory, one of sustained growth. It’s not a spike.”

Another bubble? While local venture capitalists and the string of record funding rounds say 2015 was the best VC year ever in state history, by one metric it was a runner-up year. According to the MoneyTree Report issued Jan. 15, a report jointly issued by PricewaterhouseCoopers LLP and the Washington, D.C.-based National Venture Capital Association , based on data provided by Thomson Reuters , 2015 was just the secondbest year in Michigan for the total amount of venture capital invested. There was $328.4 million invested in 54 deals in the state, up from the $223.9 million invested in 51 deals last year, and up from the $111 million invested in 74 deals in 2013. The all-time record since the NVCA began keeping records in 1995 was the $355.4 million invested in 55 deals in 2000. But that year was an anomaly, say local VCs, investment volumes driven by the frothiness — some would say a full frenzy — that preceded the dot.com bust. Valuations proved not to be based on reality but on a

Michigan’s role

CARTER SHERLINE

Arboretum Ventures Managing Directors Paul McCreadie (from left), Jan Garfinkle and Tim Petersen can celebrate the record raising of the Ann Arbor venture capital firm's

fourth fund. group enthusiasm whose bubble exploded that April. Venture capitalists gamely continued to live up to their funding agreements for the next few quarters before retrenching. National figures also reflect that mania for all things Web-related. Last year, there was a total of $58.8 billion in venture capital investing nationwide, the secondhighest total ever, and up from $50.8 million last year, $30.3 billion in 2013 and $27.7 billion in 2012. Michigan ranked No. 18 nationally in 2015 for VC investing, up from 20th in 2014. While things are going very well, especially given historical context,

some perspective is called for. Last year, California’s deal flow was more than 100 times greater than Michigan’s, with a total of $33.7 billion invested in 1,773 deals. New York was runner-up, with $6.2 billion invested in 462 deals. The record for the VC industry was set in 2000, a whopping $105 billion, which fell off the next two years to $40.9 billion and $22.2 billion, respectively. But what’s different this time is that values are more correctly based on business viability and less on that dangerous unbridled investor enthusiasm. “The values now are real,” said David Brophy, director of the Center

In 1979, Brophy founded the annual Michigan Growth Capital Symposium, which aimed to bring investors to Michigan to look at possible deals with early-stage companies. The symposium was seen then by many of his colleagues as tilting at windmills. Why would anyone want to fly in from Boston or Silicon Valley to invest here? “We’re seeing the realization that there is real value being created here, by universities in particular,” Brophy said. “We’ve got a good combination now of good science and good entrepreneurs. Look at Llamasoft. I’ve known the founder, Don Hicks, as man and boy for 20 years. Suddenly, he’s an overnight success. “Thirty years ago, we were asking: How can we find another way to make a living to dampen the cyclical effects of the auto industry. Now we’ve built a really good entrepreneurial community here.” 䡲 Tom Henderson: (313) 446-0337 Twitter: @TomHenderson2

$50,000 ... in a $500,000 round for Romulusbased Eco-Fueling LLC, which makes retrofitted fuel injectors to improve fuel efficiency in large trucks.

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Welcome to the

MIKE ILITCH SCHOOL OF BUSINESS

DETROIT’S BUSINESS SCHOOL

SPECIAL REPORT: FINANCE

Book content seller turns a page in funding, ramps up marketing By Tom Henderson thenderson@crain.com

Learn more about our new name and future home in the District Detroit at ilitchbusiness.wayne.edu.

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Ann Arbor-based ContentOro LLC, a company that specializes in selling content from books to websites that need content, has started raising a funding round of between $500,000 and $750,000 as it ramps up sales and marketing. The startup was founded in 2014 by a former vice president at nowdefunct Borders Group Inc. who had the quaint idea there was still money to be made in the book industry. ContentOro finished raising a seed round of $550,000 last August. “We’ve made a lot of progress,” said CEO and founder Bob Chunn, who said this round, termed a “bridge round,” will fund growth until the company starts raising a Series A venture capital round of $2 million next September. The company had been housed in downtown Ann Arbor in an incubator run by Ann Arbor Spark , but moved into its own headquarters in the Packard Office Center on Packard Road near US-23 in August. The company has hired its first two employees: two interns — a Web developer and a sales person — from last summer whose pay had been funded by Eastern Michigan University and Spark. More important, ContentOro has landed its first customers — Livo-

nia-based Pet Supplies Plus ; Story Patches , a website based in Brooklyn for quilting enthusiasts; and Yoga Shelter , a West Bloomfield Township-based chain of yoga studios. Chunn’s first investor was Chuck Newman, who founded ReCellular Inc., an Ann Arbor-based company that recycles cell phones. Newman invested $100,000. Chunn’s last job at Borders was managing the digital division, overseeing the Ann Arbor company’s website, eBooks, readers, online Bob Chunn: marketing and Ex-Borders VP says social media. startup is making Before that, he progress. headed up the division that bought books that were no longer being marketed by publishers to sell at deep discounts, often on racks in the entryway into the stores. Chunn said he got the idea for ContentOro after he left Borders in 2011 to join Houston-based Retail Concepts as its chief marketing officer. As Chunn told Crain’s for a profile last March: “We were paying a lot of money for content for our website, but people would land on our site

and we’d give them garbage. “We weren’t a source of real information.” “The need is great,” said Skip Simms, a senior vice president at Spark and managing member of the Michigan Angel Fund, which invested $350,000 in ContentOro. “Content for all websites makes the difference between being relevant or not, on the first page of a search or not. It’s expensive and time consuming to produce,” said Simms. “ContentOro solves both pain points. It’s scalable with good margins and has a mature team. What’s not to like?” Joining the seed round were Detroit-based I n v e s t M i c h i g a n , Farmington Hills-based L i s V e n t u r e s L L C and several high-networth individuals. In December, ContentOro was named the Startup of the Year by student judges of the Venture Capital Investment Competition at the Ross School of Business at the Uni versity of Michigan. Six teams of students, playing the role of venture capitalists, did due diligence on three area startups, with the idea to create a term sheet offering an investment to the company they thought had the most promise. All six teams chose ContentOro. 䡲 Tom Henderson: (313) 446-0337 Twitter: @TomHenderson2

MSU launches new incubator program

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Michigan State University has announced a new incubator program aimed at turning students’ ideas into companies ready for angel and venture capital funding and commercialization. The program is also open to existing — but struggling — earlystage businesses. No affiliation to MSU is required. The Conquer Accelerator program is accepting applications for

Applications and more information can be found at www.conqueraccelerator.com.

an intensive, 10-week program that starts in May. Five teams of students or companies will be accepted. They will each get $20,000 in funding, work space, mentorship and access to advice from 40 seasoned entrepreneurs

and business leaders, and other resources. The funding and resource access is in exchange for a 5 percent equity stake in the business. “The Conquer Accelerator acts as a final launching platform for startups from MSU and beyond, preparing companies to hit the ground running,” said Paul Jacques, the accelerator’s director, in a news release. Tom Henderson

Plymouth Venture leads Wellspring investment round Ann Arbor-based Plymouth Ven ture Partners has led a Series B investment round of $6 million in Wellspring Worldwide , a Chicagobased company that helps companies, hospitals and universities find, manage or invest in intellectual property. Wellspring was founded in 2003 as a spin-out of Carnegie Mellon Uni versity in Pittsburgh to help universities and hospitals manage their technology transfer operations. The company claims 500 cus-

tomers on five continents for its various software and Web-based products. The round was joined by a previous investor, Northbrook, Ill.-based MK Capital. Wellspring raised its first round of venture capital funding of $5 million in 2014. Wellspring will use the funds to ramp up marketing and sales. Plymouth’s share of the round came from its $61 million PVP Fund III. “Plymouth’s operational experi-

ence and additional capital enable us to scale Wellspring to the next level,” said Wellspring CEO Robert Lowe in a press release. “Every day we see the challenges companies of all sizes face in sourcing and investing in innovation,” said Plymouth partner Evan Ufer. “Wellspring has clearly demonstrated its software enables companies and universities to find each other and manage the complexity of licensing and investing.” Tom Henderson

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SPECIAL REPORT: FINANCE

Ann Arbor’s Companion LLC a case for not grabbing VC too soon By Tom Henderson thenderson@crain.com

Adam Wyden, who runs a private equity fund in New York, had words of advice for Companion LLC, a Webbased company in Ann Arbor that had venture capitalists flying in from California last September and offering to write checks: The best deal is often the one you don’t make, especially prematurely. Companion had been the star of the Demo Day for startup companies Sept. 11 in Ann Arbor. Companion is an app that offers safety via notification properties with a tap to smartphone users on college campuses; the product has already resonated with business editors around the country. Online stories appeared quickly in media outlets as diverse as USA Today, CNN Money, Tech Times, International Business Times and Fortune, and TV segments on the company were broadcast on the “Today Show” and on local shows in, among other places, Minneapolis, Boston and Asheville, N.C. “It was a whirlwind,” said Companion co-founder Lexie Ernst, still a senior at the University of Michigan , where the company was launched in 2014 as a project by five students. The other founders were Danny Freed, Nathan Pilcowitz, Jake Wayne and Kathy Reiner. The Companion app got 500,000 downloads in a week; Ernst said the founders would have been happy with a few thousand. The buzz and subsequent user interest kept crashing its servers. Several venture capitalists flew in from Silicon Valley. Several others in Silicon Valley set up meetings via Skype. There were emails and phone calls. “We had people saying, ‘We’ll write you a check for $500,000,’ ” said Ernst. “Or, ‘We’ll send you a blank check, just fill it in.’ ” Since the point of the Demo Day

EXPANDING:

TOM HENDERSON

Companion LLC is still working on the revenue model for its free app. Company co-founders, pictured in their incubator space in Ann Arbor, are (back row, left to right) Jake Wayne, Nathan Pilcowitz and (front, left to right) Katie Reiner and Lexie Ernst.

in Ann Arbor, and others that same week for emerging tech companies in Detroit at the Madison Building and The Fillmore, is to introduce entrepreneurs to investors, Companion had hit the jackpot, right? Wrong. Wyden, the founder and portfolio manager at New York Citybased ADW Capital Management LLC, which manages a $40 million fund, told Companion’s five co-founders to chill out, that their smartphone app wasn’t ready yet for prime time. Among the big points Wyden made: They didn’t need to dilute their equity by taking a lot of money when their immediate needs didn’t require much funding. They’d ultimately be able to make a better deal for themselves if they just showed a little patience, a quality that is something of a rare commodity in the frenetic world of

Machine manufacturer with a $1 million line of credit

launching tech startups. “I know what it’s like to bootstrap a company. I started my company at 25, and I’m familiar with the growing pains of a new company,” Wyden told Crain’s. Wyden, a family friend of Pilcowitz, warned the Companion founders that taking on venture capital at that early stage of their company’s development would likely lead to them losing control of it and having to move it to the West Coast, and that big VC funds were trying to force their hands in the middle of all the hype and attention. “If they had something that was just marginally better than the competition, sure, take the money and try to get it out there as fast as you can,” he said. “But they had lightning in a bottle. There’s no real competition. I told them: ‘What you

guys have is something revolutionary. The last thing you need is blow it out before it’s ready. Take your time. Make the product better.’ “Now, they’re in a much better position,” he said. “They weren’t ready to strike. Now they are. They have a really good mousetrap and a very good team.” Companion’s app is available for free download for iPhones and Androids. Users set up a network of friends and family who can track them, if they want, in real time, using GPS and Google maps, as they walk across campus or about town. If the user sees something suspicious or thinks he or she is being followed, a tap on the screen on the “I feel nervous” button sends out an alert to the network. In the event of a fall, or the dropping of the phone, or the phone’s holder suddenly starting to run, the

app asks if you are OK. If you don’t answer in 15 seconds, it sends out an alert to the network and to 911, and it triggers a loud alarm on the phone. Jeffrey McDole, the IT planning manager at UM, spoke during Companion’s pitch at Demo Day, announcing then that the school was serving as the first institutional beta tester for Companion. This testing phase continues. The company is still working on its revenue model. Since the app is free, how will it generate revenue? Ernst said that could be through selling the service to public safety agencies and universities, through aggregating and selling user data or a combination of both. “We’ve kicked that can down the road,” she said. Ernst and Pilcowitz say the Companion app, having added more and better features and with one million users, is now ready for fundraising, but they will still keep institutional investors at bay for the time being. They hope soon to start raising a seed round of undisclosed size from friends, family and angel investors. Until now, Companion was funded by $25,000 it won last February as best company at the 32nd annual Michigan Business Challenge at UM’s Ross School of Business, and the $25,000 it got last summer for being chosen as one of the first cohort of startups at the Desai Accelerator. Desai is a new business incubator in downtown Ann Arbor that is a joint venture between the business school and the university’s College of Engineering. “We don’t need millions. We don’t need to be tied to investors in California or New York and have to move. We have low operating costs. We don’t need to throw money at a problem,” said Pilcowitz. Tom Henderson: (313) 446-0337 Twitter: @TomHenderson2

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CRAIN'S LIST: MICHIGAN'S LARGEST VENTURE CAPITAL FIRMS Ranked by money under management Rank

Company Address Phone; website

Top local executives(s)

Money under management ($000,000) Funds 2015 Managed Recent exits

Michigan investment professionals 2015 Description

Baird Capital 425 N. Main St., Ann Arbor, 48104 (888) 792-0477; www.bairdcapital.com

Dave Gregorka, venture partner

$3,100.0

Justrite Manufacturing, Backyard Discovery, Synarbor

Preferred initial investment amount: $2 million to $7 million. Focus on early- and expansion-stage tech and health care companies. Headquartered in Chicago, Ill.

Flagship Ventures 122 S. Main St., Suite 230, Ann Arbor, 48104 NA; www.flagshipventures.com

Michael Johnson, associate

$1,400.0

Celexion, Seahorse Bioscience, Seres Therapeutics

Preferred initial investment amount: $2 million to $5 million in three sectors â&#x20AC;&#x201D; health technologies, therapeurtics and sustainability. Headquartered in Cambridge, Mass.

Beringea 32330 W. 12 Mile Road, Farmington Hills, 48332 (248) 489-9000; www.beringea.com

Charles Rothstein, founder, senior managing director and Michael Gross, managing director

$600.0

Sakti3, Relume Technologies

Preferred initial investment amount: $3 million. British unit operates as Beringea LLC. Company invests between $2M and $15M in equity and/or subordinated debt.

Arboretum Ventures 303 Detroit St., Suite 301, Ann Arbor, 48104 (734) 998-3688; www.arboretumvc.com

Jan Garfinkle; Tim Petersen and Paul McCreadie, managing directors

$450.0

CardioMEMS, Esperion Therapeutics

Preferred initial investment: $6M. Focus on medical device, diagnostic, health care IT and health care service firms. Set state record for largest VC fund with its fourth fund of $220M.

MK Capital 535 W. William, Suite 303, Ann Arbor, 48103 (734) 663-6500; www.mkcapital.com

Josh Beebe, director

$265.0

DramaFever (New York)

Preferred initial investment amount: $4M. Invests in cloud infrastructure, digital media, software and education technology. HQ in Northbrook, Ill.

Arsenal Venture Partners 303 Detroit St., Suite 100, Ann Arbor, 48104 (734) 436-1496; www.arsenalvp.com

Ryan Waddington, partner

$230.0

Multistage investor aims at intersection of government, large companies and emerging technology. Headquartered in Winter Park, Fla.

Venture Investors 201 S. Main St., Suite 900, Ann Arbor, 48104 (734) 274-2904; www.ventureinvestors.com

Jim Adox, managing director

$201.0

Celleration, Akebia Therapeutics

Seed and early-stage investor, preferred initial amount of $2M, in health care and tech firms, with a focus on spinoffs from UM and University of Wisconsin. HQ in Madison, Wis.

Draper Triangle Ventures 303 Detroit St., Suite 100, Ann Arbor, 48104 (734) 215-7577; www.drapertriangle.com

Jonathan Murray, managing director

$200.0

CardioInsight Technologies

Preferred initial investment amount: $2 million. Early-stage investor focuses on Midwest tech companies. Headquarters in Pittsburgh, Pa.

Mercury Fund 303 Detroit St., Suite 100, Ann Arbor, 48104 NA; www.mercuryfund.com

Adrian Fortino, partner

$200.0

Donde, Macheen

Seed and early-stage investor, preferred first investment of $250,000 to $2 million, with a focus on tech innovation in the Mid-continent. Headquartered in Houston, Texas.

EDF Ventures LLC 425 N. Main St., Ann Arbor, 48104 (734) 663-3213; www.edfvc.com

Mary Campbell and Michael Devries, managing directors

$178.0

Cerenis Therapeutics

Oldest VC firm in the state, founded in 1987. It has stopped making investments in new companies as it finds exits for current portfolio companies

Cultivian Sandbox Ventures 303 Detroit St., Suite 101, Ann Arbor, 48104 NA; www.cultiviansbx.com

Matthew Bell, principal

$149.0

None

Preferred first investment of $3 million to $5 million in disruptive agriculture and food-technology companies. Headquartered in Chicago, Ill.

BioStar Ventures 560 W. Mitchell St., Suite 500, Petoskey, 49770 (231) 487-9186; www.biostarventures.com

Louis Cannon, founder, senior managing director

$133.0

Focus is on medical devices for cardiovascular and orthopedic medicine.

John Fletcher; Pearson Spaght and Linda Tufts, general partners

$130.9

SurgiQuest, HTG Molecular Diagnostics

Fletcher Spaght Ventures 460 Hillspur Road, Ann Arbor, 48105 NA; www.fletcherspaght.com

Preferred initial investment: $4M. Focus on health care companies in IT, software, telecommunications, medical devices, biotech and health care services. HQ in Boston.

Renaissance Venture Capital Fund 201 S. Main St., 10th Floor, Ann Arbor, 48104 (734) 997-8661; www.renvcf.com

Christopher Rizik, CEO and founder and Jeff Rinvelt, principal

$123.3

None

Renaissance, which is affiliated with Business Leaders for Michigan, is a fund of fund mainly investing in Michigan VC firms or out-of-state firms willing to invest here.

Plymouth Ventures 555 Briarwood Circle, Suite 210, Ann Arbor, 48108 (734) 747-9401; www.plymouthvc.com

Mark Horne, CEO and managing partner

$104.0

Image Integration Systems, PODS Westrock

Focus is on growth-stage companies in the Great Lakes region, with investments ranging from $2 million to $6 million.

North Coast Technology Investors 206 S 5th Ave., Suite 550, Ann Arbor, 48104 (734) 662-7667; www.northcoastvc.com

Lindsay Aspegren and Hugo Braun, co-founders

$100.0

Arbortext

Focus is on early-stage technology companies in the Midwest, with preferred initial investment of $750,000.

RPM Ventures 320 N. Main St., Suite 400, Ann Arbor, 48104 (734) 332-1700; www.rpmvc.com

Tony Grover, Marc Weiser, and Adam Boyden, managing directors

$100.0

Xtime, Luvocracy, Arbor Photonics

Preferred initial investment 2015: $1.5M to $2M. Firm targets online marketplaces, B2B companies, cloud and socialmedia infrastructure, auto IT.

Open Prairie Ventures 241 E. Michigan Ave., Kalamazoo, 49007 (269) 377-0597; www.openprairie.com

Jim Schultz, managing partner and Pat Morand, president

$95.0

Preferred initial investment: $2M. Focuses on agriculture, life sciences, medical devices, IT, energy, manufacturing and real estate. HQ in Effingham, Ill.

Hopen Life Science Ventures 171 Monroe Ave. NW, Suite 400, Grand Rapids, 49503 (616) 325-2110; www.hopenls.com

Mark Olesnavage, managing director and Mike Jandernoa, managing general partner

$68.0

ProNAi Therapeutics

Preferred initial investment amount: $500,000 to $2.5 million. Focus on early to midstage life science companies in the Midwest.

Detroit Venture Partners 1555 Broadway St., Third Floor, Detroit, 48226 (313) 373-7751; detroitventurepartners.com

Brian Hermelin, managing partner; partners Gabe Karp, Jake Cohen; Dan Gilbert, founding partner

$55.0

Opsmatic, Velos, Chalkfly

Seed and early-stage investor in technology companies with DVP mission to rebuild Detroit through support of entrepreneurship. Preferred first investment of $500,000.

TGap Ventures 7171 Stadium Drive, Kalamazoo, 49009 (269) 217-1999; www.tgapventures.com

Jack Ahrens and Pete Farner, general partners

$50.0

Invests in software, life sciences, Internet infrastructure, specialty manufacturing and plastics, with first investment of $500,000 to $1 million.

Arbor Partners 535 W. Williams St., Suite 303, Ann Arbor, 48103 (734) 668-9000; www.arborpartners.com

Donald Walker, managing director and Joshua Beebe, partner

$37.6

One of state's oldest VC firms, founded in 1996, it focuses on enterprise software, semiconductors and advanced materials.

Courtside Ventures 1555 Broadway, Detroit, 48226 NA; www.courtsidevc.com

George Pyne, nonexec chairman; partners Brian Hermelin, Vasu Kulkarni, Deepen Perlkh

$35.0

Ramping up Detroit HQ. Funded Dan Gilbert, marketing company WPP and George Pyne, former president of IMG, to invest in firms in technology and sports.

Amherst Fund LLC 401 E. Stadium Blvd., Ann Arbor, 48104 (734) 662-2102 ; www.amherstfund.com

Matt Turner, president and CEO and David Lin, VP of operations

$30.0

ProNAi Therapeutics

Will invest as little as $50,000 in early-stage companies, $500,000 in later-stage companies. Investments can include equity, subordinated debt and senior debt.

Michigan eLab 505 E. Liberty St., LL500, Ann Arbor, 48104 (734) 926-5221; www.michiganelab.com

Doug Neal and Paul Brown, partners

$22.6

None

Preferred initial investment: $1M. Silicon Valley veterans returned to Michigan in 2012 to invest in early-stage digital health, Internet of things, enterprise and networking.

Start Garden 40 Pearl St. NW, Suite 200, Grand Rapids, 49503 NA; www.startgarden.com

Rick Devos, founder and CEO

$18.0

None

Prefers first investment of $200,000 in startups that take advantage of Midwest expertise in manufacturing and global enterprise. Also runs an incubator for startups.

Huron River Ventures 303 Detroit St., Suite 100, Ann Arbor, 48104 NA; www.huronrivervc.com

Tim Streit, partner; Ryan Waddington, partner and Sam Hogg, venture partner

$16.0

Sidecar, Zipments, RideScout

Likes first investment of $300,000 in agriculture, energy and transportation technology companies in Michigan and Midwest

Ludlow Ventures 1555 Broadway, Detroit, 48226 NA; www.ludlowventures.com

Brett Demarrais, partner and Jonathan Triest, founding and managing partner

$15.5

Has a national focus, partnering with larger firms nationally in early-stage tech companies. Will invest as little as $25,000, as much as $500,000.

This list ranks venture capital firms with a presence in Michigan. Information is provided by the Michigan Venture Capital Association, the companies, company websites and the Michigan Economic Development Corporation. It is not a complete listing but the most comprehensive available. Companies are listed with the address and top executive of their main metro Detroit office. Companies headquartered outside their local location are noted in the description. NA = not available. LIST RESEARCHED BY SONYA D. HILL

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Group Associates refocuses after split, acquisition By Jay Greene jgreene@crain.com

For nearly 30 years, David Zick ran Bingham Farms-based Group Associates Inc. as an insurance brokerage, technology services and benefit consulting firm with his business partner Kent Grathwohl. But a growing conflict of interest between brokerage and providing administrative services through information technology led Zick and Grathwohl to conclude they needed to change their business model and focus on one or the other. So, in an amicable split in September 2014, Grathwohl took his clients and left Group Associates and became area vice president with Gallagher Benefit Services Inc. in Bingham Farms. “It wasn’t easy because Kent and I worked together for 25 years,” said Zick, president of the company. “It was a painful decision. Kent and I have a lot of respect for each other. It was almost like a divorce on very friendly terms. We continue to share accounts and work together.” Grathwohl said his brokerage work selling life and health policies at Gallagher is similar to his former job at Group Associates. “We weren’t able to deliver enough lives to (fuel) the administrative (technology) engine” at

A growing conflict between brokerage and providing administrative services through IT led David Zick and Kent Grathwohl to decide they needed a new business model. Group Associates because “(outside) brokers were not willing to put business with him,” Grathwohl said. Zick said Group Associates was one of the first benefit companies to take advantage of online information technology in the late 1980s. “We worked with a lot of carriers, and over the years our services increased and added capability of enrolling employees online,” he said. “As time went on, technology became more sophisticated, and we realized we could do far more.” But Zick said the conflict developed between brokerage services and administrative services because other insurance brokers didn’t want to do business with Group Associates because they feared “we could replace them as broker” to their clients. Last July, Zick sold Group Associates to Maestro HealthCare Technolo gy and is the technology solutions subsidiary to the Chicago-based

health and benefits administration manager. Maestro now offers integrated benefit administration that includes a private exchange, enrollment services, self-funded insurance, health savings accounts and consolidated billing. “I was not planning to sell the company,” said Zick. “I just did not want to have the conflict between consulting and brokerage. We couldn’t do both anymore.” To get advice, Zick went to Chicago-based Gruppo Marcucci , a consulting firm specializing in human resources and benefits administration technology. Maestro earlier had employed Gruppo to search for a benefit administrator to acquire. Sometime afterward, Gruppo Marcucci executives suggested that Rob Butler, CEO of Maestro, talk with Zick. “Rob called me (in March 2015), and we talked a few times and came (to Detroit) for dinner,” Zick said. “I

Kent Grathwohl David Zick showed him our capabilities at the office, and the next day he gave me a letter of intent. It was an awesome synergistic relationship.” On July 1, Group Associates joined Maestro as a wholly owned subsidiary. Zick said Maestro brought Group Associates what it needed: a national sales force with connections to major brokers that includes the Willis Group and Gallagher. “We are doing what we do best, helping employers with benefit technology solutions,” Zick said. Grathwohl said Gallagher and Maestro do about half a million dollars in business together. “This has worked out fine for me,” he said. Butler said he formed Maestro two years ago to take advantage of opportunities presented by the Affordable Care Act to expand health benefit options for employers. “We offer a one-stop shop that allows employers, brokers and carriers to offer one solution,” said But-

ler, noting that the acquisition of Group Associates was important to that vision. Maestro’s four primary product lines are private health insurance exchange, benefit administration, human resources management and consumer accounts, which include health savings accounts and selffunded insurance programs. Last November, Maestro signed a contract to become the exclusive private exchange provider with Blue Cross Blue Shield of Arizona. “This is technology meets services, a nice connection to offer employers,” Butler said. Zick said Maestro has enabled Group Associates to invest in more technology, hire staff and expand its information technology services. Group Associates has about 60 employees in Michigan and expects to hire more this year. “Since July, we have written 150 accounts with Affordable Care Act (employee health benefit) reporting,” which includes 1095C form filings for all covered employees that proves coverage through the employer and the cost-sharing amounts, said Zick, noting his company was one of the first to be certified by the IRS. 䡲 Jay Greene: (313) 446-0325 Twitter: @jaybgreene

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CALENDAR

DEALS & DETAILS ACQUISITIONS & MERGERS Visteon Corp., Van Buren Township,

an automotive cockpit electronics supplier, has signed an agreement to acquire AllGo Embedded Systems Pvt. Ltd., Bangalore, India, developer of embedded multimedia systems to vehicle manufacturers. The agreement is expected to close during the first quarter of 2016. Terms were not disclosed. Websites: visteon.com, allgosystems.com. Industrial Commercial Properties LLC, Cleveland, and Industrial Realty Group LLC, Los Angeles, acquired Metro Commerce Center, 32500 Van Born Road, Wayne, a 490,000-square-foot, multi-tenant industrial building on 34.5 acres. Websites: icpllc.com, industrialrealtygroup.com.

CONTRACTS Foley & Lardner LLP, Detroit, has entered into an agreement with Michigan Legislative Consultants Inc., Lansing, a lobbying firm, to expand Foley’s public policy presence to offer government relations representation and legal advice in Michigan-related matters. Websites: foley.com, mlcmi.com.

The University of Michigan’s Artificial Intelligence Lab has entered into an agreement with IBM Corp., Armonk, N.Y., , to launch Project Sapphire, a $4.5 million collaboration to develop an advanced conversational computing system. Faculty, graduate students and postdoctoral researchers will work with IBM scientists to develop the system, which they expect to be running within the next couple years. Websites: umich.edu, ibm.com.

WEDNESDAY JAN.27

Global Economic and Industry Outlook for 2016 and Beyond. 8-10:30 a.m. Au-

tomation Alley. A discussion on the shifting dynamics of the global economy and how companies can best position themselves to do business overseas. Keynote speaker: Jim Glassman, managing director, J.P. Morgan Chase and Co. Automation Alley, Troy. $20 members, $40 nonmembers; walk-ins: $30 members, $50 nonmembers. Contact: Lisa Lasser, (248) 457-3200; email: info@automationalley.com. Creating the Cash Flow Factory. 9-10 a.m. Michigan CFO Associates. Workshop is designed to address heightened uncertainty over credit availability and help organizations generate more cash. Automation Alley, Troy. Free. Contact: Kellee Warren, (586) 580-3285, Ext. 202; email: kwarren@michigancfo.com.

THURSDAY JAN.28

Essentials of Building Loyalty via the Customer Experience. 6-8:30 a.m.

American Marketing Association, Detroit. Featuring Scott Monty, an internationally recognized leader in digital communications, social media and marketing. VisTaTech Center at Schoolcraft College, Livonia. $45 admission, $35

members, $25 students. Contact: Rua Francis Oshana, (248) 826-0281; email: rua_francis@hotmail.com.

FRIDAY JAN. 29

business economist, Federal Bank of Chicago Detroit Branch; and Tony Vernaci, vice president, global business development, Michigan Economic Development Corp. The Townsend Hotel, Birmingham. $50 admission, $40 members, $290 corporate table of eight; tickets include plated breakfast. Contact: (244) 644-1700.

Market Research Workshop. 10 a.m.-

noon. Washtenaw Community College Bailey Library. Learn to use print and electronic library resources to do market research, including potential customers and competitors, as well as business-tobusiness marketing. Washtenaw Community College Bailey Library, Ann Arbor. Free; maximum capacity is 30 attendees. Registration: wccnet.edu/resources/library/ market_research_workshop.

Professional Leadership — The Jack Aronson Story. 7:30-9 a.m. Feb. 3. Leadership Oakland. Featuring Jack Aronson, founder, Garden Fresh. MSU

19 Management Education Center, Troy. $32 members, $36 nonmembers. Website: leadershipoakland.com. Why Salespeople Fail … and What You Can Do About It. 11 a.m.-1 p.m. Feb. 3.

Ann Arbor Spark. Attendees can learn how to close more sales by following a systematic approach. Ann Arbor Spark, Ann Arbor. Free. Registration ends 24 hours before the event at annarborusa.org. Contact: phillip.coleman@annarborusa.org.

UPCOMING EVENTS Birmingham Bloomfield Chamber Economic Forecast Breakfast. 8-9:30 a.m. Feb. 2. Birmingham Bloomfield

Chamber of Commerce. Local and regional update by Paul Traub, Calendar guidelines. Visit crainsdetroit.com and click “Events” near the top of the home page. Then, click “Submit Your Events” from the drop-down menu that will appear. Fill out the submission form, then click “Submit event” at the bottom of the page. More Calendar items can be found at crainsdetroit.com/events.

M&A Experience

In Your Corner.

Arotech Corp., Ann Arbor, a provider of defense and security products for the military, law enforcement and homeland security markets, announced that its training and simulation division has received $7.4 million in new awards and contract modifications, including a $1.7 million modification to increase the capabilities of the U.S. Army’s virtual clearance training suites and more than $1 million in orders for its transit and public safety driving simulators. Website: arotech.com.

Ŷ Experienced in M&A, negotiated transactions,

securities, joint ventures, strategic alliances, corporate finance, corporate structure and governance. Strong concentration in business taxation. Ŷ Works with domestic and foreign companies in the automotive, manufacturing, pharmaceutical, finance, health care and high tech industries. Ŷ Proudly served in the U.S. Marine Corps.

EXPANSIONS Re/Max of Southeastern Michigan, Troy, opened Re/Max Dynamic, 7495

N. Telegraph Road, Monroe. The office is owned and managed by broker/owner Craig Bollerud. Telephone: (734) 265-1502. Website: dynamic.remaxdetroit.com. Deals & Details guidelines. Email cdbdepartments@crain.com. Use any Deals & Details item as a model for your release, and look for the appropriate category. Without complete information, your item will not run. Photos are welcome, but we cannot guarantee they will be used.

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PEOPLE: SPOTLIGHT

ADVERTISING SECTION

DEGC names Rafferty VP of small-biz development The Detroit Economic Growth Corp. has named Michael Rafferty

Tyanne Miskov and Thomas Tilton Account Managers,

ADVERTISING & MARKETING Lori Jo Vest, Associate Director of Digital Marketing, Moncur Provide guidance, direction and strategy for a team of copywriters and social media specialists creating digital marketing content for major brands in both B2B & B2C categories as well as contribute to corporate culture & employee engagement efforts. Lori previously was a Senior Contributor/Social Media at Organic, Inc. in Troy, MI.

Ulliance, Inc. Miskovis responsible for the delivery of services to client companies including management consultations, critical/traumatic incident debriefings and employee assistance program activities, as well as orientation programs. Miskov held prior positions at Hope Network, St. John Providence Eastwood Clinic and Easter Seals. She has her Bachelor of Arts in social science from University of Michigan and Master of Arts in counseling psychology from Western Michigan University Tilton is responsible for the delivery of services to client companies including management consultations, critical/traumatic incident debriefings and employee assistance program activities, as well as orientation programs. Tilton has seven years of experience working in nonprofit, K-12 and higher education, and as a civilian employee with the US Army. He received his Bachelor of Arts in religious studies from St. Edward's University and Master of Science in counseling from Texas A&M University.

vice president of small-business development. Rafferty, 40, had been director of the metro Detroit office of the Michigan Nonprofit Association,

where since October 2013 he led strategic direction and overall operations in Southeast Michigan. Prior to joining the MNA, he was a development officer with the Michael Rafferty

Wayne County Economic Development Growth Engine.

Givens to lead Eastside Community Network Eastside Community Network

Victoria Webb, Director of Client Service,

ENGINEERING

HEALTH CARE

Moncur Accountable for high-level relations with all clients, including overall client satisfaction and management of expectations while ensuring that the work is on strategy, on time and within budget. Victoria was formerly the Principal of 7 Spot Group in Livonia, MI.

ACCOUNTING William D. Gilbert, CPA, Vice President and Corporate Controller, REDICO Gilbert oversees the accounting and finance functions for REDICO’s national portfolio of properties. He is responsible for maintaining the financial services provided to property owners and partners to sustain year-over year growth. Gilbert had previously served as director of accounting for REDICO.

Blake R. Kolo, Managing Director, The Siegfried Group Blake Kolo, CPA, CVA, CFE, CFF has been promoted to Managing Director of The Siegfried Group’s Detroit Market. He continues to serve as a trusted business advisor to financial executives, helping clients become successful leaders in their organization. Blake Kolo, CPA, CVA, CFE, CFF started his career at Ernst and Young in their Fraud Investigation and Dispute Service practice followed by three years at Conway MacKenzie providing litigation support, transaction, and restructuring services.

Crain’s has moved its complete list of appointments and promotions to www.crainsdetroit.com/peopleonth emove. Guaranteed placement in print and online can be purchased at this website.

Patrick T. Bell,

Suzanne Ciaglia,

Environmental Project Manager,

Vice President of Clinical Operations,

G2 Consulting Group

Custom Home Health

Patrick T. Bell P.G., an experienced professional in environmental consulting and land development services, has joined G2 Consulting Group as an environmental project manager. Prior to joining G2, Mr. Bell spent his professional career in positions of increasing responsibility at AtwellHicks, AKT Peerless and Tim Hortons, providing environmental, construction, and development entitlement services.

As Vice President of Clinical Operations, Suzanne Ciaglia, PT, COS-C, is responsible for all clinical decisions within Custom Home Health including, but not limited to, hiring leadership, overseeing the clinical team, and quality assurance. Suzanne Ciaglia is a Physical Therapist with over 20 years of experience in home care. Her most recent experience was at Custom Home Health as the Director of Clinical Services. Ms. Ciaglia is a Wayne State University Alumna.

TECHNOLOGY

Andrew Scarfone, Vice President of Business Development,

Norman Lewis,

Custom Home Health

President, UltraLevel As president, Norman Lewis will work with the internal team and be a valuable resource for clients in assessing strategy and advising on the best way to move forward with new initiatives. His main focus will be the continued growth of UltraLevel. Lewis held multiple information technology director positions during his 30-year tenure with Ford Motor Company. Since retiring from Ford, he has worked and consulted for a variety of large companies, including IBM and Compuware.

As Vice President of Business Development, Andrew Scarfone's natural leadership abilities play an integral role in Custom Home Health's success in regards to hiring and training the marketing team while assessing and implementing business strategies. With over 4 years with Custom Home Health, Andrew previously served as the Director of Sales and Marketing. Andrew earned his J.D. in Law from University of Detroit Mercy School of Law and his BA in Law and Economics from Michigan State University.

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named longtime metro Detroit nonprofit leader Donna Givens to succeed founding CEO Maggie DeSantis in March. Givens, 52, has been Donna Givens president of the Youth Development Commission in Detroit for three years. Before that, she was executive director of Brightmoor Community Center. Among her previous jobs was deputy director of programs for Eastside, then the Warren/Connor Development Coalition, in 1993-97. DeSantis, who has led the organization for 30 years, announced a year ago her intentions to step down.

Detroit Bikes taps DTE manager Kiesling as COO Detroit Bikes LLC hired Chris Kiesling as COO to help strength-

en its manufacturing operations and meet growing consumer demand. He had worked for 11 years at Detroit-based DTE Energy Co., where he most recently was a plant manager in Pittsburgh.

Federal-Mogul Holdings names Rouquet as CFO Southfield-based auto supplier Federal-Mogul Holdings Corp. named Jerome Rouquet as CFO, replacing the retiring Raj Shah. Rouquet will continue to serve as senior vice president of finance of the company’s motorparts division. He previously was chief accounting officer and CFO of Federal-Mogul Vehicle Component Solutions Inc. He joined Federal-Mogul in 1996 and has served in various financial management roles. 䡲

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GUS FROM PAGE 3

plastic foam plates at Gus’s? It started with a call from Sklar’s best friend early last year urging him to check out a chicken place in Memphis, Tenn. At first, Sklar balked at the idea of jumping on a plane just to eat at a chicken joint. But eventually he capitulated. There was a line around the block when he got there, and it really was “the best chicken in the world,” Sklar said. The slightly spicy chicken, which is served with white bread, is “a timeless concept” that has a huge following around the country, he said. “I have some higher-end restaurants, and (now) I have this fried chicken, which is the world’s best, served on (plastic foam) plates,” Sklar said. The two “have one thing in com-

365 FROM PAGE 3

revenue that year of $42,000. In its second year, the company reported $463,000. In 2011, it released its first kiosk product. By 2014, sales hit $16 million. Hessling said revenue last year was more than $23 million, and he predicts $30 million in sales this year. 365 Retail Markets has 104 employees. Its industrial building in Troy handles sales and marketing, assembly of the machines with parts that come from a variety of U.S. suppliers, technology and software production and customer service. It turns out 10 to 12 point-of-sale kiosks daily, and sells roughly 200 a month, shipping them in the U.S., Canada and the United Kingdom. Hessling said the company is setting up delivery to customers in Germany and Italy. Machines that are destined for Europe differ from those in the U.S. They allow customers to pay with a credit or debit card, a thumbprint or by scanning a bar code. To accommodate the U.S. market that still likes to use cash, kiosks often come with an additional tower that takes cash. Both kinds of machines are equipped with subtle theft-deterrent cameras that snap photos of customers as they check out. The company has 5,000 micro-

“Gus’s is a place for everyone because it’s so reasonable and the food is so approachable.” Zack Sklar,a local franchise ownerofGus’s World Famous Fried Chicken

mon — great food,” he said. To open Gus’s locations, Sklar and his partners launched Schmaltz Hospitality LLC. The company is one of only about 10 franchisees for the chain in the country, he said. And the name was fitting, given that “schmaltz” is Yiddish for chicken fat. The plan is to open five to seven locations per state in their territory, which includes Michigan, Illinois, Wisconsin, Minnesota, Ohio, Colorado and parts of Florida, Sklar said. Schmaltz opened its first Gus’s in Chicago in October, and the location did $70,000 in business the first week it was open, he said. Now it has an agreement with

Midtown Detroit Inc. to purchase the vacant property on Third Street at West Alexandrine Street. The site is on the fringes of Midtown near the historic Rainer Court Apartments , which opened last fall, and not far from the new Detroit Red Wings arena and the surrounding District Detroit. Schmaltz plans to invest about $1 million to secure the land and build a 3,000-square-foot restaurant for the casual dining concept, Sklar said. A February groundbreaking and late May opening are planned. He projects that the Midtown location, which will create 35-40 jobs, will bring in $2.5 million to $3 million in revenue its first year. Between Birmingham-based

markets in place. Its main competitor, Tukwila, Wash.-based Avanti Markets Inc., has 4,700, according to Avanti Markets spokesperson Heather Quandt. Avanti and 365 are the “big two” of the emerging sector, both claiming about 40 percent of the market. Avanti has 30 corporate employees, some of whom are software developers. The hardware for its micromarkets is handled by suppliers. 365’s largest customer is Wood Dale, Ill.-based Canteen Vending, which has purchased 2,200 point-ofsale kiosks from 365 and is tasked with keeping all those micromarkets stocked with food and beverages. “365’s reputation is very good. They excel in client support and are recognized for innovation in the micromarket space,” said Michael Coffey, Canteen Vending senior vice president of strategic initiatives. Chattanooga, Tenn.-based Five Star Food Service, another 365 customer that stocks micromarkets and vending machines, relies on 365 for its kiosks. “We are putting in our 500th micromarket (with a kiosk) this month,” said Gregory McCall, Five Star Food Service senior vice president, sales and marketing. “365 has the most stable platform with strong software and technology, customer service people who resolve issues immediately and a reputation for in-

novation. “They manufacture their own hardware with U.S. parts, while their competitors outsource it,” he said. Micromarkets enable Five Star to offer customers up to 300 items versus 75 items in a vending machine. Other 365 customers include Costco, Bank of America, pharmaceutical company Sanofi, and Goldman Sachs, which offers employees micromarkets at its New York City offices. “People will buy 30 percent more food and drinks when micromarkets are available,” Hessling said, adding that each transaction averages 1.6 items. “People like the ability to pick things off the shelf and look at them before buying.” Goods that go into the micromarkets tend to be healthier than what is found in traditional vending machines that typically brim with pop, candy and salt-laden snacks. In the U.K., bananas and apples are popular, along with coffee, tea and food for people with dietary restrictions. What hasn’t changed is the No. 1 micromarket seller – Mountain Dew. Out of 25 million micromarket transactions in November, Hessling said, Mountain Dew led the pack. Another trend: Fresh food sales in vending machines are 5 percent to 8 percent, versus 30 percent in micromarkets. “Overall, micromarket eating is healthier,” he added. 365 Retail Markets owns AirVend, a Provo, Utah, company that makes point-of-sale devices for vending machines. It also licensed the technology of ReadyFlex in Silicon Valley. ReadyFlex makes a point-of-sale machine that can be operated either by self checkout or an employee. Hessling said the company’s challenges include keeping up with rampant growth that requires 365 to continually add employees and to deal with outgrowing its space. Finding software talent to work in the food industry also requires creativity. “A lot of these professionals are going (to social media companies),” he said. “We need to make sure we are providing the right compensation and benefits to attract the right employees.” 䡲

365 RETAIL MARKETS

365 Retail Markets has 5,000 micromarkets in place, as well as this one at the compa-

ny's corporate office in Troy.

Peas and Carrots and Schmaltz Hospitality, Sklar said he and his partners expect to do just under $30 million in revenue this year and to employ more than 500 employees by this summer. With its $9.50 per-person average check, the Gus’s concept is one for the locals as well as visitors to Detroit, Sklar said. A lot of restaurants have been opening up right in the middle of everything downtown, he said. But “no one is building anything for the community that lives in Detroit.” People living in the city “aren’t going to all these ritzy places,” Sklar said. “It’s white-collar, suburban people flocking down to those restaurants, which is a great thing.” But “Gus’s is a place for everyone because it’s so reasonable and the food is so approachable,” he said. “That’s what’s so exciting to me.” When it opens, the Detroit Gus’s will serve chicken, sides and a few desserts, along with cocktails, beer

21 and wine, Sklar said. The Third Street corridor in Midtown has been an area of focus for community development organization Midtown Detroit, Executive Director Sue Mosey said. Midtown Detroit has been funding a lot of development along the Third Street corridor in Midtown after about a decade of no real development there. That, combined with other investment, has resulted in the openings of properties, including the Rainer Court Apartments, Negative and Print and the Nordin Brothers’ new Detroit Design Studio. Gus’s, the first new construction project along the corridor in recent years, will bring new jobs and a vibrancy to the neighborhood, Mosey said. “We think this new project will draw a lot of new customers to that area to explore it further,” she said. 䡲 Sherri Welch: (313) 446-1694 Twitter: @SherriWelch

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PACKARD FROM PAGE 1

global economy were the main factor in its decision to renege on the agreement to provide $80 million in financing, or nearly one-fifth of the estimated project cost. “This investment fund has been affected by the slowdown of the global economy and is afraid about real estate, and our capital core has been completely canceled,” he said. So Palazuelo has opened his own wallet to pay for things like removal of asbestos-contaminated items that has been ongoing at the former administration building on the 40acre site that he purchased in late 2013 for $405,000 at a Wayne County tax foreclosure auction. “The Packard Plant project will be financed with equity from the mother companies in Peru (everything is on track and following the original business model with no need to scale back),” he said in an email. “Our business in Peru is growing, and therefore we are better prepared today than one year ago for the development of the Packard Plant conversion project.” Still, many local real estate experts have reservations about the project to convert the Packard Plant, which became a symbol of Detroit’s decay and was long the target of vandals, arsonists, graffiti taggers and scrappers. They have a difficult time imagining an economically viable redevelopment of that scale, at that site, at this time, with the uses envisioned. Those include retail, light industrial space, multifamily and senior housing, office space, recreation and art all coexisting in a largely forgotten part of the city, one previously all but ignored by the redevelopment boom concentrated on Detroit’s central core. “It’s kind of in nowhere land, in a lot of ways,” said Richard Barr, a partner with Detroit-based Honig man Miller Schwartz and Cohn LLP and leader of the law firm’s Economic Development Incentives Practice Group. “Is that really where someone wants to live? Not really.” The Packard is too far away from the buzzing downtown, Midtown and New Center areas to generate enough interest in the multifamily and office space to justify serious financing from traditional financiers, they say. New industrial space, however, is a sound fit for the area, experts have said, citing high demand for such space given a lack of it in the city, particularly with the site’s access to rail services and freeways. “Even if you can get the equity, with a traditional deal banks want 20 to 25 percent equity or so, but you still have to have a deal solid enough to get 75 percent debt,” Barr said. “That’s not a deal that’s a 75 percent deal. There’s still a lot of risk.” Richard Hosey III, a former senior vice president for Bank of America NA who now owns Detroit-based Hosey Development LLC , said traditional bank financing is likely off the table because of the project’s size and “how much vision you need to

PHOTOS BY MICHAEL LEWIS II

The sprawling Packard Plant complex became a symbol of Detroit’s decay as it was targeted by vandals, scrappers, arsonists and others. The orange figure on top of the Packard Plant bridge is one of John Sauve's sculptures as part of his "Man in the City" project.

Palazuelo targets more property The owner of the Packard Plant says he has another 1.5 million square feet of industrial space in the city under contract with plans for a large scale mixed-use conversion. Fernando Palazuelo declined to identify the property he plans to close on by May 1, but said it is in the city and will be turned into light industrial and office space, and low-income apartments. He also expects some of the redevelopment cost to be financed through a crowdfunding campaign that will kick off later this year. This isn’t the first time Palazuelo has eyed Detroit properties other than the Packard Plant, located at I-94 and East Grand Boulevard and planned for a redevelopment costing more than $400 million over the next seven to 15 years (see related story). Last year, he told Crain’s that he was planning to purchase several storied office buildings in the greater downtown area, including the Book Tower and Book Building, the Fisher Building and Albert Kahn Building in the New Center area and the Penobscot Building. The first four buildings have since sold to other buyers, and the owner of the Penobscot has maintained the building is being marketed for lease only. Kirk Pinho

believe in it.” But Hosey, who said he would peg the redevelopment cost at closer to $700 million, keeps an open mind about it. “He needs long-term equity to prove it can be done,” he said. “If he can produce that, then he has a project that will be very nice within 20 years. But it’s got to be his money.”

Global fears, local impact The private equity firm — Palazuelo said its assets are valued at more than $500 million — likely has reason to be concerned globally, said Michael Mazzeo, dean of the School of Business Administration at Oakland University. The plunge in crude oil prices — flirting with $27 per barrel last week before a Friday spike — caused by increased production and weakness in economies like China and other emerging markets has introduced “contagions” in other economic sectors, he said. “OK, I like lower gas prices, but

the contagion could be that if you lay off 100,000 people in the oil industry, these might be people who buy cars in Detroit,” he said. “The reality of it is that there is a spillover, because we are a global economy.” If people buy fewer cars from the Big 3, that could lead to reductions in the auto industry workforce, in turn leading to depleted capability to rent industrial space in a renovated Packard Plant or a multifamily unit in one of its buildings. In short: It’s all related. But, Mazzeo said, don’t rule out the possibility that the private equity firm simply used the global economy as a convenient excuse to pull from the project. “And I’m not sure I can discern the difference” in this case, he said.

grant a 12-year property tax abatement on the building. That is expected to be approved in the first quarter. That building, always envisioned as the first step in a long and grueling road toward Packard’s redevelopment, is slated to become primarily corporate offices — as well as an office for Palazuelo, a native of Spain who started developing in Lima after liquidating his assets during a personal bankruptcy triggered by the global economic meltdown. If nothing else, Palazuelo has attracted attention from unique possible users, ranging from Thomas “The Hitman” Hearns, the boxing legend and Detroit native who has publicly discussed opening a new boxing gym at the site, to German developer and nightclub owner Dimitri Hegemann, who has been in talks with Palazuelo about the site. Other uses, including drone companies and music and cultural space, have been the subject of tenancy discussions. The administration building remediation is expected to take about 3½ months, and renovation of the building is expected to be

done by the early part of next year, Palazuelo said. With perhaps a dozen separate projects envisioned as part of the overall redevelopment, a second building on the site is expected to be converted for recreation uses while a third will be for residential. And so on and so forth, Palazuelo said, until the overall project — which he expects to cost about $120 per square foot, or about $420 million — is completed. He said that beyond the $405,000 purchase price for the property, $2 million has been spent on things like attorneys, getting clear title, securing the property, insurance, and some cleaning and asbestos removal at the administrative building. And a difference is already being felt in the surrounding community, which for years was subjected to all the trappings of living and working in the shadow of an industrial graveyard, he said. “The Packard was more or less a big risk a year and a half, two years ago,” he said. “Now, something has changed in the area, and I don’t think it’s just because of us.” 䡲 Kirk Pinho: (313) 446-0412 Twitter: @kirkpinhoCDB

Waiting on tax breaks Before the first part of the plant’s renovation can begin, Palazuelo is seeking approval of an Obsolete Property Rehabilitation Act district from the Detroit City Council for the 150,000-square-foot former administration building. Approval would

Plans to redevelop the abandoned Packard Plant site have been impacted by its distance from revitalized areas of Detroit.

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FLINT WATER: WHAT’S NEXT

BEFORE ALTERING YOUR COVERAGE, RETHINK.

Health care community sounded alarm,now helps lead response By Jay Greene jgreene@crain.com

Physicians in Flint sounded the alarms early last fall about possible lead poisoning. Now, local health care providers and insurers are helping the city respond to the crisis. When the city switched to the Flint River in April 2014, residents immediately complained about the water’s smell, taste and color, said Kirk Smith, CEO of the Flint Area Health Coalition, which is coordinating the local health effort. Despite complaints, Flint residents were told for more than 18 months by state and city officials that tests indicated the water was fine and not to worry. But in late Mona HannaSeptember, Mona Hanna- Attisha: Detected Attisha, a pedia- high lead levels. trician at Hurley Medical Center, a city-owned hospital in Flint, announced tests she conducted showed up to 9,000 children in Flint were being exposed to double and even triple the average blood lead levels from the water. Hanna-Attisha’s study, which has been published in the American Journal of Public Health, showed the percentage of children 6 years old and younger with more than 5 micrograms per deciliter of lead in their blood increased from 2.1 percent when Flint purchased Lake Huron water from Detroit to 4 percent after the switch to the Flint River. “Once I got the data, I shared it with other pediatricians (that included Dr. Lawrence Reynolds, CEO of Mott Children’s Health Center),” said Hanna-Attisha, director of the Hurley pediatric residency program. “I am new and needed an army behind me.” But her warnings at a Sept. 24 press conference were criticized by the establishment in Lansing for more than a week. “Even when the state was fighting back, saying I was playing political football, causing hysteria, slicing and dicing the data and that we were wrong, I had the full support of the physician community and my hospital,” she said. Fellow physicians at the Genesee County Medical Society, at local hospitals that included Hurley, Genesys Health and McLaren Flint, and the health coalition echoed her concerns, Smith said. A doctor-to-doctor conversation with Eden Wells, M.D., the chief medical executive with the Michigan De partment of Health and Human Services, was the game changer that turned around the state’s attitude, said Hanna-Attisha, who now is lead with the Michigan State University/Hurley

Pediatric Public Health Plan Initiative.

Wells, also a clinical associate professor of epidemiology at the University of Michigan’s School of Pub lic Health, said state epidemiologists were already trying to replicate Hanna-Attisha’s study, which they did Oct. 1. The next day, Gov. Rick Snyder ordered the distribution of filters along with water testing and blood testing for children. But it wasn’t until Oct. 16 that the city switched back to the Detroit water system. And it wasn’t until Dec. 15, when newly elected Flint Mayor Karen Weaver declared a state of emergency, followed by Genesee County on Jan. 5 and Michigan on Jan. 6. “Those two months felt like a year,” Hanna-Attisha said. “I wish they could have gone back to April 2014” and never made the decision to use the Flint River. But Hanna-Attisha said even though the Detroit-supplied water is less acidic, Flint’s water pipe infrastructure has been damaged and there is still ongoing lead exposure. “Everybody is really trying to help now,” she said. “We had a meeting (last week) with all the Medicaid plans in the county. We need to all work together as providers, health plans, to address the needs of our children for the long term.”

Long-term vigilance Officials for HealthPlus of Michigan, Molina Healthcare of Michigan, McLaren Health Plan and Meridian Health Plan of Michigan said they are stepping up state-mandated lead screening tests for children 6 or younger. They have donated money and also are working closely with the Genesee County Health Department and Flint schools to provide staff for screening exams. Area hospitals also have stepped up their efforts through the Flint health coalition and clinics they operate in the city, said officials with Genesys, McLaren and Hurley. “We have been talking about prevention to make sure our members go to their primary care physicians,” said Christine Surdock, COO of Molina, which began operations in Genesee on Sept. 1 when it acquired HealthPlus’ 70,000 Medicaid members. “We have met with all the large providers in the area, including the health department,” Surdock said. “We have identified children without lead test screening, and when we get the blood test done, we have expanded our case management program for that population.” Surdock said Molina and other plans don’t yet know the long-term implications for children. “All the medical directors are having conversations at this point,” she said. At HealthPlus, CEO Mike Genord, M.D., and executive Nancy Jenkins

said tests have shown rising lead levels in children in the Flint area. Genord said HealthPlus has 8,000 commercial members in the affected ZIP codes in Flint. “We have care coordination teams who have reached out there and provided them with information and clean water,” he said. McLaren Health Plan’s CEO, Kathy Kendall, said the HMO has been involved in the lead crisis since last fall, focusing on the 5,000 members in Genesee ages 6 and under. “We have provided education and doubled down on lead testing in the most impacted ZIP codes. We have done mass screenings in the schools,” Kendall said. “We work closely with our primary care physicians to do developmental screens and encourage change in diets.” While “there is no magic pill for lead” poisoning, Wells said, it will be up to responsible officials to ensure children get all the medical and behavioral support they require. Because lead screening only shows exposure within 20 to 30 days, Hanna-Attisha said longerterm tests are needed on children for the foreseeable future. “Testing now underestimates lead exposure,” she said. “The CDC will do longer-term tests to collect (children’s) teeth. It is good way to measure lead exposure.” Other symptoms from lead poisoning include irreversible brain damage, lower IQ, developmental delays, speech problems, a boosted risk for behavioral issues and other serious chronic conditions. To address longer-term problems, Smith said the Flint health coalition has formed the Flint Child and Health Development Fund, with a fundraising goal of $100 million. The fund will provide child development, nutrition, education, social services, medical and behavioral support, he said. The coalition also is administering the Genesee County Children’s Healthcare Access Program, or CHAP, one of nine agencies in Michigan. The program helps physicians with social support services for families. “Our service volume has been increasing every month,” said Smith, adding that last week CHAP got 20 referrals in one day. But during the last year, Bobby Mukkamala, M.D., an otolaryngologist in Flint who is vice chairman of the Michigan State Medical Society , said physicians in Flint were frustrated the state did not act sooner. “We were discussing it at the medical staff level for months, long before the state of emergency,” Mukkamala said. “It wasn’t taken seriously until somebody started screaming about it.” 䡲 Jay Greene: (313) 446-0325 Twitter: @jaybgreene

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24 Pipeline to the Flint water crisis March 2013: The Flint City Council approves joining the Karegnondi Water Authority after an exploration period of several years. The idea is to pipe water in from Lake Huron to mid-Michigan instead of relying on Detroit city water. Flint Emergency Manager Ed Kurtz supports the plan. April 2014: In an effort to save money, Flint begins drawing its water from the Flint River instead of relying on water from Detroit. The move is considered temporary while the city waits to connect to the new Karegnondi water system. Residents immediately complain about the smell, taste and appearance of the water. They also raise health concerns. Summer 2014: Three boil-water advisories are issued in 22 days after positive tests for coliform bacteria. October 2014: A General Motors engine plant stops using Flint water, saying it rusts parts. Feb. 3: State officials pledge $2 million for the water system. March 27: Flint officials say water quality has improved and that testing finds it meets all safety standards. Sept.24: A group of doctors led by Dr. Mona Hanna-Attisha of Hurley Medical Center urges Flint to stop using the Flint River for water after finding high lead levels in the blood of children. State regulators insist the water is safe. Sept. 29: Gov. Rick Snyder pledges to take action in response to the lead levels. It’s the first acknowledgment by the state that lead is a problem. Oct. 2: Snyder says the state will spend $1 million to buy water filters and test water in Flint public schools. Oct. 8: Snyder calls for Flint to go back to using Detroit water. Oct. 15: The Michigan Legislature and Snyder approve nearly $9.4 million in aid to Flint, including $6 million to help switch its drinking water back to Detroit. The legislation also includes money for water filters, inspections and lab testing. Oct. 18: Dan Wyant, director of Michigan’s Department of Environmental Quality, says the state used the wrong standard governing lead in testing for drinking water. Dec. 29: Snyder accepts the Wyant’s resignation and apologizes for what occurred in Flint. Jan. 5, 2016: Snyder declares a state of emergency in Flint, the same day federal officials confirm that they are investigating. Jan. 12: Snyder activates the Michigan National Guard to help distribute bottled water and filters in Flint and asks for federal help. Jan. 14: Snyder asks President Barack Obama for major disaster declaration and more federal aid. Jan. 16: Obama signs an emergency declaration and orders federal aid for Flint, but denies the request for a disaster declaration. Jan. 19: Snyder devotes most of his annual State of the State speech to the emergency, saying he failed Flint residents. Source: The Associated Press, Crain’s research

FLINT WATER: W

Big costs, technical fixes in the o By Chad Halcom chalcom@crain.com

Lindsay VanHulle Crain’s Detroit Business/Bridge Magazine

It could take much more than the $80 million in new federal aid that President Obama has promised Michigan by this week to remove lead contamination from Flint’s public water system, officials and local experts said. What will ultimately be needed to fix the system isn’t fully known yet. But a chemical treatment regimen is expected to begin the process, and engineers highlighted a number of technical fixes, such as liners and coatings, in interviews with Crain’s. The state Senate is expected this week to take up a state budget supplement for the current fiscal year, which began Oct. 1, allocating $28 million to various immediate public health measures and some infrastructure. The House was quick to pass the new supplemental budget last week. But that funding largely addresses needs like bottled water for nurses, filters and funding to hire more school nurses, with only a fraction earmarked for infrastructure. None of the funding is expected to solve the bigger problem of how to get lead out of the city’s sprawling network of pipes. Obama last week told a gathering of mayors at the White House that a bipartisan budget agreement last month helps cities rebuild their water infrastructure and earmarks $80 million for Michigan. Kurt Weiss, a spokesman for the state Department of Technology, Management and Budget , said “no longterm infrastructure costs have been identified,” as of last week.

ASSOCIATED PRESS/PAUL SANCYA

Water from the Flint River proved too corrosive for the city’s municipal water system, leaching lead into the water. “We do know the replacement of the entire system would be very costly and take time,” Weiss said. Officials from the Michigan De partment of Environmental Quality

were not made available to Crain’s to discuss the lead problem, the city’s water infrastructure or the anti-corrosion methods being used. A preliminary estimate in a September daily briefing to Gov. Rick Snyder released along with some of his emails last week pegged the cost to replace lead service lines in the city at $60 million or more, but some Flint city leaders, including Mayor Karen Weaver, have estimated the bill could be as high as $1.5 billion. That’s probably excessive. Local experts told Crain’s the lead problem doesn’t seem to affect the entire city equally — but the briefing estimate seems to address only the cost of replacing service lines that directly connect to homes and businesses in the

city, not the mains or connectors that run for miles and might also hold lead elsewhere within the water system. State leaders budgeted $500,000 just to study the city’s water infrastructure. Another $2 million is proposed for “additional water system needs including new system infrastructure,” which Weiss said could pay for hookup costs and final piping work to get the city connected with the Karegnondi Water Authority system under construction. City leaders and the state DEQ have been discussing how to spend the funds, he said. But neither the interim reconnection to metro Detroit’s own Great Lakes Water Authority about two months ago, nor the Karegnondi connection later this year, can reverse the corrosion that’s already happened in water lines since the city separated itself from the Detroit system and began drawing water

from the Flint River in April 2014, experts said. At best the new sources can bring water with less corrosive agents, and keep things from getting worse. Actually removing lead from the water will involve either dosing the water supply regularly with phosphates, as Flint began to do last month, or installing new liners inside corroded pipes to separate the flow from the corrosion itself. The city expects the phosphates will coat the inner pipe walls and seams where corrosion has occurred, and take two to six months to begin lowering lead levels in city water. Snyder has said publicly he is expecting phosphate coatings to help address the immediate problem, and a portion of the budget supplement going to the Senate further funds anti-corrosion measures. But the bill is intended only to address immediate concerns in Flint, said Snyder’s spokesman, Dave Murray. Experts said coating is an ongoing commitment, and in many places only all-new pipes will completely solve the problem. Liners can help, and in some cases are about half the cost of new pipes, but they have limitations. “Six inches and up (pipe width) is the common application range for installing pipe liners. There’s some 4inch technology that’s come to the fore, but when you’re talking that size, there’s still a cost issue and (water flow) capacity issue,” said Fred Tingberg Jr., business development manager of Lanzo Lining Services, one of the Roseville-based Lanzo Cos. “And what about the pipe running up into the house? There’s no liner on the market that’s going to make its way up the street and into a home

Federal, state money infusion for water system repairs could aid F By Robert Snell rsnell@crain.com

Flint’s long-term economic decline isn’t being helped by the water crisis. But when state and federal aid starts flowing to fix an aging network of lead water pipes, the economy could see a boost, experts said. Work on the solution could be a boon for businesses and contractors tasked with replacing more than 15,000 lead water pipes, based on the experience of other cities that have suffered environmental disasters. The fixes won’t be cheap, and the $80 million President Barack Obama promised for Flint last week won’t cover the bill. It could take 15 years and $60 million or more to replace pipes that contaminated Flint’s tap water, according to Gov. Rick Snyder’s emails released last week, but Mayor Karen Weaver and other city officials have said replacing the entire system could cost $1.5 billion. Business leaders, residents and

environmental experts weighed in on challenges and opportunities facing Flint, which is trying to provide safe tap water while pursuing long-term funding. The money could help fix the water problem and stem damage to Flint’s economy, property values and the city’s beleaguered image, officials said. “The ability to sustain the shortterm focus and solve the underlying infrastructure problem, that’s always the challenge and will be the challenge here,” said Stephen Barnes, director of the Louisiana State University Economics & Policy Research Group. Snyder has appealed Obama’s denial of a disaster declaration, which would provide more financial help. A briefing released along with Snyder’s emails last week indicate there are more than 15,000 lead water pipes in Flint that need to be replaced at an average cost of $4,000 per pipe. The estimate, totaling $60 million, falls short of other recovery projects following environmental

disasters.For example, Enbridge En ergy Partners LP has spent an estimated $1.2 billion cleaning up an oil spill that polluted the Kalamazoo River in 2010. “No question there are business opportunities, despite how heartless or cold that might seem,” said Flint native Jimmy Greene, president and CEO of the Midland-based Greater Michigan chapter of Associated Builders and Contractors Inc. “It’s disingenuous to pretend that this won’t be a contractor boon.” The recovery effort likely will provide work for excavators, underwater welders, gravel and cement companies, and firms that specialize in heating, ventilation and air conditioning, Greene said. Nationwide, the country’s buried drinking water infrastructure needs more than $1 trillion worth of upgrades over the next 21 years, according to the Coloradobased nonprofit group The Ameri can Water Works Association. “This figure does not include the

cost of removing lead service lines on private property,” AWWA CEO David LaFrance said in a statement. Flint resident Mary Dye is frustrated with her private property, a two-bedroom, fire-damaged home three miles east of downtown. The house is for sale. Dye is asking $10,000, though she and a friend paid $55,000 nine years ago. But since listing the home in November, there’s been no open house, no offers. Now, there’s no chance of selling amid the water crisis, she said. “I’d take $2,000,” said Dye, 56, who cleans homes outside Flint for a living and fills up bottles of water at each home for cooking and for her dogs. Flint property values were plummeting before the water crisis, falling 20 percent from 2012 to 2015, according to Genesee County records. The impact of a prolonged water crisis on property values is unclear in a city and region trying to diversify following a loss of auto industry jobs, particularly at General Motors Co. GM remains the county’s largest

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DETROIT BUSINESS

e offing as Flint weighs next steps through that 3-quarter-inch line.” The Sept. 28 briefing memo to Snyder estimates that Flint has about 32,900 service connections to its public water systems, of which 15,000 might be “considered lead service lines.” At $4,000 per home, they would cost $60 million to replace, although some home replacement costs can run as high as $8,000. But the contamination might not be citywide, particularly since methods of laying and connecting pipes have changed dramatically over the past century in older cities like Detroit and Flint.

Kettering testing President Robert McMahan of Kettering University in Flint said in a letter to university parents and alumni last week that the university has tested water from six input lines to the campus 15 times in the last several months, and 12 of the tests detected no lead. Three samples that did found levels ranging from 1 part to 7 parts per billion — the U.S. Environ mental Protection Agency usually allows up to 15 parts per billion before seeking corrective action on lead. “These were single point in time detections; later repeat testing of the same distribution points detected no lead,” McMahan states in the letter. “(And) no lead has ever been detected in any water source used for food preparation.” At issue in Flint is lead within water pipes and particularly lead packing or “solder and flux” in the joints or seams connecting pipe lines, which cities used in pipe installation since at least the early 20th century. A 1986 amendment by Congress to the federal Safe Drinking Water

Act prohibits all but “lead free” pipes, solder and flux in public water systems or private plumbing lines that supply water for human consumption. The rule requires public water systems to have 0.2 percent lead solder and flux or less, and contractors who spot lead joints or solder during pipe maintenance are also supposed to report and replace them. But this rule is unevenly enforced and doesn’t address repairs where no digging occurs and no packing is seen. However, lead solder is usually external and coatings in the pipe interior and some naturally occurring mineral deposits within the lines keep the water out of contact with it — so long as the water itself isn’t too corrosive. Aggressive anti-corrosion treatments at the Detroit Water and Sew erage Department usually kept Flint and other communities with old infrastructure out of danger, until the city separated from DWSD and began drawing water from the Flint River in 2014. Local experts said that water source had more corrosive agents and wasn’t being treated as aggressively at first, until corrosion inside the pipes brought lead into the flow of water. Once that happened, virtually any pipes downstream from a leaching contamination point would be affected even if the other pipes contained no lead. The damage could be contained and reversed by installing new liners inside some pipes, said Tingberg and Jim Baglier, owner of Macomb Township-based Superior Lining Services LLC, because the water would no longer be in contact with the corroded surfaces. Local contractors like Lanzo, In land Waters Pollution Control Inc. and

d Flint’s economy, experts say employer with 7,500 employees, but that’s down from more than 80,000 in the late 1970s, according to a 2011 study by Michigan State University. Other top employers include Genesys Medical Center , McLaren Re gional Medical Center , Hurley Medical Center and Wal-Mart Stores Inc. , according to the Flint & Genesee Chamber of Commerce. A study following the 1979 nuclear meltdown on Three Mile Island in Pennsylvania shows a gap between perceptions about the economic impact of a crisis and reality. In July 1979, 32 percent of people polled believed that their property values had fallen and 9 percent said they knew people who had sold a home and received less money due to the meltdown, according to the 1988 study The Three Mile Island Crisis Psychological, Social, and Economic Impacts on the Surrounding Population” “However, subsequent studies of real estate sold near (Three Mile Island) showed no significant change in either volume or value of sales in the year fol-

lowing the crisis,” researchers wrote. Flint & Genesee Chamber of Commerce leaders are awaiting results of a survey sent to 1,200 members that could help pinpoint the economic impact of the water crisis. “Then we can zero in on their needs,” chamber CEO Tim Herman said. “There’s going to have to be a lot of resources pumped into Flint by the state and federal government to get the infrastructure right.” The crisis complicates his attempts to lure businesses and residents to Flint and capitalize on momentum that includes about $400 million invested in downtown since 2000. That figure includes money spent on University of Michigan-Flint residence halls, a proton beam treatment center and renovating a mass transit terminal. “You take a couple steps forward and three steps back,” Herman said. “We’re fighting a lot of negativity. The people here are strong and resilient, and I’m confident we will overcome this.”

Blaze Contracting Inc. all have held lining contracts with DWSD in the past, often in collaboration with St. Louisbased Insituform Technologies LLC. But the traditional “bag liners” that generally get installed inside a pipe cannot effectively seal up joints, or splits and intersections of pipes — and the tools that unfurl them have difficulty passing through pipes less than 6 inches in diameter. A more recent polymer spray-on liner can handle splits and joints or bends in water lines, and Baglier said his company has installed liners in 5inch lines before. But the cost can vary drastically depending on how many connections a length of pipe has, where in the city is being installed or even the place were it’s used. Baglier’s company finished installing liners at a site in Saginaw and another in Cleveland last year, but Baglier said his service is still more widely used in Canada than the U.S. “In Flint, there are probably many points of opportunity, where this kind of lining technology could help. But in many cases, when the lines start going down to a certain size they (cities) would just opt to replace them. It becomes a dollarsand-cents issue,” Baglier said. “And there’s probably more lead in the houses and the service lines entering them than some of these mains in the systems out there.”

Funding options The state budget supplement could reach the Senate by Tuesday. The measure also calls for spending: $36,500 on a year’s worth of anti-corrosion control, which includes adding phosphates to the water system to prevent lead from leaching from pipes.

$2 million for the replacement of plumbing fixtures, such as faucets and drinking fountains, in city schools, day care centers, adult foster care centers and nursing homes, hospitals and surgical centers — although that applies only to above-ground fixtures. $1.5 million for lead abatement at an extra 100 homes, with an estimated cost of $15,000 per home. Work could include removing lead from plumbing components, such as faucets, aerators or fixtures, short of replacing the entire home plumbing system, Weiss said. $90,000 for other residential lead investigations, particularly in homes of children with high levels of lead in their blood. Flint is certainly not the only Michigan city to rely on lead pipes to carry drinking water. But the city’s crisis laid bare the challenges of replacing underground infrastructure that is aging or failing, both in terms of cost and complexity. During his State of the State address last week, Snyder said he will create a commission to study Michigan’s infrastructure — water and sewer lines, roads and bridges and broadband Internet, among them. The commission will be expected to report recommended updates — and ways to pay for them — by September. Snyder called the state’s old underground pipes “a hidden problem” out of sight until the next power failure, flood or water issue. Yet as in Flint, lead underscored the point. “We need to invest more in smarter infrastructure so we avoid crises like this in the future,” Snyder said during his annual address.

Deloitte responds to Flint’s need Among business the citizens of Flint, Deleaders helping with the loitte has begun to work response to Flint’s water with Mayor Weaver and crisis is Mark Davidoff, her team to assess the Michigan managing situation, with sole partner for Deloitte, who focus on the path foris coordinating response ward for the city of from the accounting Flint,” Davidoff said in a and consulting firm. written statement. “As Mayor (Karen) Mark Davidoff Messages seeking Weaver continues her comment from the city efforts to respond to the needs of were not returned.

INDEX TO COMPANIES These companies have significant mention in this week’s Crain’s Detroit Business: 3 365 Retail Markets .............................................3 Beringea ..............................................................112 The Broe Group...................................................111 Companion ........................................................ 15 ContentOro ........................................................114 24 Flint & Genesee Chamber of Commerce......2 23 Flint Area Health Coalition..............................2 Gallagher Benefit Services ..............................118 Group Associates..............................................118 23 HealthPlus of Michigan ...................................2 23 Hurley Medical Center .....................................2 25 Lanzo Lining Services.......................................2 Michigan Angel Fund........................................ 13

24 Mich. Dept. of Tech., Management, Budget......2 Michigan State University ...............................114 Millendo Therapeutics.......................................111 23 Molina Healthcare of Michigan ......................2 Plymouth Venture Partners............................ 14 6 Quicken Loans.....................................................6 ReCellular ...........................................................114 Renaissance Venture Capital Fund.................111 3 Schmaltz Hospitality .........................................3 24 Superior Lining Services..................................2 Three Leaf Ventures...........................................111 3 Verii .......................................................................3 4 Wins for Warriors................................................4

www.crainsdetroit.com Editor-in-Chief Keith E. Crain Group Publisher Mary Kramer, (313) 446-0399 or mkramer@crain.com Associate Publisher Marla Wise, (313) 446-6032 or mwise@crain.com Editor Jennette Smith, (313) 446-1622 or jhsmith@crain.com Director, Digital Strategy, Audience Development Nancy Hanus, (313) 446-1621 or nhanus@crain.com Managing Editor Michael Lee, (313) 446-1630 or malee@crain.com Managing Editor/Custom and Special Projects Daniel Duggan, (313) 446-0414 or dduggan@crain.com Assistant Managing Editor Kristin Bull, (313) 446-1608 or kbull@crain.com News Editor Beth Reeber Valone, (313) 446-5875 or bvalone@crain.com Senior Editor Gary Piatek, (313) 446-0357 or gpiatek@crain.com Research and Data Editor Sonya Hill,(313) 446-0402 orshill@crain.com Editorial Support (313) 446-0419; YahNica Crawford, (313) 446-0329 Newsroom (313) 446-0329, FAX (313) 446-1687 , TIP LINE (313) 446-6766

REPORTERS Jay Greene, senior reporter Covers health care, insurance, energy, utilities and the environment. (313) 446-0325 or jgreene@crain.com Chad Halcom Covers litigation, the defense industry and education. (313) 446-6796 or chalcom@crain.com Tom Henderson Covers banking, finance, technology and biotechnology. (313) 446-0337 or thenderson@crain.com Kirk Pinho Covers real estate, Oakland and Macomb counties. (313) 446-0412 or kpinho@crain.com Bill Shea, enterprise editor Covers media, advertising and marketing, the business of sports, and transportation. (313) 446-1626 or bshea@crain.com Robert Snell, reporter Covers city of Detroit and regional politics. (313) 446-1654 or rsnell@crain.com Lindsay VanHulle, Lansing reporter. (517) 6572204 or lvanhulle@crain.com Dustin Walsh, senior reporter Covers the business of law, auto suppliers, manufacturing and steel. (313) 446-6042 or dwalsh@crain.com Sherri Welch, senior reporter Covers nonprofits, services, retail and hospitality. (313) 446-1694 or swelch@crain.com

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WEEK he Detroit Pistons were estimated by Forbes to be worth $850 million, a $40 million increase over 2015 and a $400 million improvement over 2014. The value ranks No. 22 in the 30-team National Basketball Association. Also, during an appearance in Detroit, NBA Commissioner Adam Silver was noncommittal about the possibility of the Pistons moving downtown from Auburn Hills but said he was “keeping a close eye” on discussions.

COMPANY NEWS 䡲 American Blue Ribbon Holdings LLC, the Denver-based parent company of the Max & Erma’s restaurant chain, suddenly closed eight of its 11 metro Detroit locations. A company statement cited “streamlining operations and underperforming locations” in closing sites in Ann Arbor, Auburn Hills, Canton Township, Livonia, Novi, Plymouth Township and Rochester Hills. 䡲 A subsidiary of Dan Gilbert’s Bedrock Real Estate Services purchased the three-building Lofts @ Woodward Center from a Farbman Group entity for an undisclosed price. Bedrock’s 1448 Webward Avenue LLC bought the buildings, plus a small surface parking lot, from Farbman’s Woodward Center LLC. The lofts, which consist of 61 residential units and 15,000 square feet of retail storefronts, are on the M-1 Rail line, to begin service in 2017. 䡲 Hogan’s, a fixture in Bloomfield Hills for 40 years, is set to close at month’s end, said a posting on the website of the golfthemed restaurant. According to the Detroit News, owner Richard Bochenek said the building at 6450 Telegraph Road will be torn down. 䡲 In an effort to expand its coverage of the city of Detroit, Detroit Public Television entered a twoyear agreement with the Detroit Historical Society to work from the Detroit Historical Museum. DPTV’s WTVS-Channel 56 will gain the use of more than 1,100 square feet of editorial space at the museum. 䡲 Rosemont, Ill.-based private equity firm Wynnchurch Capital LLC announced the establishment of a Bloomfield Hills-based industrial investing arm, Wynnchurch Industries LLC, to invest in industrial materials companies. 䡲 A federal class-action lawsuit filed against Ann Arbor-based Esperion Therapeutics Inc. alleged the drug-development company made false and misleading statements last year about regulatory

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ON THE WEB JAN. 16-22

Detroit Digits A numbers-focused look at last week’s headlines:

38,911

The net loss of residents Michigan suffered between July 2014 and July 2015, according to the U.S. Census. Young, educated people are leaving the state in great numbers, with a net migration loss of 0.7 percent of those ages 22-34 with a bachelor’s degree or higher.

15,000

The square feet in One Campus Martius, formerly known as the Compuware Building, that Plante Moran PLLC is adding. The Southfield-based accounting firm is doubling its current leased space with a goal of adding 70 more employees to its Detroit office.

The age of Howard Tanner, former director of the state Department of Natural Resources. Tanner is working with a Michigan State University-led effort called Project F.I.S.H. to educate youth on the importance of the Great Lakes.

hurdles it faced before it could commercialize its lead drug in fighting metabolic diseases. 䡲 Portland, Ore.-based Pendleton Woolen Mills is closing its three Michigan stores, including locations in Rochester Hills and Northville, by March.

䡲 The Kroger Co. of Michigan

plans to offer its Clicklist service providing online shopping and store pickup starting Feb. 3 at the new Kroger in Roseville. The service debuted in the state last month at a Northville location. 䡲 General Motors Co. is consolidating and expanding its carsharing programs under a new brand, Maven, in its latest push to adapt to new business models, Automotive News reported. 䡲 The Detroit Tigers signed free agent outfielder Justin Upton to a six-year, $132.75 million contract. Upton, 28, batted .251 with 26 home runs in 150 games last season with the San Diego Padres. Meanwhile, Southfield-based Fox Sports Detroit said it will air six Tigers spring training games in March. 䡲 The Detroit Lions selected Chicago-based Levy Retail Group as the new retail merchandise concessionaire at Ford Field, according to a report from Sports Business Daily, which did not report the deal’s financial terms or length.

OTHER NEWS 䡲 After securing $19 million in tax credit reservations from the Michigan State Housing Develop -

ment Authority, Troy-based nonprofit Community Housing Network will develop 72 new affordable housing units in Oak Park and Pontiac, with occupancy by the end of 2017. 䡲 Armed with nearly 3.1 acres of property ready for a new intermodal transit center along the M-1 Rail line, the Michigan Department of Transportation is expected to issue a request for proposals or qualifications this quarter that could lead the way for a new mixed-use development in the New Center area. 䡲 Detroit’s popular WRIF 101.1 FM “Dave & Chuck the Freak” morning show was renewed for an additional four years, through 2020, by station owner Greater Boston Radio Inc. Financial terms were not disclosed. The show, which began in 2001 on Windsor’s CIMX 88.7 FM, has been on WRIF since 2013. 䡲 Most of Detroit’s public schools closed for the day Jan. 20 due to teacher absences, as educators stepped up efforts to protest Gov. Rick Snyder’s plans for the district’s ramshackle finances and dilapidated buildings. Organizers said the sick-out was timed to coincide with a visit to the city by President Barack Obama for the North American International Auto Show, AP reported. Majority Re-

publicans in Michigan’s Legislature proposed legislation to make it easier to deem such work stoppages illegal strikes. 䡲 The U.S. Supreme Court refused to give businesses a new tool for stopping class-action lawsuits, saying a defendant can’t end a case simply by offering full payment to the lead plaintiff, Bloomberg reported. The 6-3 ruling was a setback for Detroitbased marketing agency Campbell Ewald, which was sued for allegedly sending unwanted text messages as part of a contract to help the U.S. Navy with recruiting. 䡲 Detroit-based Quicken Loans Inc.’s latest sports marketing initiative is a basketball ticket sweepstakes at 26 colleges, including the University of Michigan and Michigan State University. Participants will have a chance to win tickets for the 2016-17 season. 䡲 Former Detroit Mayor Kwame Kilpatrick is asking the U.S. Supreme Court to overturn his corruption conviction and 28-year prison sentence, AP reported. The request was recently made after a federal appeals court said in October it had no interest in taking a second look at the case.

RUMBLINGS UM-MSU rivalry game gets new Detroit-based trophy he winner of the Feb. 5 hockey game between the University of Michigan and Michigan State University at Joe Louis Arena will receive the new “Iron D” trophy. The Detroit Red Wings, who operate Joe Louis and play there, commissioned brothers Erik and Israel Nordin of the Detroit Design Center to sculpt the trophy. Most of the trophy is stainless steel, but the “D” is hand-forged carbon steel, Erik Nordin said. Other elements of the trophy will be a cup and a base that will list the winners of the game from each season. Details on the trophy will represent the game of hockey, both universities, the city of Detroit and the new Red Wings arena now under construction downtown. The commission price was not disclosed. UM hockey coach Red Berenson and MSU coach Tom Anastos visited the Nordins’ studio earlier this month to help forge the trophy centerpiece, a 1½-inch-thick iron letter “D.” The trophy will be awarded annually to the winner of the rivalry game at Joe Louis.

COURTESY DETROIT DESIGN CENTER

The “Iron D” trophy will go to the winner of the annual Michigan-Michigan State hockey game at Joe Louis Arena.

GM plans facelift for Renaissance Center General Motors Co. plans this summer to launch a large-scale renovation of its Detroit headquarters, the Renaissance Center. The 120,000-square-foot renovation will include an addition to extend the section of the complex housing the People Mover station

to Jefferson Avenue, Tim Mahoney, chief marketing officer and leader, global Chevrolet, and global marketing operations for GM, said during a media briefing last week. He declined to discuss the cost of the project or projected investment. Developed with GM’s design team, Neumann Smith Architecture and EWI Worldwide, the project is set to be finished before the end of 2018.

Local health care CEO to participate on Clinton panel Reginald Eadie, CEO of Detroit Medical Center’s Detroit Receiving, Harper University and Hutzel Women’s hospitals, will join a panel at Bill Clinton’s fifth annual Health Matters Activation Summit on Monday in

Coachella Valley, Calif. Eadie, an emergency physician who was a Crain’s Health Care Hero in 2013, is the only hospital executive to sit on the panel, which includes two other health care executives. Representing DMC and its owner, Dallas-based Tenet Health, he will discuss the nation’s health care challenges and rising death rates. This year’s Clinton health summit will focus on innovations in health, living longer and technology. Other panel members come from a variety of industries, including technology, business, education, sports and government. Clinton will moderate the panel, with members first sharing their perspective and expertise in front of an expected gathering of several hundred health care leaders.

Custom suit maker 1701 Bespoke opens in Midtown Custom men’s clothier 1701 Bespoke opened its flagship store last week at Woodward Avenue and Willis Street in Midtown Detroit. The opening marked the end of a long search for the shop, which closed its temporary pop-up space in the Chrysler House in the city in late 2014. It opened a satellite fitting room in Birmingham in April 2015. Build-out of the new 2,700square-foot fitting and showroom at 4160 Woodward Ave. cost more than $70,000, founder Max Schmidt said. 䡲

OBITUARIES 䡲

Glenn Frey, the Detroit-born,

Royal-Oak raised guitarist and cofounder of the famed rock band the Eagles, died Jan. 18 in New York City. He was 67. 䡲

COURTESY GENERAL MOTORS CO., NEUMANN/SMITH ARCHITECTURE, EWI WORLDWIDE

General Motors says its planned updates to the exterior of the Renaissance Center will act

as a beacon to draw people to the building on Jefferson Avenue in downtown Detroit.

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GMRENCEN, HART PLAZA

BOB AND MARLOWE ARE reflecting A NEW DETROIT. STORYTELLERS. HISTORIANS. REFLECTIVE DETROITERS. BOB AND MARLOWE TELL US WHY DETROIT’S HISTORY MATTERS. That everyone has a story – some epic, some small, but all meaningful. Bob Bury, Detroit Historical Society CEO, preserves Detroit’s remarkable stories and explains why they matter. Marlowe Stoudamire leads the Society’s Detroit ‘67 project, promoting an understanding of Detroit’s last 100 years – and showing how what we’ve learned can make us stronger going forward. Our shared history unites and inspires us, and makes us unique. Let’s keep making history, Detroit! GMRENCEN is celebrating the spirit and vision of the SHRSOH RI 'HWURLW /HDUQ PRUH DW UHŴHFWLQJGHWURLW FRP #REFLECTINGDETROIT