Detroit's Bankruptcy Filing Isn't A Fiasco, It's A Pivot

As embarrassing as the global headlines are, the bankruptcy filing represents quick action after years of inaction and ineffectiveness. Chuck Salter explains how filing for bankruptcy could signify a positive turning point for the city.

The tech world has a word for Detroit's bankruptcy filing yesterday, and it's not fiasco, fatal, or doomsday. It's pivot. If something fundamental isn't working—the business model, the core technology—you make a dramatic change, despite the risk and short-term pain. It's a gambit for the long-term survival of the enterprise.

While many outsiders are criticizing the city over its $18 billion in debt, which would represent the largest municipal bankruptcy in United States history (if a judge's objections today don't stall the process), some of Detroit's entrepreneurs see the petition as a long overdue and even bold step in the right direction.

"This is an entrepreneurial move," says Josh McManus, the founder of Little Things Labs, which created D:hive, a welcome and training center in downtown Detroit for entrepreneurs and newcomers. "It's the idea of failing faster to find a solution. You're putting one creditor on hold to regain control of cash flow to service your core business, which in this case happens to be the city of Detroit."

Earlier this year, I wrote about the new groundswell of entrepreneurs—some from the city, some from the likes of Silicon Valley—building a small but growing tech scene downtown. They're determined to plant the seeds of an economic recovery. At the same time, however, the city continues to crumble around them. As the population and tax revenue have shrunk in tandem over decades, city services have dwindled. Schools, police, fire—all of it suffered. As many as a fourth of the housing units are abandoned.

Last winter, Bill McGraw, the founder of Deadline Detroit, told me, "I’m tempted to write a story called 'What If Detroit Doesn't Get Any Better?' because I'm not sure Detroit has reached bottom yet. The city may be bankrupt by the time your article runs." (He was only off by three months.)

As embarrassing as the global headlines today are, the bankruptcy filing represents quick action after years of inaction and ineffectiveness. Just three months ago, Kevin Orr, a bankruptcy lawyer, was brought in by the state as emergency manager to rectify the city's financial mess. After trying to negotiate for creditors to forgive much of the debt, he opted for what many have long considered inevitable: restructuring (and hopefully reducing) those IOUs under the protection of a court.

Bankruptcy, says Bob Marsh, CEO of LevelEleven, one of Detroit's new startups, "gives me hope in what's going to happen next. For decades, those of us living here have seen mismanagement and corruption and the same pattern: a new mayor comes in with plans on how to fix things and yet they keep getting worse. A lot of people here have wanted this to happen. It's time to take drastic measures so the city can correct itself. Someone's finally willing to take a pivot here."

In talking to dozens of people at Detroit startups, big companies, foundations, and universities over several months, I was struck by how organic the recent entrepreneurial momentum is. Individuals are starting companies on their own, drawn to the opportunity (such as cheap office space) presented by the crisis. The city, strapped for resources, isn't doing much of anything for them. In fact, the local government looms as a threat to their progress. "If the city can't get back on track, the little ecosystem that's happening here is going to stall," says Marsh.

Yesterday perfectly embodied Detroit's dueling narratives: a city sinking further into trouble, and a city recovering some of its entrepreneurial mojo. (Detroit, the Silicon Valley of its day, gave rise to the auto industry, which shaped society here and abroad.) On the same day that the city moved to make bankruptcy history, Dan Gilbert, the founder and chairman of Quicken Loans, announced his latest plan. His real estate arm offered to buy an unfinished jail and convert the site into retail, office, and residential space. Since moving Quicken downtown in recent years, Gilbert, a native Detroiter, has invested more than $1 billion in his vision of a thriving tech community. He's bought and renovated office towers. He's started a venture capital firm (with fellow Michigander Magic Johnson). Gilbert is now the city’s third largest landowner.

His offer to replace an unsightly and over-budget jail near one of the city's jewels, the Tigers' home, Comerica Park, is yet another bet on Detroit's future. "Maybe it gets the next round of people mimicking Gilbert because they see his investment," says McManus.

In the meantime, it's business as usual at Marsh's startup, despite the city's bankruptcy plans. LevelEleven, launched in October and based out of one of Gilbert's buildings, makes a sales gamification app used by 3M, Delta, and 90 other companies. "We embrace the fact that we're in Detroit, and it works in our favor," Marsh says. "We're trying to revitalize the city. Clients say, 'Oh, we assumed you were on the coast. We’ve heard about the tech scene popping up there and we're pulling for you.'"

[Photo by Chuck Salter for Fast Company]