Reports of Motor City’s death have been exaggerated, although not greatly so. Detroit is a poster child for downtrodden America, having shed an astronomical number of manufacturing jobs decades before the Great Recession further hastened (and broadened) that economic decline. Detroit the Dinosaur hardly feels like the right place to investigate pockets of American innovation.
And yet. In a converted theater in downtown Detroit, Detroit Labs  is a testament to the city’s resilient spirit of invention. The one-year-old startup designs and builds mobile applications, including Domino’s ordering app , which accounts for $150 million in annualized revenue, and the Chevy Game Time app , which dominated the Super Bowl last January, outranking Angry Birds for a time in the iTunes app store. Since turning a profit (in year one), Detroit Labs has activated phase two of its business plan: letting its developers work one day a week on totally independent projects. That’s right. Employees get paid to futz around.
How was Detroit Labs able to build a successful business, while devoting 20% of billable hours to personal work? And what can other startups learn from that experience? The answers lie, in part, in the city of Detroit itself.
Detroit Labs’s four cofounders went into business with a long-range plan: start a sustainable business based on client work, then carve out one workday exclusively for independent projects.
Cofounders Paul Glomski and Dan Ward both grew up in suburban Detroit and knew not to underestimate the power of local pride. “Despite the bad press it gets, the industry around Detroit drives a real economy still,” Glomski says. That economy is indeed realer (and less sick) than most outsiders suspect: $197.7 billion GDP in 2010 (according to Greyhill Advisors ) with 9.9% unemployment per Bureau of Labor Statistics data in May.
“When you’re a startup also in Detroit, they take notice of you,” Glomski says. “If we weren’t down the street from GM, would we have gotten the Chevy Game Time business? It’s hard to say. But that was a factor in them choosing us.” Detroit Labs also tapped other area businesses like QuickenLoans (where Ward was previously employed), wall graphics company Fathead , and Stryker , a Fortune-500 medical devices company based in Kalamazoo. “Because we’re doing premium services on an agency model, you don’t have to work a million hours a week,” says Glomski. “That frees us up to do the cool stuff we came to do in the first place.”
Glomski has a name for this business model: “the innovation factory.” “What that means is we do high-end client services work,” he says. “One day per week, we spend on lab time--that’s product development for our own products.” Ward clarifies: “It’s a different model from Google’s--they focus their 20% creative time towards making their own products better, enhancing their business. Our goal is to empower the actual developers to become entrepreneurs.”
The idea is to resolve the dilemma every hot young mobile developer faces: should you take a steady-paying gig that runs on billable hours, but drains you creatively? Or start your own business without a financial safety net--with a founder’s payout if you’re successful? Detroit Labs provides both, offering founder-like incentives to developers if their product ideas spin off. That notion of lucrative spinoffs is as-yet untested, but the cofounders have carved out a deal with their own backers Detroit Venture Partners  that encourages startup creation (and, it's hoped, VC-like exits in the future).
“It attracts good talent, it creates a culture of innovation, and it’s a multiplier for the one day per week of business time we spend on it,” Glomski says. “The lab stuff also helps to sell client work,” Ward adds. “We showed Chevy all this cutting-edge stuff we’re making that nobody’s doing yet, and they loved it. It’s R&D on their behalf.”
Both Glomski and Ward are emphatic Detroit boosters--with more-than-visible chips on their shoulders about their much-maligned city. “We’ve got that blue-collar work ethic here in Detroit, which is really needed in a startup,” Ward says. Plus entrepreneurs “can actually make a difference here. In New York, you’re one of a zillion people ‘making a difference.’ There’s kind of a renaissance going on in Detroit. Any single person can have a massive impact on the larger outcome. It pushes people to do great things.”
“We have phenomenal universities here [in Michigan], feeding the coasts year after year,” Glomski adds. “There’s no reason as opportunities grow that people won’t want to stay here. Detroit is also extremely entrepreneurially friendly. Because we’re a community of people changing this city for the better, we help each other out. You won’t find that in San Francisco.”
When asked how he counters Detroit skeptics, you can hear Glomski winding up into a less-than-mild-Midwesterner riposte. “Here’s where you’ll find a company like Detroit Labs, where in a year’s time we’ve done amazing things,” he says. “We won a Gold Lion at Cannes Creativity Festival. We’ve grown a talented group of 20 developers and designers that companies like Zynga and Facebook would love to have. We make real revenue; we’re profitable. How many startups in San Francisco or New York could you say that of in their first year?”
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[Image: Flickr user Kevin Goolsby ]