Ann Arbor startup companies thrive in recessions thanks to small budgets and big innovations

Editor's note: This is part of a series of articles about local companies surviving the economic downturn.

Recessions make life difficult for large companies, which provides opportunities for smaller, cheaper, newer alternatives to make inroads into their markets.

Duo Security co-founder and CEO Dug Song has helped start two companies during recessions because he believes that the opportunities presented are perfectly tailored to computer-security services sector he has helped pioneer in Ann Arbor.

Dug Song (right) founded Duo Security in the Tech Brewery before moving the company to new offices in Kerrytown last year.

Mark Bialek | For AnnArbor.com

Duo Security, co-founded with chief technology officer Jon Oberheide, develops two-factor authentication software that helps secure websites and information by requiring a second form of log-in often linked to a phone.

Song said the company has grown from just the two co-founders in 2010 to approximately 35 people in its new Kerrytown office. The company moved downtown in late 2012 after outgrowing its initial home in the Tech Brewery, a startup workspace that Song also helped found.

As with most startups, once acceleration starts the plan calls for rapid growth to continue. Song plans to add approximately 15 new employees before the end of 2013 and continue expanding his footprint in the former Bay Design building.

“The goal is always to grow. We don’t really want to build a small company,” he said.

“Part of the reason that we’re doing Duo is because Arbor Networks was somewhat limited. …We ran out of green fields at Arbor, which, in its lifetime over 10 years has only ever had about 400 customers. We have more customers with Duo in three years with fewer people. It’s a much broader opportunity.”

Duo Security’s customers include three of the top five social media networks and more than 1,500 other clients spread across approximately 80 countries. Information security is a hot market due to risks of cyber-attacks and sophisticated hackers making high-profile thefts of codes and passwords more and more common.

Being in a hot market also means a lot of competition, and that is partly why Song prefers to work in recessions. Having started multiple companies, he knows that not every startup will succeed, and the difficult sales conditions and lack of available venture and angel capital during periods of economic stagnation or contraction can hurt many companies in their earliest stages.

“Recessions are good for startups that know what they are doing because they clear the playing field of competitors,” he said.

For those software startups that do survive economic downturns, the circumstances can be the perfect because people and companies are more willing to listen to a sales pitch because they are already hunting for cheap alternatives.

“When you get into a recession, so are your potential customers,” he said.

“So if you’re a very lightweight capital efficient software startup and you can deliver products in ways that big companies can’t because they’re bloated and inefficient, you’re now at a major advantage.”

One place where emerging from a recession can be beneficial to startup companies is that investors gain confidence in the market and are more willing to invest in riskier ventures like startups. For Duo Security, which raised approximately $6 million in 2012, Song said more venture capital will likely be needed to continue or even accelerate the company’s pace of growth.

“Capital is oxygen to a company,” he said.

“While we’ll be cash flow positive shortly, the question is how do we capture the energy to grow the company quickly enough to compete with [current industry leader] RSA.”

As Duo Security continues to grow, Song has also kept his eyes on other projects in Ann Arbor that he helps nurture. Multiple companies that were formerly in the Tech Brewery are now operating in offices adjacent to Duo’s new home.

Creating a vibrant startup ecosystem begins with serial entrepreneurs mentoring younger first-time executives. Song said Ann Arbor is just waiting for one company to make a major exit that could really put the area on the map as a global technology center.

“I’m really excited about software startups and I know there’s a lot of good activity here in Ann Arbor,” he said.

“This is considered a major place for life science and pharmaceutical startups in large part because of Esperion’s first $1 billion purchase by Pfizer. We’ve had multi-hundred million dollar exits here with Arbor Networks, Accuri Cytometers, HealthMedia, and HandyLab. Those are base hits, we’re looking for a home run.”

Ben Freed covers business for AnnArbor.com. You can sign up here to receive Business Review updates every week. Reach out to Ben at 734-623-2528 or email him at benfreed@annarbor.com. Follow him on twitter @BFreedinA2.