June 15, 2012 By Colin Wood
The American Dream is alive and well among tech startups.
There’s no shortage of entrepreneurs who believe that all it takes to become the next Facebook is a billion-dollar idea and the determination to see it through. Of course, taking a promising concept and turning it into a thriving company isn’t nearly that simple. At the onset, a budding enterprise needs money, office space and other resources.
Historically this support has been provided by private investors of all stripes — Wall Street funds, established corporations or interested tycoons. But increasingly, the public sector is participating in this ecosystem of assistance. Through weekend workshops, seasonal contests or permanent programs, governments nationwide are seizing this golden age of entrepreneurship with the hope of boosting local economies and building long-lasting innovation hubs.
Moreover, a growing number of C-level IT officials — whether they are CIOs, CTOs or chief innovation officers — are taking an active role in nurturing and engaging tech startups in order to spur economic development. And this type of activity isn’t limited to big cities anymore.
Situated between Los Angeles and San Diego, the City Council of Murrieta, Calif., can’t help but feel the community is somewhat overshadowed as thousands of its residents commute to those major metropolitan areas for tech jobs each day. The daily exodus isn’t just about losing the taxpayer dollars those employees spend while working outside of Murrieta. City officials also want local tech startups to locate or stay put in Murrieta — rather than leaving for greener pastures to the north or south.
That’s why Murrieta is taking the novel step of renovating its old city hall building and will offer it as $1 rental space to about four tech startups. The idea is the same as any other business incubator: help the little guy until he’s big enough to return the favor to the city. But for Murrieta, it represents a lot more than that, said Mayor Doug McAllister.
It’s about developing Murrieta to its full potential and helping the city stand out. Many consider Murrieta part of Southern California’s sprawling Inland Empire, McAllister said, but in terms of demographics and crime statistics, that couldn’t be further from the truth. Murrieta is one of the fastest-growing cities in California, and in 2009 was also ranked the second safest U.S. city with more than 100,000 residents. The city’s leaders hope that these attributes — and a bit of assistance in the form of cheap office space — will be enough to retain the area’s local tech startups.
“We are Southern California’s best-kept secret. When folks discover us, it’s like, ‘Why didn’t I know about you before?’ And we hear that all the time,” McAllister said.
Business incubation is a means for Murrieta to reach its potential, to become the “post-recession boomtown” that Forbes.com said might be possible once the recession settles. Gallup CEO Jim Clifton outlined in his book, The Coming Jobs War, the type of cities that will create jobs and wealth in the future, and Murrieta is the poster child for that kind of city, McAllister said. “It’s like this perfect petri dish for the future of job creation and wealth creation — and when folks get here, they discover it,” he said.
There is no one cookie-cutter approach to business incubation. Murrieta is targeting biotechnology companies with similar specialties in the hope they could help one another succeed, McAllister said. Rather than settling for a “shotgun approach” that takes on any company that arrives in town, he said Murrieta has a laser-like strategy: defining the type of industry the city wants, finding the companies that fit that mold, and then bringing those businesses there.
One of the companies that may be moving to Murrieta is a 3-D imaging company with applications in defense and medicine called Tactical 3rd Dimension Systems, said Bruce Coleman, Murrieta’s economic development director.
The city wants to create a reputation as a place that picks good companies and gives them the help they need to succeed, Coleman said. Part of fostering success, he said, is creating mentor networks, holding educational seminars and involving local entrepreneurs, in this case through the Murrieta and Temecula Valley Innovators group.
One thing Murrieta isn’t doing is throwing money at the issue. Repairs to the old city hall building, which cost about $10,000, would have been done regardless of startups moving in, Coleman said. The space isn’t a good fit for private rental, he said, so the city decided to make the best of the situation and find promising startups to move in instead of leaving the building to rot.
“We have to be very careful that we are including companies that really do have the potential to grow locally in the Murrieta area — and then create jobs.” Coleman said. The city can’t depend on the state or federal government to help create jobs. “It’s our responsibility, at the local government level, to encourage the private sector to want to grow in our community and find a mechanism to grow.”
At first glance, business incubation seems to be something that should be left to a chamber of commerce. Many larger cities and state governments also have an economic development department that gets involved. But more and more, CIOs and other public-sector IT positions also are lending their expertise.
This is especially true in big cities like Louisville, Ky., and Chicago. They have a CIO in charge of the inward-facing technology infrastructure that’s essential for operating the government, while the CTO takes care of outward-facing functions that include business development.
“But many cities are not large enough to split those roles, or don’t have the funding to split those roles,” said Bill Schrier, the longtime CTO of Seattle who recently left public service to become the deputy director of e.Republic’s Center for Digital Government. “And in those places, the mayor or the county executive, the governor — in the case of a state — need some sort of adviser on tech incubation.” In many cases, the CIO is that adviser.
Schrier did just that in Seattle, where he advised the city’s Office of Economic Development and its 12-person staff. When the mayor wasn’t available to make a speech at the opening of a new IT business, Schrier often would fill in. He also would tweet about promising local tech startups, and set up impromptu lunches with entrepreneurs he met. And in 2010 when tech giant EMC bought Isilon, a Seattle-based storage company, Schrier initiated dialog. “I took folks from the city government down to talk to them about the potential use of their products,” Schrier said. “And we’re going to start a collaboration where we’re using more EMC products because they have a superior backup solution.” He also spent time talking to Microsoft, which is headquartered in the neighboring city of Redmond.
In addition, Schrier helped facilitate public-private efforts that support incubation. Recently Seattle partnered with Startup Weekend, an organization active in about 200 cities worldwide, that hosts 54-hour events connecting aspiring entrepreneurs with established industry veterans and investors in the hope that successful new companies will be born then and there.
Startup Weekend doesn’t usually focus on government, but last fall the organization held education-focused programs in several cities, which led to a $250,000 grant from the Bill and Melinda Gates Foundation. In April, Seattle saw the first Startup Weekend with a government focus, called Startup Weekend GOV.
Startup Weekend GOV was originally to be organized by local business owner Marina Martin, entrepreneur and attorney Eric Koester and others, but Koester left Startup Weekend to run Zaarly, an online commerce startup that has now raised millions, after catching the attention of actor Ashton Kutcher at a Startup Weekend event in Los Angeles.
Stories like Koester’s are a big part of what’s attractive about getting involved in the tech startup world. “I think people hear that story and it’s kind of like winning the lotto but with much better odds,” said Martin, who is chair of the Evergreen Apps Committee on Seattle’s Citizens’ Technology and Telecommunications Advisory Board.
Startup Weekend GOV was a collaboration between the Seattle, King County and Washington state governments. The goal of the weekend was to find credible business ideas, increase awareness of government data sets, and begin long-term relationships with local developers and entrepreneurs.
In this case, government did a lot more than pay lip service and foot the bill. “All three governments have also put significant staff resources behind it,” Martin said. “They didn’t just hand us off and say, ‘do what you want’ – they’re very involved.”
The payoff is facilitating communication between government and the public that isn’t usually possible, Martin said. “Normally I can’t go to the city municipal tower, plop down my laptop and work with the city development team — and maybe get some feedback from the mayor.” There wasn’t a mechanism to do that before. “The long-term ripple effect of just getting these people together for a weekend at City Hall is going to be far reaching.”
Although technology incubators have been around for decades, we could be seeing a new resurgence, said Maris McEdward, Startup Weekend’s community manager.
“I think that people are starting to see that job growth is coming from startups and very young businesses. On an aggregate level, that’s creating hundreds of thousands of new jobs,” McEdward said. And those with money and influence have noticed the power of these small companies and are trying to harness it.
The government-funded incubation in smaller cities like Murrieta and metropolitan areas like Seattle are emblematic of a trend that appears to be catching fire across the country.
Evanston, Ill., decided in February to continue funding the local nonprofit incubator Technology Innovation Center, despite some controversy that the city was funding companies that were simply leaving after finding success. Evanston officials decided that incubation was still a worthwhile investment because of the companies that stayed and the always-present possibility of finding the next big thing.
San Francisco partnered this year with Google, Code for America, The Ewing Marion Kauffman Foundation and angel investor Ron Conway to create a yearlong fellowship program that will build relationships between developers and government to get tech startups more involved with government projects. Code for America will also host a citywide app competition in conjunction with the incubator.
In May, Chicago opened a new 50,000-square-foot office rental space called 1871 that has room for 100 small startup companies. The center charges between $125 and $400 for monthly rent and offers access to conference rooms, storage space, audio and video equipment, mentorships, classes and seminars.
And one of the nation’s most ambitious incubators is set to start this summer 2,000 miles east of Murrieta in Chattanooga, Tenn.
Like Murrieta, Chattanooga wants to be an innovation hub that rises to the topin the post-recession economic pecking order. But Chattanooga has a different philosophy on how to best distinguish itself.
Chattanooga has both private and publicly run business incubators, including a publicly run 125,000-square-foot facility that’s among the largest in the country. With a fiber-optic network that offers 1 GB Internet speeds to a 600-square-mile area, Chattanooga is branding itself the “Gig City.”
This summer, the city will host a two-part event called “Gig Tank,” backed by Chattanooga, Hamilton County and several private-sector sponsors. For the three-month event, entrepreneurial teams will be given $15,000 each to create an idea and business plan, the best idea will receive a $100,000 prize in August. There is also a student-oriented event, with the best idea will receiving $50,000 and a chance to pitch the idea to informal investors.
The best incubation strategy is to create an environment where businesses either fail quickly or show promise that they can succeed, said J. Ed. Marston, vice president of marketing for the Chattanooga Area Chamber of Commerce. “It’s very important to make sure that there are accountabilities in place so that you don’t end up, in effect, propping up a company that can’t really survive in the market,” he said. “When it comes to entrepreneurial ventures, it’s not necessarily about the idea, it’s not necessarily about the technology. It’s about technology, idea, leadership and timing. So there’s a real value in creating a situation that isn’t about making every venture work.”
Every company should get a fair shake, Marston said, but once the resources, infrastructure and public-private partnerships are in place, it’s up to the business to survive. The Gig Tank should create a good test environment for success, he said, because it’s short enough to create a sense of urgency and long enough that something substantial can be created.
The popularity of business incubation in its many forms is a kind of insurance, Marston said. Just as individuals diversify their stock portfolios, governments are diversifying the businesses that feed their economies. “So even if you’re fortunate enough to have very successful major employers, it behooves you to have lots of new companies starting up all the time. Hopefully some percentage of those will eventually grow up into major employers,” he said.
With business incubation taking all sorts of forms and permutations, it’s unclear which method is best. Each region is different and may require a different approach, and there are points upon which reasonable decision-makers can disagree. But there are a few traps that every government should avoid, said Paul Kedrosky, venture capitalist and adviser to the Kauffman Foundation.
When any government wants to be directly involved in incubation, it’s important to realize that the private sector is both aware of incubation and has enough money to carry it out, Kedrosky said. “So you have to ask yourself, ‘Why isn’t it happening in this particular region?’ The answer could very well turn out to be that there simply isn’t the same opportunity there. The government is just going to lose its shirt.”
In areas where infrastructure already exists, the best incubation projects are ones that spend money on the companies themselves, not more infrastructure, Kedrosky said. “You want to have something to show taxpayers, you want to have something to show voters,” he said.
Business incubators are popular because they work and they’re easy to emulate, Kedrosky said. Perhaps more importantly, technology has become affordable. “The cost of company creation, specifically in IT, media, Internet services, has plummeted in the last 15 years,” he said. What cost $3 million or $4 million to do back in 1998 now probably costs $30,000 or less today. That’s an important factor in why these accelerators are taking off.
“A mistake a lot of cities make is to say, ‘I want to keep people here.’ Well, that’s not the right way to think about it,” Kedrosky said. “The right way to think about it is in terms of this notion of flux.” You’re not trying to turn someone who’s a doubtful candidate for a tech startup into a tech CEO. That’s just a low-probability proposition. It may happen, but it’s not the right place to focus, Kedrosky said.
“You want to create the infrastructure where people who might otherwise have left, will come to your region and do what they were going to otherwise do there,” Kedrosky said. Put together a constellation of services around acceleration, and then build a community of like-minded people who inspire one another to innovate.
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