January 4, 2012

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From Sparks to Flames

Igniting Utah’s Tech Industry

By Heather Stewart

January 4, 2012

The elements are starting to fall into place. For years, Utah’s tech industry leaders have tried to spark a big bang—a brilliant explosion in the number and quality of technology companies in Utah. The raw material is here: a strong entrepreneurial spirit, a tech-savvy workforce and an engaged, supportive state government. So what would it take to spark the transformation of Utah into the new technology hub of the West? The past five years have seen an unprecedented investment in the state’s technology industry. USTAR has brought new dollars to the state’s research universities. The Utah Fund of Funds is attracting out-of-state venture funding to Utah’s startups. And a myriad of other state programs, from the Centers of Excellence to the Business Resource Centers, have fostered the growth of new technology companies. “We’ve got the pieces,” says Brad Bertoch, president of the Wayne Brown Institute, an organization that coaches startups on raising money and entrepreneurship. “We’ve got to make sure that it’s fed right—that the infrastructure isn’t starved.” Utah is fortunate to have state and private universities that are renowned for technology, computing and life science programs. This, along with state leaders who are committed to economic development, has created a strong groundwork for the industry. “The question is how do we attain the elusive goal of critical mass, which is necessary to turn Utah into the next Silicon Valley?” asks Bertoch. Money Hungry Local technology experts say the most simple and obvious answer is to invest more money in economic development efforts, in expanded infrastructure and in new startup companies. New tech startups are struggling to find funding, especially now that the financial markets have tightened. “The complaint I hear the most is that there’s no capital in Utah,” says Blaine Nielsen, CEO of Doba, an Orem-based company that connects online retailers with wholesale suppliers. The Utah market could definitely use more investment capital and more financing options for small businesses, says Nielsen, but funding is available for promising young companies. “If the idea is right and the timing is right, it will happen.” Deals are still being made, even in this economy, agrees Mike Alder, director of Technology Transfer at Brigham Young University. BYU saw eight of its new technologies licensed in 2008; this year, it already has eight new licensing deals with six more in the works. “We have a very high rate of new startup companies coming out, but they have a hard time finding funding in this area,” says Alder. “But if they move, they can often find funding.” So while the research universities are generating new technologies and entrepreneurs are lining up to license them for startup or existing companies, many of these new ventures end up settling out of state. “I am worried that we don’t have the funding systems in place to keep these technologies here,” Alder says. Even so, access to capital has improved in Utah over the past few years. For example, the $300 million Fund of Funds invests in venture capital and private equity funds that, in turn, invest in Utah companies. “The Fund of Funds has fundamentally changed the venture structure of our state,” says Richard Nelson, president and CEO of the Utah Technology Council. “It has attracted more than 200 venture capital firms and created buzz for the state.” Will West, CEO of Control4 and chairman of the board for the Fund of Funds, agrees that the Fund was a huge step forward. “The barriers are coming down. We’re doing a lot of the right things,” he says. “The whole venture capital industry has really been hit hard. People are being more conservative. But venture capital people are still more than willing to look at Utah deals.” Another positive step forward has been the development of Utah’s network of private equity Angel groups, each of whom invests in a portfolio of local companies. The network has grown from a single group to about eight groups across the state. But according to Alder, this network could use some additional strengthening. For example, there is no Angel group active in Utah County. To support and strengthen the Angel network, Bertoch of the Wayne Brown Institute suggests the state offer a tax holiday on capital gains to Angel groups, provided they reinvest part of their gains in a new deal. The state can do even more to bolster young technology companies, says Bertoch, who suggests a state-sponsored revolving loan program that is venture-debt oriented. Such a program could provide small loans of up to $250,000 in conjunction with a bank or other financial institution. “If the loan is managed well, it gets paid out and replaced with a standard bank loan. The money in the fund is replaced and loaned out again to a new startup,” Bertoch explains. A Place to Grow Money spent on fostering technology companies is generally considered a good investment for the state. “Information technology contributes 25 percent of the state’s GDP—but only 6 percent of our payroll—and that is what has kept our state’s economy from cratering like so many others have,” says Bertoch. In general, technology companies pay higher wages than the state average. They also attract out-of-state talent and funding sources. So it makes good sense to promote the development of technology companies. But too many of the state’s efforts are spent on enticing companies to relocate to Utah, rather than on fueling the creation of brand new companies, according to Doba’s Nielsen. “The whole idea is to go steal jobs from some other place by offering incentives for companies to relocate. Those funds would be much better served if they were put into an incubator so we can grow new jobs,” Nielsen says. A technology-oriented incubator would better accommodate the needs of young, cash-strapped companies, say many tech leaders, including providing work space for startups. Standard office accommodations are often out of reach for the tiny tech companies that start out in someone’s garage or basement. Aside from the expensive lease payments, office space is generally not flexible enough to meet the needs of newly hatched ventures. “Small startups are usually made up of small groups of people living off of Ramen noodles and working late nights to develop technology that is going to be worth hundreds of millions of dollars,” explains Ryan Caldwell, CEO of EnticeLabs, an online sourcing and recruiting company based in Provo. In a typical office building, the air conditioning or heat is turned down after hours. Caldwell and his team quickly discovered that this makes it very uncomfortable to work late hours. EnticeLab’s landlord offered to keep the air on until late at night—for a fee of $700 per hour. “We have this amazing entrepreneurial mindset that is getting held down by the traditional corporate mindset,” says Caldwell. Besides offering after-hours air conditioning, the ideal incubator according to Caldwell, would offer workspace to several individual startups, as well as common areas that the companies would share: conference rooms, kitchen and break rooms, for example. Also, the companies would share infrastructure like multiple T-1 Internet lines and professional-grade phone systems. Incubators like these are scarce in Utah. In the northern part of the state, Grow Utah Ventures operates three incubators called “eStations.” Grow Utah Ventures has invested in numerous startups in the region, and hand selects businesses to use its eStations. But the only incubator in Utah County that Alder from BYU’s tech transfer office is aware of is operated out of Utah Valley University—and most of the businesses in residence there are not technology-oriented. According to Alder, the political will to create incubators is lacking among the county’s various cities, and no one has taken the lead. “Somebody has to do something,” he says. Caldwell believes there should be at least one incubator in every metropolitan area in the state. In fact, he would like to see local and state governments offer incentives to developers and investors for the creation of office buildings that are specifically geared to startup technology companies. “We are talking a sliver of a budget to encourage developers to create incubators,” he says. Tech companies of all sizes have difficulty locating buildings that are geared toward their industry, says Bertoch. “Most real estate companies just don’t understand the needs of high-tech companies.” Survival of the Fittest Of course, a startup won’t thrive without business acumen. But this is another area where incubators could play a vital role. Grow Utah Ventures, for example, provides mentorship and other assistance to the businesses in the eStations. Caldwell envisions incubators that provide shared wrap-around services such as legal, financial and business advice, or even classes on those topics. Furthermore, the businesses in the incubator could share the lessons they’ve learned through hard experience—something Caldwell calls “mindshare.” In the meantime, there are resources available to help new entrepreneurs get their feet under themselves. The State of Utah last year funded new Business Resource Centers, located primarily at state colleges and universities, which support new businesses with training, networking and technical expertise. The Business Resource Centers have been a welcome addition to the state’s economic development efforts. Bertoch would like to see the budget for the Business Resource Centers doubled from $125,000 to $250,000. “The resource centers have had a big impact,” he says. The Utah Technology Council (UTC) also provides valuable support and networking opportunities to local tech firms. The UTC hosts several peer-to-peer forums, which allow industry colleagues to discuss topics and share insights in a confidential setting. The organization has specific forums for CEOs, CTOs, marketing executives, human resource executives and many others. “Where else do they have a chance to refuel and network across the industry in a comfortable setting?” says UTC’s Nelson. And Utah entrepreneurs seem more than willing to share their hard-earned insights. “For the most part, people here are rooting for each other. They are willing to share ideas, and I think that’s really refreshing,” says Nielsen of Doba. What’s not so easy is attracting top-level executives from out of state. Such executives have a depth of experience that is not attainable in Utah, says West of Control4 “My company just opened a Bay Area office because we needed engineering talent that is not available in Utah,” he says. “The problem is finding people who have operational experience in large, $500 million companies.” The local talent pool at this level is certainly small. And the Utah market currently lacks the vibrancy—and the pay scale—to turn the pool into a lake. A Delicate Ecosystem Alder has a vision for the future of Utah Valley: he sees a technology corridor stretching from Pleasant Grove to Lehi, encompassing Novel, the Canopy Properties, commercial space at Thanksgiving Point and other new developments. “A Utah Valley technology corridor would help create a unified vision and image for the area,” he says. “The only way you’re going to have a technology hub is to have a large number of companies formed and continuing to form.” But tech leaders say the entire state needs to develop the same kind of unified vision for its tech industry. Caldwell from EnticeLabs describes the ideal technology ecosystem as a forest with large, mature trees, successful mid-size trees and numerous young shoots. “You can’t have tech startups thrive in an environment where they are isolated,” he says. “People don’t realize how delicate this ecosystem is.” When large companies move away or shut down, such as WordPerfect, most of the talented employees are forced to move out of state, unless there are many surrounding companies to absorb them. This loss of talent can cripple the industry for years to come. And, as West of Control4 explains, it makes it hard to attract experienced people to Utah. “If you move to the Bay Area for a job and it doesn’t work out, you know there are 1,000 other companies you can go to,” he says. But there isn’t the same kind of safety in numbers in the Utah market. Tech leaders say if Utah truly wants to develop into a regional technology hub—into the next Silicon Valley—it needs to expand its efforts to foster the growth of tech startups. “All of the raw elements are sitting here in Utah. If we make the right investments, we can really have a huge impact,” says Caldwell. Q&A with Josh James Utah Business editors speak to Josh James about Adobe’s $1.8 billion acquisition of Omniture and what it means to Utah’s growing technology community. UBM: Do you see Adobe’s acquisition of Omniture a boost or a hurdle to the state’s tech industry? James: The acquisition is another example that Utah can grow great companies. Adobe is a huge software company in the world and when a company like that comes along and says that it’s interested in a Utah company and in our market, that’s a good thing for the state. UBM: How does the acquisition affect the Silicon Slopes campaign? James: [The acquisition] reinforces the idea that you can build world-class companies here in Utah. It provides a reflective look at all these up-and-coming companies and reinforces to the rest of the world that a company in Utah can acquire other companies and become one of the fastest-growing public companies. It also reinforces the fact that there are strategic advances to doing business in Utah. One of those advantages is our employee base—we have a young, hard-working, educated employee base in Utah. UBM: With such a strong entrepreneurial spirit, Utah has potential to become a national tech leader. Why aren’t we there, yet? James: I don’t agree that we don’t have enough venture capital or the right infrastructure here to make Utah a great [tech community]. I think the challenge is we don’t have enough angel investors to help entrepreneurs get started. But once you get through that initial fire, world-class VCs will come to our state—they’re more than happy to get on a place and invest in the best companies that will give more return to their shareholders. What I also think we need is time. We need more time for more companies to grow into big companies. So many Utah companies get to $10 or $20 million and then sell. That doesn’t help build Utah’s brand [as a technology hotspot]. We need companies to grow to $100, to $200, to $300, to $400 million in revenue. That takes time. UBM: What does the acquisition mean for Omniture employees? James: Our employees are ecstatic about the opportunities. This acquisition will mean a lot of opportunity for them. Not only will Omniture run out of Utah, but certain Adobe functions will also run out of Utah. Utah will be an important geographic location for Adobe. I suspect that there will be many more employees at Omniture here in Utah in just a few years than there are today. It’s really an exciting opportunity for them. UBM: How will the acquisition change Omnitures’ goals and initiatives? James: There will be no dramatic changes. We’ve been a really healthy, fast-growing company—that’s what Adobe liked about us. Going forward, Adobe wants to accelerate the path that we’re on. Adobe is looking for more growth opportunities—we are complimentary to their business. UBM: What advice do you have for Utah’s entrepreneurs and technology community? James: It’s important that everyone in Utah has patience. It seems that there’s a desire for quick wins in Utah—with all of the get-rich-quick scenarios all over the state that feed into the patience problem. The reality is that [Omniture] struggled for the first seven years. We were turned down by almost every VC in the state. We finally figured out what we were doing and realized that the market was evolving. Today we’re one of the fastest-growing companies. Business leaders and investors need to be patient with the companies. Entrepreneurs need to have higher expectations and goals. So many want to get to $20 million and sell. We still want to get to a billion dollars as fast as we can. If we elevate our goals, we’ll elevate our companies and our community.
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