Santa Cruz, the City Over the Hill, Works to Build Its Own Startup Culture

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295 days a year of beautiful weather. It has life balance. It is a great place to raise kids. And if you have to go over the hill, you are close enough to go once every few weeks.”

Of course, many residents go way more often than that, which is part of the city’s problem. Santa Cruz proper is home to 60,000 people, not counting the neighboring cities of Scotts Valley and Capitola, and there are estimates that nearly half of them—some 20,000 to 30,000 people—commute over Highway 17 to Silicon Valley every workday. Buses from Apple, Google, and Microsoft whisk Santa Cruz residents to their offices in Cupertino and Mountain View, exporting the city’s talent in what amounts to a massive, daily brain drain.

Many in the business community would like to see more of those people plying their skills and generating economic activity in Santa Cruz. “This community is filled with brilliant people,” says Andy Halliday, a serial entrepreneur who leads a mobile social networking startup called Erodr and has lived in Santa Cruz since 2001. “What I would want more than anything else is to create conditions to farm the best ideas here, instead of shipping them to Silicon Valley.”

The young companies that do set up shop in Santa Cruz choose the city for some of the same reasons as individual residents: they’re looking for a place where people think a little differently. Robert Singleton, a recent graduate of the University of California, Santa Cruz, is co-founder and chief marketing officer at Civinomics, a downtown startup building a Web-based suggestion box and citizen engagement forum for civic-improvement projects. He says Santa Cruz is a far better fit for his policy-minded company than Silicon Valley would be.

“With people who are working in Palo Alto, a lot of times it’s about, ‘How are we going to make money? What is the next big thing?’” Singleton says. “In Santa Cruz, it’s more like, ‘What problems do we really want to solve? How can we add some value to the community in which we live?’ There is a focus on generating a unique style of innovation, rather than on the next Angry Birds.”

And there’s another advantage to starting up in Santa Cruz: it’s an authentic place to find many of the amenities, from vegan cafeteria options to yoga studios to bike trails, that big companies try to simulate at their Silicon Valley campuses. “When I go to the Valley and I look at the tech companies, I feel like they are trying to create what we have in Santa Cruz,” says Rosas, whom I met outside Verve Coffee Roasters on Pacific Avenue, the city’s leafy, animated downtown hub. “You know how the Google campus has people riding their bikes around and eating beautiful organic food? Well, this is our campus.”

Unfortunately, investors don’t always buy these arguments when startups say they want to stay in Santa Cruz. I’ve talked to entrepreneurs and lawyers in the city who say they’ve repeatedly run into Sand Hill Road venture partners who refuse to invest in any startup that’s over a hill (or a bridge, for that matter—meaning startups in places like San Rafael and Berkeley and Fremont may be in the same boat).

Santa Cruz business attorney Jason Book (left) and Erodr CEO Andy Halliday, overlooking Capitola's most popular surf beach.

Santa Cruz business attorney Jason Book (left) and Erodr CEO Andy Halliday, overlooking Capitola's most popular surf beach.

Jason Book is the younger member of Book & Book, a father-and-son law firm in Santa Cruz that specializes in representing emerging companies. One Menlo Park-based venture partner, he says, “told us flat out that there was a time in venture investing where if the deal was more than 20 minutes away, partners wouldn’t even bring it to committee, it’s not going to get done. And he said there are plenty of VCs who still feel that way.”

Halliday, who’s surfing buddies with Book (I interviewed the pair on a seaside bluff in Capitola), shared a similar story. “One of the VCs we spoke to recently said, ‘We really want to track this [Erodr]. We think it has great promise. Reach out again when you have relocated your company over to the Valley.’”

For that reason and no other, Halliday says, Erodr is reluctantly considering a move to Los Gatos. Score one more for the brain drain.

Surfing, Cycling, and Sustainability

After hearing a couple of these stories, I began to ask venture investors I know whether they would have a similar reaction to a pitch from a Santa Cruz startup. No one said they’d rule out a Santa Cruz investment based on geography alone. But one useful insight into the venture mindset came from Norm Fogelsong, general partner at Institutional Venture Partners, a large and prestigious late-stage venture capital and growth equity firm in Menlo Park.

Fogelsong says he asks three questions whenever he’s evaluating companies outside Silicon Valley and other traditional startup clusters. “First, is there a unique expertise within the geography, whether it’s manufacturing or bioengineering or whatever? Second, are there examples of success that people can point to within that geography, so it creates a positive ecosystem and inspires entrepreneurs to emulate what others have done? And third, is there a sufficient number of qualified people within the geography that could help you grow a company, or are you limited in scale by the population?”

(Interestingly, IVP was one of the founding investors in Seagate Technology, the hard-disk manufacturer founded in Santa Cruz in 1979 by longtime resident Al Shugart. “They built a very nice company because the founders wanted to live there, and a lot of people moved there or were willing to do the commute,” Fogelsong says. “But one of the scaling issues was, could you get enough trucks over 17 to ship the product?” Seagate eventually moved to Cupertino.)

Fogelsong’s questions provide as good a framework as any for examining Santa Cruz’s prospects as an innovation hub. To the first question—what are the region’s unique areas of expertise?—virtually every Santa Cruzan would start off with the same answer: healthy living, outdoor sports, and recreation, especially surfing, skateboarding, biking, fishing, and whale watching. Santa Cruz Bicycles, Santa Cruz Skateboards, Santa Cruz Surfboards, and Arrow Surf are some of the city’s iconic brands in this sector. Every year, three million people visit the Santa Cruz Beach Boardwalk, California’s oldest amusement park. And the wetsuit was invented by longtime Santa Cruz resident Jack O’Neill, which may tell you all you need to know. “If you go to the coffee shop, people are talking about the weather and the surf, not ‘Did you hear about this or that IPO?’” says Rosas.

But it’s not just about boards and bikes: the CrossFit craze is the invention of Santa Cruz native Greg Glassman, and in 2012 the Golden State Warriors NBA franchise relocated its development-league team to Santa Cruz. Wilder Ranch State Park, a former dairy ranch on the west edge of town, boasts 34 miles of trails, and it’s not unusual to see … Next Page »

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Wade Roush is a contributing editor at Xconomy. Follow @wroush

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