Can Sacramento End Its Innovation Drought?

The Sacramento-Davis Corridor: Seeding an Innovation Cluster

Xconomy presents a two-part series on efforts to transform the Sacramento region into a major new innovation cluster. Part 1, today, looks at changes in Sacramento that could make the city more hospitable for technology entrepreneurs. Part 2, coming May 15, focuses on nearby Davis—home to the University of California's leading agricultural campus—and its role as an innovation engine for the region.

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we’re always comparing ourselves [to Silicon Valley], and usually that doesn’t come out in our favor.”

Part of Arnold’s job is to share the region’s success stories and promote its strengths in areas like infotech, energy, agriculture, and medical technology. But while SARTA has been around since 2001, the devastating hit sustained by the state’s capital region during and after the recession means that in a way, the organization is still just getting started. If the tentative progress so far is to continue, the region will need to build up not just its public image but its financial and human capital.

That includes attracting more people like Eric Ullrich, the 28-year-old co-founder of a downtown co-working facility called Hacker Lab, which offers classes, workshops, cheap startup office space, and community events. He’s a native of Woodland, north of Davis, and went to college in San Diego, but came back after he was unable to find a job in Southern California. To Ullrich, the point of places like Hacker Lab—and the key to the region’s growth—is to cultivate an entrepreneurial state of mind in Sacramentans.

“Figuring out ways to inspire more people to do things and create things is, I think, the best thing we could do,” he says.

Planning for the Next Economy

If you’ve never been to Sacramento—or if you know the area mostly as a bathroom stop on the way to Tahoe, as so many oblivious Bay Area residents do—there are a few key points of geography to understand.

The city was built at the confluence of the American River and the Sacramento River beginning in 1848, the year gold was discovered in the Sierra foothills to the northeast. It’s been the state capital since 1854. It was the western terminus of the Transcontinental Railroad, and it’s still an inland port served by a deep-water ship channel that stretches 43 miles down the Sacramento River to San Francisco Bay. Crucially, it’s at the northern edge of the most fertile agriculture region on Earth, the San Joaquin Valley, which is famous for its grapes, raisins, cotton, almonds, pistachios, citrus, and vegetables, and accounts for about one-eighth of the nation’s entire agricultural output.

Dramatis Personae
A few of the Sacramento-area business leaders and innovators mentioned in this story
Bob Adams Director, UC Davis Sustainable AgTech Innovation Center
Meg Arnold CEO, Sacramento Area Regional Technology Alliance (SARTA)
Atri Chatterjee Chief Marketing Officer, Act-On Software
Jack Crawford General Partner, Velocity Venture Capital
Cleve Justis Executive Director, Child Family Institute for Innovation and Entrepreneurship
Dushyant Pathak Associate Vice Chancellor for Technology Management and Corporate Relations, UC Davis
Vivek Ranadivé CEO, TIBCO, Owner, Sacramento Kings
Dave Sanders Managing Partner, WorldBridge Partners, Mentor, SARTA VentureStart
Eric Ullrich Co-founder and COO, Hacker Lab
Peter Van Deventer Co-founder, SynapsSense, Board Chair, SARTA
Brandon Weber Manager, Urban Hive
Rob White Chief Innovation Officer, City of Davis

For most of the 20th century, Sacramento was a sedate place dominated by the farming economy, state government, railroads, a couple of military bases, and the businesses serving them. It was also prone to catastrophic flooding, which brought billions of dollars of state and federal spending on dams, levees, and other flood control projects.

In the 1980s, companies like Hewlett-Packard and Intel, looking for places to expand outside of Silicon Valley, began a high-tech transformation by building big campuses in the Sacramento suburbs. (HP still has 3,000 workers in Roseville, and Intel employs 6,500 people in Folsom.)

That helped seed the area with tech talent. During the dot-com years, startups in the region attracted a respectable amount of venture capital: $119 million in 1999, $372 million in 2000, and $203 million in 2001. The region also saw a few profitable exits. In 1999, Intel bought Sacramento-born Level One Communications for $2.2 billion. The following year, Agilent bought Folsom-based OSI for $665 million, and in 2006, Emulex bought Sierra Logic for $180 million.

But by the early 2000s, the pace of startup investment had cooled, and the small contingent of venture firms with offices in the region, such as American River Ventures and DFJ Frontier, had shrunk or become less active. Then came the recession, hitting Sacramento with a triple whammy: large-scale layoffs of state government workers, huge cuts in state spending on contract work, and a brutal correction in the housing market, which had become significantly overbuilt and overpriced.

If there is one priority on which every business leader in Sacramento now agrees, it’s diversifying the local economy. The region is still massively dependent on government jobs, with nearly 70,000 Sacramento County residents employed by the State of California, and another 30,000 working for the city, the county, and the local school districts. Together, these public employees represent about a quarter of the workforce. Then there are the healthcare giants—Dignity Health, Kaiser Permanante, Sutter Health, and the UC Davis Health System—which employ another 27,000 people in Sacramento County. There’s only one technology company, Intel, among the region’s top 10 employers.

In 2011, convinced that the region’s economic advantages were narrowing, several area CEOs, non-profits, and business leadership groups—including SARTA, the Sacramento Metro Chamber, the Sacramento Area Commerce and Trade Organization (SACTO), and Valley Vision—convened to draft a “prosperity plan” for the six-county capital region. Branded the “Next Economy” initiative, the plan calls for diversification through investment in high-tech innovation, especially in six industries where the Sacramento region already shows promise: advanced manufacturing, agriculture and food, clean energy, education, information and communication technology, and life sciences and health services.

Arnold, SARTA’s head, says there are three main reasons for the Next Economy emphasis on technology. First, when successful tech companies start to scale up, they can add jobs quickly. Second, the jobs they add are generally high-value, well-paid, knowledge-based positions. Third, tech companies are better than others at bringing in wealth from outside the region.

The California State Capitol was built between 1861 and 1874. Today, the state government is by far the Sacramento region's largest employer, with almost 70,000 workers. While the overall number fluctuates depending on the economy, government offices employ between 23 and 28 percent of Sacramento's workforce, according to SARTA chief Meg Arnold.

The California State Capitol was built between 1861 and 1874. Today, the state government is by far the Sacramento region’s largest employer, with almost 70,000 workers. While the overall number fluctuates depending on the economy, government offices employ between 23 and 28 percent of Sacramento’s workforce, according to SARTA chief Meg Arnold.

A car dealership might facilitate local economic churn—you buy a car, and some of the money goes to the dealer’s employees and their families, who use it to buy groceries, and so forth—“but that is not increasing the growth, the wealth of the region,” Arnold explains. Tech firms “do that until they are blue in the face.”

Arnold’s biggest effort of late has been to build three vertical programs—AgStart, CleanStart, and MedStart—focused on promoting specific industry clusters. In the sustainable agriculture cluster, she says, SARTA has identified 66 companies in the nine-county area around Sacramento. Most are in or near Davis. In clean energy, there are 99 companies, and in medical devices and biosciences, there are 137. The programs sponsor mixers, showcases, and other networking events designed to publicize the accomplishments of local firms and ensure that people working within each cluster get to know each other.

The area’s single largest engine for generating ideas that can grow into companies, Arnold says, is the University of California, Davis, which captured a stunning $754 million in research funding in 2012-13, putting it ahead of powerhouses like UC Berkeley, MIT, and Harvard. In fact, that’s where Arnold cut her economic-development teeth. From 2002 to 2008 she worked in the university’s technology transfer office, where she helped to run a program called UC Davis Connect that was designed, she says, to “better connect the intellectual horsepower of the campus with the commercialization potential of the private sector.”

But the program had mixed results, and only in the last couple of years has the university begun to experiment with … Next Page »

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

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