Can Sacramento End Its Innovation Drought?

5/14/14Follow @wroush

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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they’ll be here all the time,” Pathak says, referring to a running joke from the TV sitcom Everybody Loves Raymond. “But you don’t want them too far away, or when they come to stay, they’ll be here for a month. You want them close enough that you can send them home in the evening.”

What is not in dispute, however, is that the Sacramento area has a shortage of Silicon Valley-style local investors able to put significant sums into area startups. Ullrich calls it “a huge missing factor.” Cleve Justis, executive director of the Child Family Institute, says it’s “the biggest barrier” to startup growth in the Sacramento region.

When Peter Van Deventer left Intel to co-found Folsom-based data center monitoring startup SynapSense in 2006, he was able to secure most of the early funding from the two leading local venture firms, American River Ventures and DFJ Frontier. But both firms have long since scaled back their Sacramento-area investments. “There is a lot of angel and seed money, but you don’t have the classic, quarter-billion-dollar funds lying around,” says Van Deventer, who is now chairman of the board at SARTA. “So you have to hit Highway 80.”

Sacramento has also failed so far to spawn or attract the big technology-company headquarters that could help put the city on the map—the way Microsoft did in Seattle or Dell did in Austin—and give local tech workers the flexibility to move sideways. “When Google and Apple and Yahoo are constantly ripping employees off one another, you have a different capability,” says White.

Sacramento has tried to grow its own big companies, but like Boston and other hubs, it often loses these companies to far-away acquirers once they reach a certain size—witness Level One’s acquisition by Intel, or AgraQuest’s purchase by Bayer CropScience. A buyout can result in a nice payback for the founders and investors, but “you lose the biggest part of the benefit [of local ownership], which is that the leadership feels more invested in the region,” says Sanders, the executive recruiter. “If the headquarters is in Austin and the developers are here, there is no commitment back to Sacramento.”

“What we are trying to do now is hit mostly singles, but over time we need a home run,” Sanders says.

New Arenas for Entrepreneurship

But the more relevant metaphor for the city is basketball, not baseball. Sometime this month, if all goes according to plan, demolition will begin at Downtown Plaza, site of the new $477 million Sacramento Kings Arena.

When it opens in 2016, the arena will be a proving ground for new e-commerce and social networking technology as much as it will be a sports stadium. “It’s going to be cashless, ticketless, frictionless,” claims Vivek Ranadivé, leader of the Kings’ new ownership group. (Don’t underestimate Ranadivé’s tech chops: his company TIBCO supplies real-time communications software to thousands of large enterprises, and he’s credited with helping to invent computer-driven stock trading on Wall Street in the 1980s.)

Demolition crews will soon converge on Sacramento's Downtown Plaza mall, which will be razed to make way for the new Sacramento Kings arena.

Demolition crews will soon converge on Sacramento’s Downtown Plaza mall, which will be razed to make way for the new Sacramento Kings arena.

“What is it that keeps a city together?” Ranadivé asks. “It’s really the gathering places, the coliseum, the arena. What we are doing in the downtown is going to be the spark that ignites the fire.”

Indeed, business leaders around Sacramento hope that the arena project will have big knock-on effects, the same way Camden Yards has boosted Baltimore’s harbor area. “The new arena is going to create a revival of downtown Sacramento and make it much more of a destination city than it has been before,” says Van Deventer. “The financial group that is now in ownership of the Kings is a very wealthy, technology-savvy organization. They want to turn the Kings into the premier technology-marketed sports company on the planet. That means they are going to do things that are very creative and innovative.”

Artist's rendering of the new Sacramento Kings arena, scheduled to open in October 2016. “When we bought the Sacramento Kings, we committed to the NBA and to the people of Sacramento that we wouldn’t just build a new arena, but that we’d build a world-class entertainment venue, an arena truly for the 21st century,” says Vivek Ranadivé.

Artist’s rendering of the new Sacramento Kings arena, scheduled to open in October 2016. “When we bought the Sacramento Kings, we committed to the NBA and to the people of Sacramento that we wouldn’t just build a new arena, but that we’d build a world-class entertainment venue, an arena truly for the 21st century,” says Vivek Ranadivé.

But that’s all in the future. Meanwhile, there’s a fair amount happening already to strengthen the city’s entrepreneurial base.

Sacramento may not have any quarter-billion-dollar venture funds, but it does have Velocity Venture Capital, a $20 million fund run by general partners Jack Crawford and Jacob Jorgenson. Crawford is a Kauffman Fellow, a former PriceWaterhouseCoopers CPA, and an Ironman triathlete who believes that it’s important that early-stage companies in Sacramento have more access to local capital.

“We launched Velocity with the idea that there is this flow of entrepreneurs from Sacramento to Silicon Valley,” Crawford says. “We said, what if we could fund companies at the seed stage here, and the follow-on could come from Silicon Valley? UC Davis is doing some exciting things, but UNR [University of Nevada, Reno] and University of the Pacific are also graduating entrepreneurs who are recognizing that Sacramento has a lot of the ingredients of an innovation economy.”

One new ingredient is Velocity’s Entrepreneurs Campus, which opened in downtown Folsom on March 20. It’s a permanent home for a five-year-old accelerator program that Crawford has run in partnership with the University of the Pacific in Stockton, CA. The operation is funded by big corporate sponsors like Dell, Samsung, Oracle, Bank of America, TriNet, and Silicon Valley Bank. “The end we have in mind is to identify 10 of the best companies in Sacramento and Northern California each year and get them to cash-flow positive or their next funding round,” Crawford says.

Pondera Solutions, which helps government agencies detect fraud in Medicaid, unemployment, tax collection, and housing programs, is an alumnus of the program. It started off helping government agencies implement Google App Engine and other Google services, but now offers an independent product built on Google’s tools called Fraud Detection as a Service. Crawford says Pondera is typical of the successful tech startups around Sacramento, in that it chose a capital-light path to market. “You start companies that are service-oriented and not capital intensive, and as you become profitable you morph into a product company, often selling to government,” Crawford says.

The Entrepreneurs Campus will also host startup showcase events designed to bring together what Crawford calls a “fragmented” population of local angel investors. “You have a lot of individual investors [around Sacramento] who are not necessarily joining angel groups. They’re lone wolf investors. Part of what we are doing with our events is … Next Page »

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

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  • Julia Mjehovich

    As a Sacramento native, it was SO great to see an in depth article like this shining a spotlight on the city we love. I moved to SF to go to college and stayed to work in tech. However, I moved home to Sacramento to work at the startup I’m currently at because I had faith in the region’s ability to prosper and for the quality of life issues mentioned. Sacramento is a fantastic city to live and work in and it’s wonderful to see it finally getting some of the attention it deserves, especially from such a well-respected journalist.

    • http://www.xconomy.com/san-francisco Wade Roush

      Thank you, Julia. I hope Sacramento can convince more of its native sons and daughters to move back!

  • mffitzgerald

    Joan Didion wrote that Sacramento was a Valley town, but the Valley is the real Valley, the Central Valley. As such, she wrote, it suffers the Valley fate, “which is to be paralyzed by a past no longer relevant.” She wrote that in the 1960s, of course, before people knew what Silicon Valley was. But your piece reminded me of her words. It is hard to change a place’s identity, and take people away from the allure of making it big in the place that really matters. As you indirectly document, Sacramento’s tech industry has the same problem as theatre entrepreneurs in the midwest: the best talent wants to be someplace else, for reasons that have nothing to do with quality of life.