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.

It’s raining, at last, in the Sacramento region.

It’s just past noon on the last day of March. As I’d glided east on Interstate 80 that morning, the sky had been darkly pregnant, a wash of Payne’s Gray. Yet not a drop of rain had streaked my windshield.

Now, as I’m leaving City Hall in Davis, CA, the sky is opening up and the sidewalks are beginning to splotch. I trot toward the parking lot, pulling a windbreaker out of my backpack and throwing it over my head. My umbrella, naturally, is inside the car.

I won’t be separated from it for the rest of my trip. A protracted drought—bad enough to provoke Governor Jerry Brown to declare a California-wide state of emergency—has suddenly turned into a continuous, but gloriously welcome, downpour.

In Sacramento, the storm will bring nearly two inches of precipitation over the next 24 hours, a record for that day of the year. Before I arrived, Folsom Lake, the area’s largest reservoir, had dwindled to 25 percent of its normal volume—far enough to uncover Mormon Island, a town submerged since the construction of Folsom Dam in 1955. By the time I left, rainwater had restored the lake to 71 percent of capacity.

I won’t claim that I brought the rain to Sacramento. But it certainly augured well for the work I was there to do, which was to document the region’s emergence as a hub for high-tech entrepreneurship.

In San Francisco and Silicon Valley, my usual haunts, the Great Recession of 2008-2009 is a distant memory, and the venture money is showering down on startups at a rate not seen since the dot-com boom of 1999-2000. The peninsula is soaking in cash—and in people competing with one another to earn it and spend it, which is driving rent and other costs to historic highs.

Sacramento, just 85 miles to the northeast, was hit harder by the recession and by the state government’s resulting fiscal woes, and has been much slower to bounce back. Venture firms have closed a mere 34 deals in the Sacramento/Northern California region since 2009, compared to 6,216 in Silicon Valley, according to data from the National Venture Capital Association. When Davis-based natural pesticide maker Marrone Bio Innovations went public last August, raising $57 million, it was the region’s first IPO in eight years.

The population of Sacramento County—including key Sacramento suburbs like Folsom, Rancho Cordova, and Elk Grove—is 1.4 million, which makes it more than half again as large as San Francisco. But in terms of the number of high-tech startups per capita, Sacramento doesn’t make the list of the nation’s top 20 densest startup hubs; it’s behind places like Atlanta, GA, Fort Lauderdale, FL, and Kansas City, MO. In a 2013 survey of small-business friendliness by Thumbtack and the Kauffman Foundation, Sacramento was one of only four big cities to receive a failing grade; the other three were Cincinnati, OH, Newark, NJ, and San Diego. [Update, 6/11/14: Thumbtack's 2014 survey is out now, and Sacramento again received a failing grade.] Two years ago, the region’s largest publicly traded company, Waste Connections, shut down its Folsom headquarters and moved to Texas, citing regulatory hassles and the high cost of doing business in California.

So the capital region has a long way to go if it wants to be seen as a haven for new high-tech companies. Nevertheless, advocates believe things are moving in the right direction. For several years, local investors, university administrators, city leaders, and community boosters have been pursuing a range of separate projects to make the Sacramento area more hospitable for startups, and some of the local entrepreneurs I talked to said the efforts are beginning to have an effect.

A crescent-shaped sliver of Sacramento County extends all the way down to the confluence of the Sacramento and San Joaquin Rivers near Pittsburgh and Antioch, but the city itself (in red) is about 85 miles from San Francisco. Public domain map from Wikimedia Commons.

A crescent-shaped sliver of Sacramento County extends all the way down to the confluence of the Sacramento and San Joaquin Rivers near Pittsburgh and Antioch, but the city itself (in red) is about 85 miles from San Francisco.

Combine that with the region’s built-in advantages—including open space for expansion, deep expertise in key areas like food production and healthcare, one of the nation’s best-funded research universities (UC Davis), and a cost of living that’s modest compared to the Bay Area—and you can begin to see why Vivek Ranadivé, chief executive at Palo Alto, CA-based TIBCO, says Sacramento has the opportunity to become California’s “next hub of creativity and innovation.”

Ranadivé is putting his money where his mouth is. Last year he led a group that purchased a majority share in the Sacramento Kings at a valuation of $534 million, the highest ever for an NBA franchise at the time of purchase. Another $477 million will go toward a new high-tech arena on the site of Sacramento’s shuttered Downtown Plaza mall.

The fact that the Ranadivé ownership team was able to keep the Kings out of the clutches of Seattle and other rival cities was “a minor miracle,” says Dave Sanders, an executive recruiter with WorldBridge Partners in Roseville and the head of venture programs at the Sacramento Area Regional Technology Alliance (SARTA), a non-profit that aims to help local technology companies grow faster. He and many other area residents hope that the arena’s construction will spur more economic development and accelerate a cultural and commercial renaissance that has begun to sweep through other parts of the city.

And that’s exactly what the Kings are promising. Sacramento is in position to be the first fully modern city to emerge in the 21st century, Ranadivé says. “It’s close enough to San Francisco and Silicon Valley that you can draw from that,” he says. “But it’s growing, it’s inexpensive, the weather is great, and we are going to have the coolest, hippest downtown on the planet. And the arena and the team are no small part of that.”

But just as a couple of inches of rain doesn’t make up for a 16-month drought, the new Kings Arena by itself won’t transform the regional economy. Groups working to boost innovation and entrepreneurship in and around Sacramento face a laundry list of challenges, including a shortage of local investment capital for new ventures, a talent squeeze, and a perception that it’s far easier for startups to get things done in the Bay Area.

Old Sacramento, on the western bank of the Sacramento River, is one of the city's top tourist attractions. The "Ziggurat" building in West Sacramento (far left), built in the 1990s, was originally home to The Money Store, once the region's largest publicly traded company. It now houses the State of California Department of General Services.

Old Sacramento, on the eastern bank of the Sacramento River, is one of the city’s top tourist destinations. The “Ziggurat” building in West Sacramento (far left), built in the 1990s, was originally home to The Money Store, once the region’s largest publicly traded company. It now houses the State of California Department of General Services.

There’s a decent base of small- to medium-sized technology companies in the region—about 350, by SARTA’s count. Growth is healthy in certain sectors, like cleantech and medtech. And there are success stories: Rocklin, CA-based 5th Planet Games, a five-year-old maker of massively multiplayer online games, recently passed the $10 million mark in annual revenue. And this year San Mateo, CA-based online backup company Backblaze selected Sacramento as the site for a large, 500-petabyte data center. (Backblaze praised the city for both its low costs and its seismic stability.)

But regional leaders know it could take years to turn Sacramento into the next “hot” location for high-tech entrepreneurs, professionals, and investors. The truth is that when Sand Hill Road investors look Sacramento’s way—well, to borrow a line from Gertrude Stein, they don’t yet see a lot of there there. Norm Fogelsong, general partner at Institutional Venture Partners, a large venture capital firm in Menlo Park, CA, says “there is not a lot of tech action in the Sacramento area. Given all the IT spending by the state government, there could be some opportunities for tech services companies. However, given the lack of a significant tech ecosystem, I expect that the best startup opportunities will be in the non-tech fields.”

In one sense, this is just a larger version of the problem faced by Santa Cruz, CA, which I visited on a similar mission last summer. If you’re a Northern California city and you want to build your own distinct entrepreneurial culture, what do you do about the reality that Silicon Valley is just a short drive away? Do you treat it as a resource, or a threat, or both?

Sacramento’s proximity to San Francisco “is a real double-edged sword,” SARTA chief executive Meg Arnold told me. “The awesome edge is that there is capital, talent, peer companies for people to learn from. And it’s a heck of a lot easier to get down to a meeting on Sand Hill Road from here than it would be if we were in Denver. The challenging side of being so close is that 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 more reliable ways to translate its faculty’s science and engineering insights into commercial products. Off campus, too, business and government leaders in the city are working to make Davis a more hospitable place for entrepreneurs.

Because Davis and Sacramento are so economically interdependent—and because they’re so physically close, separated only by a causeway across the Yolo Bypass floodplain—it isn’t possible to understand the larger regional picture in Sacramento without looking at the story of Davis’s own emergence as a startup-friendly city. And that’s exactly what I’ll do in Part 2 of this story tomorrow. But for today, I’m going to stay focused on Sacramento, and look more closely at the forms that high-tech entrepreneurship is taking in various corners of the city.

The Midtown Renaissance

Sacramento’s historic center is a giant square nestled in a crook in the American River. The streets are laid out in an alphanumeric grid, running from A Street to X Street and from 1st Street to 30th Street, with the Capitol complex located more or less in the middle. The area east of 16th Street, with its tree-lined avenues, Victorian homes, and abundant upscale restaurants and bars, is known as Midtown.

If you trek to the corner of 17th and I Street in Midtown, you will see something interesting. On one corner is a 5,000-square-foot innovation lab called The Shop. It’s operated by VSP Global, the giant vision-care benefits plan headquartered in the Sacramento suburb of Rancho Cordova; on the day I walked by, its lobby was filled with fantastical sculptures made from corrugated cardboard. On the opposite corner is Hacker Lab, a 10,000-square-foot co-working space that opened in November 2012. This propinquity isn’t a complete accident: the three VSP employees behind The Shop started out renting a tiny one-room office at Hacker Lab.

Co-founder Eric Ullrich agreed to show me around the cavernous Hacker Lab building, which was probably an auto dealership in a former life, though no one is quite sure. There’s a glassed-in showroom in front and a huge garage out back. Startups and freelancers rent desk and office space in the front area, and the garage is now a makers’ playground full of donated equipment, with areas for metalworking, woodworking, textile work, electronics assembly, 3D printing, and the like. Upstairs, there’s a meeting area where some 40 classes, meetups, and hacker events are held each month.

Ullrich formerly worked for SARTA and helped to put together its VentureStart program, a kind of finishing school for startups getting ready to seek funding. Back in 2011, he was trying to get his own technology startup off the ground when he volunteered to help his friend Gina Lujan run a hackathon event. “It had such a big turnout, and it was so much fun, that we realized, ‘Okay, maybe solving the innovation ecosystem in the region and laying some groundwork for other types of businesses is more important’” than working on a startup, Ullrich says.

The Rubicon Brewing Company is a popular destination in Sacramento's Midtown neighborhood. Source: Eric Fredericks/Flickr.

The Rubicon Brewing Company is a popular destination in Sacramento’s Midtown neighborhood. Source: Eric Fredericks/Flickr.

The first Hacker Lab was a tiny, 800-square-foot space outside the downtown grid, but in the summer of 2012 Lujan, Ullrich, and co-founder Charles Blas found the I Street space and began the move. By February 2013, all of the offices were rented out, and today the business is “on the way to being 100 percent member-funded,” Ullrich says. It also takes in some money from corporate sponsors like Intel and VSP Global.

The big idea is to give early-stage companies a stepping stone on their way to commercial success—a place to work, a place to build prototypes, and a place to learn. It’s not a new idea, or a unique one; the Bay Area has scores of co-working centers and maker spaces. But it seems there was a special thirst for it in Midtown. In its first full year of business, Hacker Lab graduated 14 companies, Ullrich says. The startups have created 36 new jobs in Sacramento and have combined annual revenue of $2.6 million. Ullrich and his co-founders are already in discussions to open two more Hacker Lab locations, in Roseville and Davis.

Hacker Lab is just one of the co-working businesses popping up in the area. There’s also ThinkHouse Collective, at 18th and Q; Capsity, just south of the midtown grid; and The Urban Hive at 20th and H, which dates back to the very birth of the local co-working movement in 2009.

Urban Hive manager Brandon Weber formerly ran a real estate development firm out of the 7,000-square-foot space, but he says the recession killed all of the firm’s projects. “We had the property, we wanted to do something cool with it, and we had the space and flexibility to try something,” he says. Today all 125 membership slots inside the art-filled space are taken; its desks and offices are filled by Web designers, remote workers, small e-commerce firms, and non-profits. One member is an incubator called Public Innovation that supports civic programming efforts like the Sacramento Hashtag Project, designed to highlight activities around the city through social media.

In addition to managing the co-working business, Weber runs the TEDxSacramento series, which featured seven sold-out events last year, attracting crowds of up to 700 people. He’s a veteran networker, a big Sacramento partisan, and a foodie who asserts that the city’s restaurant scene is starting to rival that of San Francisco, Boston, Seattle, or Los Angeles. “I love to have friends from L.A. come up visit,” Weber says. “Everybody is shocked after a few days of hanging out here, at the art galleries and the food scene and the great little bars and brew pubs.”

Mind you, the changes are gradual—and the contrast between Sacramento and San Francisco is still dramatic. At certain times of day, Ullrich says, it’s still possible to walk over to J Street, the main commercial drag through Midtown, and see no one else on the sidewalks for blocks and blocks. “You go to a festival like Launch [in San Francisco] and the place is just packed with energy,” he says. “And you come back to Sacramento and it’s like a ghost town, honestly.”

But the density needed to put Sacramento into creative hyperdrive could come if people just get down to work, he says. “I really feel like we are in a renaissance area,” Ullrich says. “The whole Midtown is being revitalized. What’s Austin known for, or Portland? Having a bunch of people doing cool shit, in a fun place to live where you can find good work-life balance and diversity and culture. That’s what I would want to see here.”

Different Planets

There’s some disagreement in Sacramento about whether it’s a good thing, or a bad thing, that San Francisco is just a 90-minute drive away. Thanks to the relative convenience of jet travel today, “Traveling 70 miles is just as big a pain in the ass as traveling 700 miles,” says Rob White, chief innovation officer for the City of Davis. That means Silicon Valley venture investors often put Sacramento in the same mental category as places that are much farther away, like Salt Lake City, UT, or Bozeman, MT.

“There is this big perceptual wall that exists,” says Bob Adams, director of the Sustainable AgTech Innovation Center at the UC Davis Child Family Institute for Innovation and Entrepreneurship. It can be difficult just getting people in the Bay Area to drive to the Central Valley for startup events, he says. “It’s not very far, but you might as well be on different planets.”

Dushyant Pathak, associate vice chancellor at UC Davis, is a little more sanguine. He thinks Davis and Sacramento are actually in what astronomers would call the Goldilocks zone: not too close to Silicon Valley and not too distant. “The in-laws shouldn’t live right next door or 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 we have been able to mobilize that capital and give them an efficient access point for qualified startup companies.”

Velocity expects to spread its own $20 million fund across roughly 20 startups. The firm has plans to raise a “significantly larger” second fund that will allow Velocity to “not only invest in more companies, but also actively and aggressively participate in follow-on financing of our portfolio companies,” Crawford says.

Silicon Valley Career, Sacramento Lifestyle

Everyone in Sacramento has an interest in making their city sound more attractive. Even so, I was struck by how often my interviewees used the same phrase: “quality of life.”

Partly, this was a reference to Sacramento’s ideal location, in a sunny spot that’s within easy driving distance of the beaches of Marin County, the wine country of Napa Valley, and the ski mountains at Lake Tahoe. As Van Deventer, the SARTA board chairman, jokes, Sacramento is “in the middle of nowhere, but the center of everything.”

There’s also access to a prestigious art museum (the Crocker), numerous farmers markets, a new annual restaurant festival called Farm to Fork, boating and kayaking on Folsom Lake, and miles of biking and horseback riding trails. It all makes for a “work hard and play hard” culture in the region, says Crawford. “You can blend the three-hour bike ride with learning about the startup company that you want to know more about, so you go hard with regard to fitness, but you also get something accomplished on the business front.”

But I think the quality-of-life meme is also code for some other important features of life in Sacramento. One is the radically lower cost of housing. Home prices are on the rise again in Sacramento after a severe dip, but the median value of a home in the city is still only $237,000, compared to $909,000 in San Francisco and $985,000 in Sunnyvale. When Hacker Lab’s Ullrich told me that he pays only $400 per month for his share of the 4-bedroom Victorian that he rents with three other people in Midtown, I nearly cried.

Startup founders and investors gather at Velocity Venture Capital's new Entrepreneurs' Campus in Folsom; this photo was snapped by an aerial drone. Source: Velocity Venture Capital.

Startup founders and investors gather at Velocity Venture Capital’s new Entrepreneurs’ Campus in Folsom; this photo was snapped by an aerial drone. Source: Velocity Venture Capital.

The fact that Sacramento has relatively cheap housing could turn it into an important release valve for the overcrowded, overpriced Bay Area—and local companies know it. As you head east from the downtown on Highway 50, you’ll see a giant billboard that says “Silicon Valley Career, Sacramento Lifestyle.” It’s a recruiting ad for Act-On Software, a marketing automation startup with a large sales office in Roseville. The company, which competes with the likes of Marketo, Eloqua, and HubSpot, is formally headquartered in Beaverton, OR, but about 110 of its 250 employees are in the Sacramento area, chief marketing officer Atri Chatterjee told me.

The growth of the Roseville office was partly an accident of timing: the company picked up a number of Sacramento-based WebEx employees who wanted to move to a smaller, nimbler company after WebEx’s acquisition by Cisco. [Corrected 5/14/14: The former WebEx employees weren't "downsized" by Cisco, as a previous version of this sentence indicated.] But the location also turned out to be a recruiting tool. At Act-On, ambitious sales professionals of software developers can work at a fast-growing startup without having to cope with Silicon Valley traffic and mortgages, Chatterjee says. “We are able to build a Bay Area sales culture without the expense and cost and, frankly, the lower quality of life that those same employees would have if they were in the Bay Area,” he says.

It’s unlikely that Sacramento will ever develop the Bay Area’s pull as a magnet for young technology talent. On the other hand, nobody can stay 22 forever—and not everyone in Silicon Valley gets rich.

There’s a vision of Sacramento where the city isn’t a bedroom community for the Bay Area, but an alternative stage for a whole career; a place where people can enjoy Northern California living without having to be part of the 1 percent. “Pulling all-nighters becomes a little less sexy when you are 30-plus and you have a family and other things you are trying to balance,” Sanders says. “I think there is a tremendous opportunity for us to grab all of those students who moved to the Bay Area, have been there six or eight years, got a lot of great experience but didn’t make the big bucks, and are now starting to think about raising a family. Good luck buying a house in the Bay Area.”

Continue to Part 2, where we complete our look at innovation in the Sacramento area by venturing to Davis, and ask how the city and its university are solving the entrepreneurship challenge on an even more local level—and what that could mean for the region.

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.