Madison’s Tech Future: 5 Ways It Could Succeed, 5 Ways It Could Fail

6/12/14Follow @XconomyWI

Silicon Valley wasn’t built overnight. Neither were smaller, newer tech startup hubs like Austin, TX, and Boulder, CO.

In the Midwest, Madison, WI, hasn’t yet reached that level, but the city is gradually and quietly positioning itself to at least join the conversation. Xconomy has been closely following Madison’s aspirations to be a healthtech startup epicenter, and the capital of Wisconsin is also starting to grab some attention as an up-and-coming area for information-technology jobs in general.

Last month, Forbes ranked Madison fifth on its list of metros with the fastest-growing information clusters, a category that included software, publishing, broadcasting, and telecommunications services. That followed a similar study last October by the Progressive Policy Institute that found Dane County, where Madison is located, had the ninth-highest growth in tech/information jobs between 2007 and 2012.

Zach Brandon, president of the Greater Madison Chamber of Commerce and former vice chair of public policy for the Angel Capital Association, thinks the time is ripe for Madison to claim a place among the nation’s leading tech centers.

“If every region is going to have one of these tech powerhouses, what’s the upper Midwest?” Brandon says. “It’s not defined yet, and Madison has just as much of a claim to that as anybody else.”

Business leaders in Chicago—with its larger pool of tech startups, talent, and venture capital—might argue that Madison isn’t in the same league right now, but Brandon is probably fair in saying that no Midwest city has emphatically established itself as the region’s tech capital in the way that San Francisco has done on the West Coast.

So, can Madison ascend the Midwest throne? Here are five reasons why it could succeed—and five ways it could fail.

First, the factors working in Madison’s favor:

1. Young talent: Ask anyone how Madison is building an IT cluster, and one of the sure responses is the talent flowing from the University of Wisconsin-Madison, whose computer science graduate degree program tied for 11th in the most recent U.S. News & World Report rankings.

“We find that we really enjoy recruiting from the university,” says Anne Raimondi, the vice president of people operations for San Francisco-based Zendesk, which opened a Madison office in 2012. “We find a great population of talent there across the board.”

Zendesk has 51 employees in Madison representing a range of departments, including IT, sales, and customer service, Raimondi says. Outside of its headquarters, Madison is the customer-service software company’s only domestic office. That’s a testament to what’s brewing in Madison, Brandon says.

2. Critical mass of diverse startups: It’s difficult to identify the tipping point when a city has developed a self-sustaining tech cluster, but observers say Madison is getting there. One sign is that computer programmers are starting to feel like even if their startup fails, “they know there’s another company around the corner they can go to,” says Mark McGuire, co-founder and CEO of Madison-based Nextt, a private online social network. “That has changed, I think, in the last two to three years,” McGuire said during the recent Wisconsin Entrepreneurs’ Conference in Madison.

More than 15,000 people in Dane County hold information-related positions, according to 2012 U.S. Bureau of Labor Statistics data provided to Xconomy by the Madison Region Economic Partnership (MadREP). Those employees work for companies like Epic Systems, the electronic health records giant based in nearby Verona; fast-growing startups like Nordic Consulting and EatStreet; satellite offices for major tech companies including Google, Microsoft, HP, and Amazon (through its 2006 acquisition of Shopbop); and in the IT departments for corporations like American Family Insurance, Great Lakes Higher Education Corp., and WPS Insurance, says Betsy Lundgren, MadREP vice president of marketing.

Madison’s IT diversity is a key piece of its tech play, Brandon says, citing healthy concentrations of companies in data, computer programming, healthtech, and gaming.

“The diversity of all that is an asset to us in the long term because it allows us to weather the boom and bust that generally comes with tech,” Brandon explains. “But it also gives us sort of a blank canvas to be able to paint the brush strokes of what’s next” for Madison.

3. Epic: Epic Systems is a big reason why Madison’s economic engine is humming right now. The private company, which makes a variety of software for healthcare providers, is the eighth-largest healthcare IT company in the U.S., with $1.75 billion in revenue last year. It employs an estimated 6,800 people locally, many of them recent college grads from around the country. Optimists like Mark Bakken, CEO of Epic software consultant Nordic Consulting, have said Epic could be the anchor for Madison that Dell is in Austin and Microsoft is (or was) in Seattle.

And stakeholders believe Epic is making a big contribution, albeit indirectly, to Madison’s healthtech startup scene because several hundred employees reportedly quit each year, according to a February article in Isthmus, and some of them choose to stay in the area and start new companies. Recent examples of firms founded by Epic ex-pats include consulting firms BlueTree Network and Vonlay, which was recently acquired by Chicago-based Huron Consulting Group; Moxe Health; and the new healthtech incubator, 100health.

4. Lower costs: As Silicon Valley gets more crowded and housing costs in San Francisco continue to get more outrageous, cheaper places like Madison start to look more attractive for tech company outposts. From that standpoint, it wouldn’t be surprising to see more companies follow the lead of Google, Zendesk, et al., and set up shop here. Greg Robinson, a former Silicon Valley VC and head of the new $30 million Madison-based IT fund 4490 Ventures, is high on Wisconsin’s potential for building “capital-efficient” tech startups. In his view, the talent is just as good in Madison as Silicon Valley, but the real estate and employee salaries are a fraction of the cost.

5. Cool factor: Having an unquantifiable hip vibe is one of the intangibles a city needs to lure and retain young talent. Think “Keep Austin Weird.” Does Madison have it? Brandon thinks so. “It’s hard to identify it and even harder to create it, but whatever ‘it’ is, Madison has it,” he says.

Being a college town certainly helps. Also contributing to Madison’s cool factor are a vibrant craft beer scene, fun restaurants and bars in a walkable area downtown, a bicycling culture, and two lakes buttressing the city, to name a few.

Factor in the increased job opportunities in tech and new housing developments downtown, and college grads have more reasons to stay in Madison, says James Laudon, site director for Google’s Madison office, which opened in 2007. Laudon is a Wisconsin native who got his bachelor’s degree in electrical engineering at UW-Madison, and then got a doctorate at Stanford University and worked in Silicon Valley for a decade before returning to Madison.

“When I came [back] in 2003, all the articles were about how the city was losing all its bright people from the university because there was nothing for them in Madison,” Laudon says. “Now it’s the complete opposite.”

But the long-term prospects for Madison’s IT play certainly aren’t assured. Here are several things that could hamper its growth:

1. Lack of venture capital: It’s been said plenty of times, but we’ve got to say it again—Wisconsin has fostered a strong network of angel investors, but it still has a dearth of venture capital firms. Startups often need these institutional investors to close larger, Series A funding rounds. Wisconsin’s early-stage companies have had more success snagging dollars from out-of-state VCs the past couple of years, and there’s been a flurry of activity in the past month that indicates new investors have noticed what’s happening in the Badger State. But it obviously would be easier for Wisconsin entrepreneurs if they could find more funding closer to home. That would also alleviate any fears that the out-of-state investors might demand the startup relocate.

2. Exits: The Madison area has seen some sizable exits by its biotech startups, but its relatively young tech startup scene has yet to experience the same level of success, outside of a few notable wins like Jellyfish’s sale to Microsoft for a reported $50 million in 2007. When a startup gets acquired or goes public, it brings visibility and credibility to the local startup community. And although acquisitions sometimes result in the new parent company consolidating and shutting down the local operations, the deals often mint new millionaires who might become investors and start more companies, Brandon says. Investors have placed big bets on some promising Madison tech startups in the past few years, and now they need to deliver by expanding their businesses and achieving an exit.

3. Small airport: Madison’s Midwest location is a double-edged sword: It’s centrally located, which is nice for a West Coast company like Zendesk that wants to have an office closer to clients on the other side of the country, Raimondi says. But Madison is still 2,000 miles from the San Francisco Bay Area, and its airport has no direct flights to the West Coast. (The closest is Salt Lake City.)

Brandon admits the small airport presents some challenges for turning Madison into a tech hub, but he says the Dane County Regional Airport is one of the fastest-growing among similar-sized airports. It has added three new direct flights in as many years, and could add a direct West Coast flight in the next year or two, Brandon says. Epic, which flies its employees in droves to work on site with clients around the country, is spurring much of the airport’s growth, he adds.

4. Climate: Wisconsin winters suck. There’s no way around it. Yes, the snow is beautiful and provides ample opportunity for those who love skiing, snowboarding, snowmobiling, and ice skating. But winter here can be bitterly cold (polar vortex, anyone?) and unbearably long. And that will always be a problem for recruiting a certain segment of recent college grads and seasoned executives from outside the area.

Again, Brandon finds a silver lining: “Not everybody wants to live in Silicon Valley, Austin, or New York City,” he says. He points out that Madison is a good option for those who want four seasons, enjoy winter sports, and are “attracted to the Midwest quality of life and work ethic.”

“I think Madison…can play to its strengths without wringing its hands about not having the same weather as Austin or San Jose,” Brandon says. (Just ask Bostonians.)

Zendesk execs occasionally hear minor grumbling about the weather from San Francisco employees who relocated to the Madison office, Raimondi says. “But that’s a result of people being really spoiled in California,” she says.

5. Culture and policy: Assuming Madison has the right pieces to make this tech dream a reality, it will need the support of the community, Brandon says—from residents to business leaders to politicians. His chamber of commerce is committed to integrating the tech industry into the broader business community, Brandon says, pointing to his organization’s recent acquisition of Accelerate Madison, a networking and support group for local digital tech firms.

Startups have been paid more lip service and funding by state politicians in recent years, including a new state-backed “fund of funds.” On a local level, Madison city council members like Scott Resnick and Mark Clear, who both have day jobs with software companies, are advancing ordinances to benefit the local tech sector. Grassroots organizations like Capital Entrepreneurs are convening local tech workers and putting a spotlight on the sector.

All of those efforts will likely need to continue and be amplified in order for Madison’s tech play to succeed.

The city needs to “create a culture that’s accepting and celebratory of the tech sector and doesn’t view it as a one-off,” Brandon says. “We need to convince the rest of the [community] that tech is a viable place to put resources and energy and promotion.”

Jeff Engel is the editor of Xconomy Wisconsin. Email: jengel@xconomy.com Follow @XconomyWI

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