The Puberty Code
Can the tech startup scene survive, thrive and mature into a grown-up community?
Friday, November 15, 2013 7:00 AM
What if StartupCity goes away?
When StartupCity Des Moines opened its doors in the Bank of America Building in 2011, the business incubator’s creation was one of several symbols of the momentum of Des Moines’ young startup community.
Christian Renaud and Tej Dhawan opened StartupCity to try to help startup companies grow and provide an environment where entrepreneurs and potential entrepreneurs would feel comfortable taking a chance on their idea.
StartupCity had goals of reaching 20 to 30 resident businesses in its third year, which started in October, but to this point, it has never had more than 10 residents at any one time. Today, it has four.
The incubator model was one in which an entrepreneur would come in with an idea, and the mentors at StartupCity would help the company develop to the point where it could sell to customers. As the economy has turned around, fewer new startups have applied to use that model. Instead, StartupCity has turned into more of a “coworking” space, where more well-established startup owners come to work and interact with one another. Nine companies are using StartupCity as a coworking space today. Activity and buzz at the space has never been higher, said Geoff Wood, chief operating officer at Startup Genome, who recently started working out of the space.
The problem is, StartupCity’s external loan funding, which comes from the city, county and state, was specifically given for the incubator piece of the company. Applications in the incubator have gone down, and StartupCity has had less businesses housed in the incubator than expected. The founders – Renaud and Dhawan – didn’t know, as of press time, whether they would have funding for 2014. If they don’t get it, they will have to close the space.
If that happens, does that end Des Moines’ startup community?
Not even close, said some in the startup scene.
“Whether StartupCity ceases to exist or not, tomorrow, next year or five years from now ... in and of itself, I’m not going to be terribly worried about that,” said Mike Colwell, director of the Greater Des Moines Partnership’s Business Innovation Zone. “Because it’s one piece, and the ecosystem is bigger than that.”
In fact, Renaud and Dhawan have purposely tried to remove themselves from being the center of the ecosystem, electing to let other people and organizations take on some of the community functions that StartupCity got going initially.
It’s crucial that the startup scene adapts and evolves to what is needed, Colwell said, and the incubator model doesn’t seem to be needed right now. But others will have to step up to fill the gaps that StartupCity would leave if it closes.
Torey Maerz, co-founder of the company Rocket Referrals, one of the newest startups to join the incubator, says that he has benefited from the mentorship at StartupCity. But his company has benefited as much or more from interaction with other startups in the space.
If the space closes, Rocket Referrals will stay alive, but “it would impact the community if someone didn’t step in and say, ‘Here’s a place for startups to work and be together,’” Maerz said.
An awkward stage of life: Your body is changing, hormones are raging. Pimples pop up. You’re still dependent, but you crave independence - sometimes you fail.
The challenges of growing up are not all that unlike the plight of Des Moines’ young startup scene.
Back in 2011, StartupCity Des Moines, a business incubator for tech startups, opened its doors and was one of several symbols of the momentum of the startup community.
Around the same time, the term “Silicon Sixth Avenue” was coined to represent the concentration of tech startups in buildings along Sixth Avenue in downtown Des Moines. The Des Moines Register hired a business reporter to cover the tech community full time, and Ben Milne’s startup, Dwolla Inc., started making local and national headlines before gaining funding from some well-known venture capital firms on the coasts.
But, the once cute and photogenic Des Moines tech startup community is experiencing some growing pains:
* StartupCity Des Moines may have to close due to a lack of incubator residents.
* An improving economy combined with high corporate demand for people with tech skills has enticed tech workers who otherwise would consider starting their own companies to take salaried positions.
* Silicon Prairie News, a website that covers the startup scene in Des Moines, Omaha and Kansas City, canceled its planned Big Des Moines conference in October.
*This week Amici Espresso on Sixth Avenue, a regular meeting spot for entrepreneurs, announced it will close on Dec. 13.
One national expert on how cities build entrepreneurial ecosystems is not particularly surprised or concerned.
“As humans, we are conditioned to hope that things grow at a steady rate and continue to grow forever. Of course, this isn’t how it actually works,” said Brad Feld, author of the book “Startup Communities: Building an Entrepreneurial Ecosystem in Your City.” Anyone involved in (entrepreneurial activity) knows the journey, especially at the beginning, is a mess – totally chaotic, and full of surprises.”
Building such an ecosystem takes decades, he said.
The question is: How does Des Moines help its adolescent startup community grow to become a well-adjusted citizen in the business community?
Look to quality rather than numbers
No one disputes that new entrepreneurial activity has slowed down, but Geoff Wood, a former chief operating officer at Silicon Prairie News who now holds the same position at Startup Genome, said that, in fairness, the energy of tech startups may have been overhyped a bit a few years ago because they were trendy.
Tej Dhwan, a principal and co-founder of StartupCity, said there may be fewer new startups, but their quality and their chance for success have improved today. He and others point to the success of companies such as Dwolla Inc. and Ames-based cloud computing solutions company WebFilings LLC, which are successfully growing. WebFilings recently announced it will add 700 jobs over the next five years.
“We started off with a high quantity. We didn’t know what the quality was,” Dhwan said. “We need a high quantity of high quality.”
Alternately, the sale of one successful startup to a larger company could free people from that startup to launch their own companies. Mike Colwell, executive director of the Greater Des Moines Partnership’s Business Incubation Zone, points to what happened with PayPal, which was acquired by eBay Inc. in 2002. Suddenly, the “PayPal mafia” of employees who got rich from the buyout started new companies. But the process from PayPal’s founding to fully seeing the effects of the buyout took about 12 years.
“That’s hard to do in five years or less,” Colwell said. “I think there are a lot of those original people who are still in those startups working their hearts out to try to get to that next level.”
Encourage business involvement
Companies in Silicon Valley often encourage employees to step out and work on startup projects, said Colwell. Cisco Systems Inc. is a prime example. If the employee’s idea works, Cisco will often buy back the product. If it doesn’t, the developer can take back his or her job.
“I think it can be successful,” Colwell said. “It’s just, that’s not something we’ve done so much.”
Says Christian Renaud, a co-founder of StartupCity, “Every vibrant startup community in the country works really really synergistically with the largest companies around, either the serial acquirers or just as customers.”
That’s not happening much in Des Moines.
Part of the reason for that is that Des Moines doesn’t have a lot of tech-focused companies. Of course, some of the area’s largest industries, such as financial services and insurance, have technology components, but there hasn’t been a good fit or natural connection between the large companies and those in the startup scene. Nor is it necessarily top of mind for the large companies.
“In my opinion, our strongest startups ... are all in that financial services market,” Wood said, referring to companies such as Dwolla and Social Money, a financial services technology company. “But I don’t think any of them have that connection to the existing market here. None of them spun off.”
If nothing else, said Suku Radia, president and CEO of Bankers Trust Co., large companies in Greater Des Moines should care about having a vibrant startup scene, because it will help attract and retain young professionals. Radia makes a habit of mentoring young professionals with weekend coffee meetings, and some of his mentees are entrepreneurs.
“While not all of these young entrepreneurs will be financially successful, the fact is that some of that talent will be a great recruiting opportunity for our larger companies,” Radia said.
Recruit more investors
Available capital to help startups grow took a huge step forward with the development of Plains Angels, an initiative of the Business Innovation Zone. Plains Angels brings together people who want to invest in fledgling businesses in meetings where companies that need capital can make a pitch to them. Angel investors typically have more money to invest than an entrepreneur’s friends and family, but less than venture capital funding.
Since the group launched in mid-2012, Plains Angels members have invested more than $925,000 in five deals, and a pair of other deals are in the process. Colwell hopes six to eight companies will gain angel funding next year.
Plains Angels is a step in the right direction, but it’s not enough. Colwell is working to identify more ways to get more investment money flowing into companies.
A local startup being bought out could help that process. If founding employees of that company get rich off of an acquisition, they might choose to invest money back into the startup community.
Also, the more national venture capital firms take a look at companies like Dwolla, the more that potential local investors will take note of local startups, Renaud said, especially if Dwolla ends up making its investors rich. Dwolla’s success has caused some venture capital firms on the coasts to take note of companies coming out of Iowa, Renaud said.
Strengthen the body
Today, Des Moines’ startup community leaders have come to believe that slowdowns - real or perceived - are cyclical.
Feld, the startup ecosystem guru, says that comparing metrics from quarter-to-quarter or year-to-year isn’t useful. You have to look at least 20 years ahead.
“I’d say we are in a far better place than we were 24 or 12 months ago,” Renaud said. “(Maturity) doesn’t happen in six months, 12 months or an electoral cycle. It takes years and years and years.”
For the ecosystem to move from childhood to adulthood, it’s going to take all of the body parts working together. Perhaps StartupCity is just a baby tooth to the community, necessary for a growing young body but replaceable as the organism ages.
There have been some signs of maturity. People outside of the StartupCity banner have stepped up to move the community forward. For example, within hours of the Big Des Moines cancellation announcement, a group of startup owners and support people came together to put on the I/OWA Conference, a similar event that brought together local entrepreneurs and national speakers. Another event, 1 Million Cups, brings together a group of entrepreneurs every week to learn about area startups.
“The community has so many disparate pieces that the I/OWA Conference, for the first time, showed me are itching to bond,” Dhawan said. “In creating the strong communities, whether it is the angel investors at Plains Angels, or the West Des Moines community or downtown community, we as a tech community have strengthened various pieces. Now, they need some way to attach back as a single organism that can be the adult.”