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.

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.

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 … Next Page »

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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