Seeding a New Generation of Startups in Santa Cruz

This is Part 2 of a three-part series on efforts to create a stand-alone startup culture in Santa Cruz, CA. Part 1 was published on July 30.

Norm Fogelsong, a general partner at Menlo Park venture capital firm IVP, and an early investor in Santa Cruz-born hard disk pioneer Seagate Technology, says he looks for three things when he’s putting money into a company in an unfamiliar geography: Does the area have unique local expertise? Have other companies succeeded before, creating a network of entrepreneurs who can help guide and inspire new businesses? Are there enough qualified workers?

In Santa Cruz, the answer to Fogelsong’s second question is multi-layered. It’s a crucial issue, since startups thrive best when they’re immersed in a culture of risk-taking and a large network of mentors, advisors, and investors. Look at most thriving tech hubs—especially Silicon Valley—and you’ll find multiple anchor companies that create wealth, buy up other local companies, and produce a constant stream of skilled engineers and managers who can start or advise new businesses.

Santa Cruz has spawned several such companies over the last 40 years—but not recently enough to have a strong impact today. And that’s one of the city’s key challenges. It will need a few more big wins before the cycle of entrepreneurship is firmly established.

A Distant Legacy

Most of the companies that locals mention as the progenitors of the technology scene in Santa Cruz and Scotts Valley are long gone today. One of the biggest was Borland Software, which incorporated in 1983. It made tools for software development, database management, and office productivity, and is probably most famous for its Quattro Pro spreadsheet program, released in 1989. Borland’s founding CEO Philippe Kahn is still the city’s most prominent and successful serial entrepreneur, having gone on to found Starfish Software (acquired by Motorola in 1998), LightSurf Technologies (acquired by VeriSign in 2005), and Fullpower Technologies, maker of the accelerometer technology inside the Nike+ and many other health and fitness devices. But Borland itself moved to Cupertino in the early 2000s, and is now based in Austin, TX; today its former headquarters, a palatial seven-building campus adjacent to Highway 17, stands nearly empty.

Other high-tech companies that built major operations in the area, only to ship the jobs elsewhere later, include Texas Instruments, which shut down its Santa Cruz chip fabrication plant in 2001; Santa Cruz Operation, or SCO, a UNIX pioneer that sold its products and services divisions to Caldera in 2001 (Caldera later renamed itself the SCO Group, launched a controversial series of lawsuits against Linux users, and went bankrupt); Netflix, which was founded in Scotts Valley in 1997 and moved to Los Gatos in 1999; and Seagate, once the largest employer in Scotts Valley, which moved to Cupertino in 2011.

Today the only large technology company still based in Santa Cruz is Plantronics, which has been making a variety of audio gadgets since the early 1960s. (The Apollo astronauts wore Plantronics headsets inside their spacesuits.) With some 500 local workers, Plantronics is the city’s fourth-largest employer, after the university and the city and county governments. It’s a big supporter of the community, in part through its charitable work with groups like Second Harvest, but it’s not known as a training ground for future startup founders or angel investors, the way many Silicon Valley companies of comparable size are.

So Santa Cruz lacks an anchor company that might play the role of a Google, a Facebook, an Intel, or even a Dropbox, to name just a few of the companies that keep the Bay Area technology scene humming. What it does have is a collection of small, young startups that tap into the Silicon Valley ecosystem but have begun to band together to create their own network of mutual support and invite more entrepreneurs into the community.

Partying on Pacific Avenue

Take Looker, the downtown startup where Margaret Rosas heads client services and support. Looker makes Web-based software that helps other companies visualize their business data; it competes with vendors like Tableau Software, Microstrategies, Birst, and Good Data. This spring, the 14-employee company raised $2 million in outside funding from San Francisco-based First Round Capital and PivotNorth Capital, a micro-fund launched by former Seqouia Capital partner Tim Connors.

Looker’s founder and chairman is Lloyd Tabb, who got his start in the business as a database architect at Borland and went on to become chief technology officer at LiveOps, a Redwood City enterprise that makes cloud-based customer service software. At LiveOps, Tabb worked alongside Bill Trenchard, who later went on to be a partner at First Round. He also became an angel investor, putting seed funds into search startup Blekko alongside Connors. Those Valley connections were key for the new startup. “Lloyd has been investing with Bill and Tim for a long time,” says Rosas. “The lesson for me in Looker is that building those networks and those relationships is what creates the ability to get funding.”

The company is deeply involved in Santa Cruz’s nascent startup scene. Rosas is the three-time organizer of TechRaising, a 48-hour hackathon event where coders, designers, and what Rosas calls “business types” invent product ideas from scratch and spend the weekend working with mentors to build them. “We feed them great organic local food and do some fun keynote talks and workshops, and then we have demos on Sunday, and a panel gives feedback and advice,” Rosas says. “It’s very much a way of growing the community—to understand what a VC is, what an MVP [minimum viable product] is.” The last TechRaising, in October 2012, drew 100 people who self-organized into a dozen teams; Tabb was a mentor.

In addition to TechRaising, Santa Cruz is home to an active chapter of PechaKucha Night, a Tokyo-born tradition where entrepreneurs and other creative types give presentations of 20 images for 20 seconds each. The events take place at cultural hotspots like the Museum of Art & History, one block over from Pacific Avenue.

Unlike many Northern California cities, Santa Cruz has managed to find a place for startups on its main downtown drag, rather than relegating them to sterile office parks. Pacific Avenue is home not just to Verve Coffee Roasters but also to more than half a dozen startups, including ProductOps, a software development consultancy; Five 3 Genomics, a UC Santa Cruz spinout that provides genomic analysis services to researchers and biotech companies; remote sensing startup Gridata; Intuvo, which specializes in sales and marketing automation software for banks and other lenders; Philippe Kahn’s FullPower Technologies and its sister company MotionX; and NextSpace, Jeremy Neuner’s coworking facility (of which more below).

For nearly 20 years, Pacific Avenue was also the location of Cruzio Internet, the city’s largest independent Internet service provider. Today the company is a block away on Cedar Street, in a big building that once housed the Santa Cruz Sentinel, the city’s newspaper. After vandals cut the sole AT&T fiber optic line into Santa Cruz in April 2009, leaving much of the city without Internet and wireless service for more than 24 hours, Cruzio arranged for a new 10-gigabit fiber optic line from Silicon Valley to UC Santa Cruz to be extended into the downtown, terminating at its office.

Internet service provider Cruzio opened a coworking space, Cruzioworks, in the former Santa Cruz Sentinel building.

Internet service provider Cruzio opened a coworking space, Cruzioworks, in the former Santa Cruz Sentinel building.

As a result, the Cruzio building sports the city’s fastest Internet service, which is now available to scores of local entrepreneurs through the company’s coworking facility, Cruzioworks. “Cruzio was already a community hub when we were located on Pacific Avenue,” says Jahnai Eldridge, a recent UC Santa Cruz graduate who is the company’s business development manager. But stripped of its printing presses, the old Sentinel building offered even more room for the community. Cruzio co-founder Peggy Dolgenos led a major remodeling effort, and today Cruzioworks is home to 150 coworking members and about 30 rental suites and offices, nearly all of them occupied. Civinomics is one of the companies housed there, as is Makers Factory, which offers 3D printing services to local businesses and educational workshops for local students.

Cruzioworks’ large open-seating area is frequently used for community events like TechRaising. If you look at the high occupancy rates and event calendars at Silicon Valley coworking facilities like Plug and Play Tech Center or NestGSV, you’ll begin to understand how important affordable office space, community events, and proximity to other entrepreneurs can be to a young startup. “Had we not had a place like Cruzio, the business either would not have come to fruition, or we would have had to go over the hill,” Civinomics’ Singleton says.

The NextSpace Effect

But Cruzioworks wasn’t first on the coworking scene in Santa Cruz. That honor goes to NextSpace, which opened its doors in Pacific Avenue’s elegant old County Bank building in 2008. (The building’s guts were reduced to rubble in the 1989 Loma Prieta earthquake, then rebuilt as part of a huge downtown revitalization effort. That’s a story too long to tell here, but many Santa Cruzans credit former economic development manager Ceil Cirillo with putting Pacific Avenue, and the larger community, back on a path to prosperity after the quake.)

Neuner’s co-founders at NextSpace are Caleb Baskin, a local attorney who also co-founded a local community advocacy group called Santa Cruz Next, and Ryan Coonerty, who has twice served as Santa Cruz’s mayor, in 2007-2008 and again in 2011-2012. “The three of us had spent a lot of time talking about how to create a better economy, and how to make Santa Cruz hospitable for people in their 20s and 30s, not just their 60s and 70s,” Neuner says. “We discovered that there were a lot of people who were living here but working over in the Valley—so wouldn’t it be great if they didn’t have to drive over the hill?”

The basic idea at NextSpace, as at many other coworking operations popping up in the Bay Area at that time, was to provide a common space so that telecommuters or one- or two-person businesses wouldn’t have to work in isolation. But Neuner says there was always a bigger agenda: creating opportunities for “accelerated serendipity,” the introductions, collaborations, and new projects that seem to happen whenever you arrange a bunch of desks around a coffee maker.

This sort of cross-pollination is thought to help businesses grow faster, and Neuner says his happiest moments come when a company gets so big it has to move out of NextSpace. Five 3 Genomics did that recently, as did UserVoice, a maker of online help desk software that’s now based in San Francisco. Another NextSpace member company, PrivacyChoice, was acquired in March by Amsterdam-based antivirus firm AVG.

NextSpace itself has grown enormously. Despite competition from Cruzioworks, it’s at its full 225-member capacity in Santa Cruz, and has another 1,000 members at the seven other locations it has opened over the last five years (three in San Francisco, one in San Jose, one in Berkeley, and two in the Los Angeles area). “The thing we have sort of become the poster child for lately is that you can start a business successfully in Santa Cruz and scale it outside of the community,” says Neuner, who, with Coonerty, recently co-wrote a book on freelancing called The Rise of the Naked Economy: How to Benefit from the Changing Workplace. A “fair number” of NextSpace member companies are profiled in the book, Neuner says.

A Chicken-and-Egg Problem

NextSpace’s expansion and the PrivacyChoice acquisition are signs that Santa Cruzans have the entrepreneurial and engineering chops to build great companies. Another five or 10 success stories like those would truly supercharge the local startup scene. But the community would still have to solve Fogelsong’s third problem: increasing the supply of skilled workers.

Bonnie Lipscomb, the city’s current economic development manager, says she goes on weekly “retention visits” to local employers in an effort to learn about their business challenges. The most common complaint, she says, is about the employment crunch. “What they say they need help with is access to the talent pool and making sure there are enough people living in Santa Cruz who can physically be there,” Lipscomb says. “They would love to have the talent here in Santa Cruz rather than having to seek it from outside communities.”

At bottom, there are only three ways to increase the supply of workers so that more tech companies can thrive in Santa Cruz. One is to convince some of the 20,000 to 30,000 people who commute over the hill to stay. Another is to persuade more professionals to move to the city. But both of those are chicken-and-egg problems, since most people can’t relocate or change where they work without a job offer from an existing local company. The third way is to entice more graduates of Santa Cruz’s high schools, colleges, and universities to stay in the city and pursue their careers locally.

Coming tomorrow in Part 3: A detailed look at efforts to guide more UC Santa Cruz students into the Santa Cruz startup scene, and a survey of other challenges, including the city’s image problem in the outside world. Says attorney Jason Book: “There is an unfortunate perception out there in the marketplace that we are all a bunch of pot-smoking flakes.”

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

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One response to “Seeding a New Generation of Startups in Santa Cruz”

  1. Alice Resnick says:

    What a pleasant surprise to see this series on Santa Cruz. My son just graduated from UC Santa Cruz with a degree in physics, and I know he’d love to be able to find a job on that side of the hill, a place he has come to love. A more robust business community would certainly help—but would it change the character of the place? Illustrating that UCSC is a heavyweight: Times Higher Education reports that UCSC ranks in the 99.9th percentile in research influence, and 11th overall among the 100 top universities in the world less than 50 years old.