In the Spotlight

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The Digital Furnace
by Bill Catlin
March 20, 2000
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High technology has become a major focus of economic development efforts around the country. Governors and lawmakers across the country are unveiling plans to prevent their states from losing out on the job growth and high wages that characterize successful technology industries. In Pittsburgh, the state's efforts are helping the region emerge from the ashes of the steel industry as a technology powerhouse.
The Pittsburgh skyline and Smithfield St. Bridge seen from the south side of the Monongahela River. Pittsburgh was once a steel town, but is now reinventing itself with high technology.
Photo: Bill Catlin

UNDER REPUBLICAN GOVERNOR TOM RIDGE, Pennsylvania has spent years and tens of millions of dollars to fuel technology industries. Pennsylvania was one of the first in a wave of state technology-development programs over the last few years, and it remains among the most aggressive. While it's too early for final judgments it's clear the state has added momentum to a growing high technology sector.

A $100,000 state grant is helping a Pittsburgh software company called Storm convert an abandoned horse stable into office space. Storms's chief financial officer is Pittsburgh native Andy Hannah, whose career path reflects the changes in Pittsburgh. He joined an Internet start-up company in 1994.

"It was very difficult to get loans and very difficult to get venture capital here in Pittsburgh," he said. "So, once we reached a certain scale, we decided to move to Boston, for a couple reasons. One was the capital needs, secondly there was a talent pool of people that we could draw from, and it wasn't resident here in Pittsburgh."

Hannah says Pittsburgh always had plenty of promising technology bubbling out of Carnegie Mellon University and The University of Pittsburgh, but the region lacked the capital and entrepreneurial talent to build companies around those ideas.

Lycos, one of the most popular Web sites on the Internet came out of Carnegie Mellon, but moved to Boston. Now the Pittsburgh area boasts more than 1,000 information-technology companies, a leading robotics industry, and strength in biotechnology. After his first company was sold, Hannah says he agreed to come back because things have changed.

"What's happened over the last 5 years especially, is that the capital is starting to flow. And, people are starting to realize - managers of entrepreneurial businesses outside the region, and inside the region - that Pittsburgh is a great place to raise your kids, it's low cost of living."
"Getting the infrastructre in this city to buy into a small company is like getting a recreational root canal."

- Astro Teller
CEO of Bodymedia

Hannah's new company received investments totalling $2 million from one of Pennsylvania's most noteworthy efforts - a state-backed venture capital fund. Two years ago, a partnership between taxpayers, a public schools pension plan, and a Philadelphia venture capital firm launched a $50 million fund with the goal of investing in promising Pennsylvania firms. After a year and a half, the paper value of the fund's portfolio had risen 250 percent, Most of the investments went to Pennsylvania firms. Two similar funds have followed. The state's investment of $13 million led to a total of $200 million in venture capital funds managed by professional investors, not state bureaucrats, with Pennsylvania firms a first priority.

Don Jones of Triangle Capital in Pittsburgh helps run one of the funds. He says local funding is key to keeping tech companies from moving to Boston's Route 128. "The movement out of Pittsburgh and other regions to Silicon Valley and to Boston 128 is because the venture capital firms have become magnets and they have pulled them there," Jones says. "Now that we have more funding in the regions, the chance of them staying here is very very high."

Filling a gap in funding for early stage companies was a top recommendation from a group convened by Governor Ridge in 1996, called Technology 21. Sam McCullough, Pennsylvania's Secretary of Community and Economic Development, says their charge was to build blueprint for the state.

"We asked 1,000 technologists, academia, business entrepreneurs and so on, to work with us and tell us what we should do; not that we weren't doing anything - we were doing lots of things. But to tell us what more we need to do as a state to really be a player in the global economy with respect to technology. Where does Pennsylvania need to position itself?"
New buildings devoted to university research or technology companies are taking the place of steel mills that lined the banks of the Monongahela River for miles.
Photo: Bill Catlin

The Tech 21 priorities ranged from workforce training to commercializing university research. Further programs followed, like the digital greenhouse, the state's $13 million partnership with industry and universities to jump start a semiconductor design industry in Pittsburgh.

But finding capital for early stage companies has been a top priority and, so far, one of the state's clearest successes. Critics say states have no business in the venture capital game. But private capital has flowed to Pennsylvania as well. Total venture capital investments in Pennsylvania rose nearly 80 percent in two years to more than $500 million. But like most states, Pennsylvania's share of all U.S. venture capital has declined as investors dash for hot spots like Silicon Valley.

Still, technology's momentum in Pittsburgh is unmistakable. Doug Goodall, stands on the banks of the Monongahela River, looking at a series of new buildings devoted to technology companies and university research. "As far as your eye can see going up the river here, literally for the next several miles, was all steel mill, a series of mills," he points out. "You don't see any mills anymore. They've all been torn down."

Goodall is president of Innovation Works, one of four regional economic development operations collectively known as Ben Franklin Technology Partners. Goodall says the program was born in 1983, an effort to rebuild an economy reeling from the collapse of the steel industry.
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Goodall's program provides entrepreneurs with assistance and financing designed to keep them going after personal funds run out until they're ready for venture capital. Statewide, the Ben Franklin program says its efforts boosted Pennsylvania's state's economic output by a total of nearly $3 billion from 1989 to 1996. Alumni include CDNow, a leading Internet music distributor, as well as two Pittsburgh information technology companies: Fore Systems, which was sold for more than $4 billion; and Freemarkets, which has a market value exceeding $6 billion.

Goodall says even though the Ben Franklin Program predates the Ridge administration, the old and new are built on the premise of collaboration among government, industry, and academia.

But allegations of mismanagement in the Pittsburgh program led to a major overhaul prior to Goodall's arrival a year ago. And not everyone gives the program high marks.

Astro Teller, CEO of Bodymedia - a 16-person company pioneering the marriage of clothing and computers for monitoring physical health, says he and his co-founders decided to skip programs like Ben Franklin and concentrate instead on earning a million dollars themselves working as computer consultants.

Teller praises the direction and leadership the state has given to high-tech economic development efforts, but he says banks and other service companies in Pittsburgh remain too cautious in dealing with start up companies.

"Getting the infrastructure in this city to buy into a small company is like getting a recreational root canal," Teller said. "You want something, you pretty much have to have it, and you spend these endless periods, trying to haggle with people over something you could get in Silicon Valley, but in Pittsburgh, it's probably not going to happen."

But Andy Hannah of Storm says Pittsburgh has come a long way in addressing such concerns. Hannah says the lesson of Pittsburgh's revival is government can help a region identify strengths and weaknesses, and spark efforts to fill the gaps.

Part One: The Digital Furnace | Part Two: Keeping Ideas in Minnesota