Why popular tourist towns are becoming Silicon Valley copycats

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PhishMe is the type of job-creating start-up that many communities wish they could attract. Launched in Leesburg, Virginia, from the home of co-founder and chief technology officer Aaron Higbee in 2011, PhishMe has grown to 378 employees and a projected $70 million in revenue for 2017. The company raised $42.5 million in funding in a Series C round led by Paladin Capital in July 2016.

Higbee briefly considered moving PhishMe to a nearby tech hub like Reston or Tysons Corner as it grew. But ultimately, the entrepreneur saw more advantages to doing business from Leesburg – a tourist destination where, on balmy summer nights, the sound of live musicians playing on the street corners fills the air.

For one thing, staffers really like the quality of life in Leesburg, a historic town of just under 53,000 people. Established in 1758, the town is known for historic sites like Ball’s Bluff Battlefield and National Cemetery, its annual air show, and a downtown brimming with vibrant restaurants and quaint shops. “Leesburg has been focusing more on a town-center vibe where everything is walkable,” Higbee says. Plus, office space was much cheaper than in the other cities he considered. It was only $21 to $30 per square foot versus $55 to $60 per square foot.

It’s not an accident that companies like PhishMe are choosing to put down roots in cities best known as tourist destinations and finding them to be a good place to scale up. More of these popular vacation spots – from Niagara Falls, Canada, to Tampa, Florida, are actively trying to nurture start-ups.

There’s a powerful incentive for leaders in tourist meccas to diversify beyond the hospitality industry. It can help to insulate their residents from economic downturns like the Great Recession, still fresh in many of their minds.

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“Tourism is quite a volatile industry,” says Rachel Crane, a professor in the school of business and management at Niagara College in Southern Ontario. “When the economy is poor, tourism and hospitality sectors are the first thing to get cut out of folks’ budgets. We want to make sure we have a sustainable economy that can weather that.”

A side benefit is that as start-ups become scale-ups, they bring the type of well-paying jobs that keep college graduates from leaving tourist hubs for bigger cities. To spark new business creation and growth, many of these cities are launching formal economic development programs, partnering with universities and leveraging existing resources, such as federally funded Small Business Development Centers.

Leesburg, for instance, is part of Loudon County, where, in an effort to spur new business creation and growth, the Department of Economic Development hired Vanessa Wagner six years ago for the new position of small business and entrepreneurship manager.

Source: Leesburg Economic Development

“There was a need to begin mapping the ecosystem and understand where we were strong in our programs and partnerships and which attributes we still needed to add to support entrepreneurs in Loudon County,” says Wagner.

Meanwhile, the MEC-Leesburg Incubator at George Mason University has worked to spark entrepreneurship through efforts like Loudon Tech Startups, a group launched several years ago. “We designed it specifically so tech people could get together and talk to each other about their ideas,” says Susan Henson, regional director at George Mason University’s Mason Enterprise Center. And, located in the same building, the federally funded Small Business Development Center provides guidance to smaller firms, recognizing they help the economy, too.

“A lot of people talk about start-ups as if the fast-growth start-ups are the only thing going on,” says SBDC manager Eric Byrd. “We work with a lot of companies that are not looking to create the next Google.”

In one sign of the growth such efforts are sparking in Leesburg and surrounding communities, the Loudon County Department of Economic Development announced it had worked with more than 100 businesses that moved to or expanded in the county from July 1, 2016, to June 30, 2017, in its annual report.

A homegrown phenomenon

Against this backdrop, new hubs for entrepreneurship are springing up organically. For instance, Makersmiths, a nonprofit facility in Leesburg that offers budding entrepreneurs access to a laser cutter, a 3-D printer and other tools, has grown to about 43 members since opening in late 2014 and is hoping to expand into an additional facility in nearby Purcellville. Michael Fistler, a co-organizer who works for a local tech firm, has noticed a growing number of new businesses in the community, including a number of breweries. “A lot of them are bootstrapping from their 401(k)s and family members, he says.

Far to Leesburg’s north, Niagara Falls, Canada, which has a population just under 49,000, is taking its own approach to supporting start-ups.

Niagara College’s Crane is running ncTakeOff, which hosts entrepreneurial development programs on campus, not far from the area’s tourist hubs. ncTakeOff is part of the province of Ontario’s Youth Jobs Strategy, a $295 million program launched in 2015 to help young people find jobs or create start-ups. Many of Crane’s students are getting involved in artisanal ventures, such as brewing beer, wine-making and baking.

Many young people have, in the past, left Niagara Falls after graduation and flocked to big cities like Toronto, where there are more jobs. “We have an issue with youth retention,” says Crane.

“With more start-ups launching in areas such as digital media,” that’s changing, says Jeff Chesebrough, CEO of Innovate Niagara, a network of three business incubators and service providers to help entrepreneurs in the area. Some of them are coming up with technologies that serve local industries, such as the robust community of wineries.

The Generator, which nurtures digital media and tech firms, now has 11 portfolio companies. Biolinc, at Brock University’s Goodman School of Business, has five resident companies in the health and bioscience sectors. Meanwhile, the Educational Research and Innovation Hub has 26 portfolio companies.

“The students don’t leave,” says Chesebrough. “They’re staying here because there’s real opportunity.”

Brent Porter and his business partner Paul Vance run Form & Affect, a digital creative agency in a storefront in St. Catharines, a community close to Niagara Falls. They incorporated the business in 2012. “Things were pretty lean back when we started, but the community has grown by leaps and bounds,” Porter said in an email while traveling. “I’m always blown away by the quality of work done here.”

As the company has grown, Porter and his partner have turned to Innovate Niagara for advice. “They gave us some much needed guidance,” Porter said. Innovate Niagara pointed the company to a legal team to help with specific contracts and also offered guidance on growth strategies and recruiting talent, he says. Now the company has five employees and has served clients such as Visa and Samsung.

Leendert Bolle, who served 16 years in the Canadian military, also worked with Innovate Niagara after he started Loyalty Dog Treats in St. Catharines in 2014. Searching for healthy treats for his dog and finding that many were loaded with additives and preservatives causing allergies, Bolle saw a gap in the marketplace and began making them out of human-grade dried liver, chicken and other meats.

Once in business, Bolle found he needed help with understanding his manufacturing costs so he could price his products appropriately. Innovate Niagara connected him with a mentor who referred him to a cost accountant. The accountant helped him get a precise understanding of his manufacturing costs. “We were able to sell the product but then do it in a way you can earn money,” says Bolle. The business has now grown to 5 employees besides Bolle and his wife and now has about $2 million in annual revenue. “We are reinvesting every penny,” says Bolle.

The funding gap

One challenge that many tourist hubs still need to bridge is funding, however. In Niagara, says Chesebrough, “VC money is very dry. We rely more on angel groups.” When local companies do raise venture capital, he says, it is usually out of San Francisco.

Leaders in some tourist destinations are trying to bridge the funding gap so more start-ups can flourish. That’s the case in Tampa, which has population of more than 377,000.

The University of South Florida won a U.S. Economic Development Administration grant in December 2016 to create an early stage seed fund for the Tampa Bay region. USF’s Innovation Enterprise, the economic and business development arm of the university, is creating a $5 million fund called Seed Tampa Bay, which will invest in high growth potential tech start-ups that span a range of sectors. The city is also home to investment firms such as New Angel Group, Arsenal Ventures and Osage University Partners.

To nurture deal flow, USF is also trying to encourage more students to bring their innovations to market by, for instance, training them to patent their ideas. “We ask students, faculty and staff to look at their research and see if it has a use in society,” says Paul Sanberg, USF senior vice president for research, innovation and economic development. The university has also made it easier for professors to form companies, revising tenure and promotion guidelines to support this.

One local success story is Molekule, which makes air filters for allergy sufferers. USF Engineering Professor Yogi Goswami patented the technology in 2006 and 2007 ago when he was at University of Florida but was able to license it later and in 2014 co-found his company, where his son Dilip is CEO. It now has 24 employees – four doing R&D in Tampa and 20 in San Francisco – and is still hiring. After raising some initial funding in Tampa, it just closed a $10 million Series A round of funding, led by Crosslink Capital in San Francisco.

“It’s not like there’s a shortage of money here,” says Goswami. “Some of the financial industry is in the Tampa Bay area, but they are not as used to tech start-ups as investors in Silicon Valley area.” Among his initial investors was a fund run by TiE Tampa, part of the global entrepreneurship organization The Indus Entrepreneurs.

But what tourist destinations lack in funding they sometimes make up for in quality of life. That factor has helped PikMyKid, a Tampa start-up that created a cloud-based technology to simplify carpool lines at schools. PikMyKid creates a geofence around a school, and when a parent with a registered phone comes within a certain distance of the building, the technology tells the school where the parent is in the carpool line. PikMyKid crossed the $1 million revenue mark the first six months of this year and has raised $2.2 million in funding from investors including Florida Funders, a Tampa-based investing network and online investing platform, and the Dreamit accelerator.

CEO and co-founder Saravana Pat Bhava finds recruiting is easy, and not just because of the abundance of college graduates in the area. Thanks to the local beach scene, he says, “even if someone is out of town, it’s not a hard sell to get someone to move to Tampa.”

– By Elaine Pofeldt, special to CNBC.com