The Upper Valley tech economy: a roundtable

NHBR's editors met recently at the Dartmouth Regional Technology Center in Lebanon with businesspeople involved in the Upper Valley’s vibrant technology sector.



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NHBR’s editors met recently at the Dartmouth Regional Technology Center in Lebanon with businesspeople involved in the Upper Valley’s vibrant technology sector. The wide-ranging conversation included a discussion of the current state of the region’s tech sector, along with the participants’ concerns, interests and expectations.

The participants were:

Gregg Fairbrothers, founding director, Dartmouth Entrepreneurial Network

Phil Ferneau, managing director and co-founder, Borealis Ventures

Tom Naughton, executive director, Center for Private Equity and Entrepreneurship at Dartmouth College

David Stevens, founder, True Progress, developer of the Track My Progress Common Core assessment system

Vince Berk, founder, ProQueSys, a provider of scalable network security software for enterprise environments

What has made the Upper Valley so attractive to people involved in the technology business?

Vince Berk: There is really no reason to leave here when starting a company. Being in the software space, we don’t actually have to meet a lot of customers face-to-face, so it doesn’t really matter where you are physically located. This is a nice place to be in. There’s nothing else to do, so I work hard.

David Stevens: My wife and I were living in Cambridge, Mass., and I decided to leave a company and start my own company – I was looking to reduce costs and bootstrap a company. We had been up to this area a lot on vacation and decided to move up here.

Gregg Fairbrothers: In 1971, my dad said, “Why don’t we stop in this town here on the way home and take a look at this school and tell me if you like it?” I stepped out of the car and I looked around at the green and said, “Yeah, this looks like a good school. I think I’ll go here.” And I did.

The only goal I had when I left Dartmouth was to find some money somehow, buy a farm, and live close to Dartmouth. Took a little longer than it should have, but that’s where I landed.

Tom Naughton: I left and came back a couple times. I was here as an undergrad and then grad school. I left and ended up starting my own venture firm in Boston and San Francisco. Ultimately, I came back here for the quality of life and to raise our family up here. I was fortunate enough to get the job at Tuck running the private equity center.

Phil Ferneau: I did Dartmouth undergrad and went away to law school, and began practicing law and then came back to get my MBA. I didn’t think I would be staying, but once I came back here, I decided I didn’t want to leave, and one thing led to another.

When I graduated from Tuck in ‘96, I didn’t want to leave, but the short list of companies in the Upper Valley in the tech sector was a really short list. There was Hypertherm and Thermal Dynamics and Centricut, but they were all clustered around plasma-cutting equipment. Then you had the hospital, which t wasn’t what it is now. At the time, if you wanted to stay up here you would look beyond technology at that point. There were a lot of mom-and-pop operations. Now it’s a much longer list. Fifteen years made a huge difference.

GF: One thing you can’t overlook is that between 1999 and 2004, just about everywhere federal funding of basic research doubled. That just drove a lot of activity and spun off a lot of stuff. You build the infrastructure, you attract a lot of people.

Of course, the flip side of that story is, since ‘04 and ’05, it was flat, and now it’s even trending down a little bit. That’s the dark side of that.

We were at roughly $80 million in 1999, and we peaked out at $210 million in 2004 -- it was steady up every year. At the same time, they were building a lot of this infrastructure around medicine at Dartmouth-Hitchcock Medical Center. It was a time of tremendous growth in medicine in general, a growth in health care costs and infrastructure.

Phil, as a venture capitalist, what kind of businesses are you involved with in the region?

PF: Borealis Ventures is about 10-1/2 years old. We are about to fund our 27th company in that time frame. Half have been in New Hampshire, and a good number of those have been Dartmouth-related, Upper Valley companies. They are science-related, mostly life science and bioengineering, but also some health care IT and medical devices coming from the engineering school (Thayer School of Engineering at Dartmouth).

Part of what I think you see in the Upper Valley has been a couple of companies that are successful that grow in place, recruit talent into the community, and as these companies succeed they then spin out related businesses or successor businesses, so success begets success, and you get a critical mass.

It happened with the plasma cutting with Hypertherm, and it happened around the bioengineering side.

GlycoFi was acquired by Merck, but Merck stayed in place – they’re downstairs in this building now. GlycoFi’s founders founded Adimab, which created additional companies in the Upper Valley. And then they start to attract additional like-minded entrepreneurs to come start their companies here.

It all starts with what seems to be one small step, and sometimes it becomes the steppingstone toward a critical mass of activity.

That’s here, and we’ve had other successes, but I don’t how much you can connect all those dots except that professional people like to be with other knowledge workers, creating an economy of dynamics that you have around a college campus.

What I think is interesting is that when these companies have grown and been acquired by larger strategic acquirers, quite often they have kept the companies here. They have not moved them away. I think that speaks to the perceived quality of life that allows them to recruit and retain capable workers here and the cost structure seems to work to stay in the Upper Valley as well.

TN: I think if you think back to what has changed when Phil was knocking on doors in 1996, you’ve had a massive explosion in telecommunications ability. The external technology has really allowed companies to start up in a variety of different places with a lot less money and a lot less people -- often with workforces around the country and around the world.

PF: I think the other thing that has changed is the fact that you have entities that support entrepreneurship -- typically technology-focused. It makes it easier for the technology entrepreneurs coming out of Dartmouth or the medical center to build businesses locally rather than just export their technology to companies in bigger markets elsewhere. Having the DRTC here allowing companies to grow in place rather than move south makes a big difference.

VB: I think the people are the biggest challenge, even for a software company. I can only speak for myself, obviously, but finding qualified people that are able to work with me is very hard.

Obviously, when it comes to sales and marketing, those are not local for me here -- those people are either out in the field or live closer to Manchester.

But I have found the people who have actually built product that I keep coming back and sourcing from are from this area. Somehow they just think in a similar way, and you’re going to end up being where your people are -- the people that are going to be able to make your business work. Obviously, the school is a big part in that.

I have about a half-dozen employees, but I have a large group of contractors -- anything from business advice to marketing -- and then we sell software through reseller channels, so a lot of our sales is really actually managing sales channels.

For example, marketing is out in Portsmouth, specifically because they worked for a firm similar to us in our space before. Finding a group of people that had done this before for a similar company was very important to me, and they ended up being in Portsmouth, but they could have been in Silicon Valley.

DS: My situation is very similar. Our current team is in Ukraine, Poland, Indianapolis, Springfield, Ill., Los Angeles, Taftsville, Vt. -- it doesn’t matter where the team is because there are enough people out there learning to be very successful on how to work remotely. These are very disciplined people -- when they say something will be delivered, it will be delivered. If there’s a flaw in it, they will fix it right away.

We compete with very large publishing companies in the U.S., but our expertise is equal to or better than theirs because we just go wherever the people are that we need.

On the workforce side, being in the Upper Valley is great because we also find it easy to find people for our core team in the office, which is mostly customer support-focused. It is very easy to recruit what I call mission-driven people. We put an ad in the Valley News saying we’re looking for people who want to help teachers and students in public schools across the U.S., we get a stream of emails, and I’ll sit down and interview a lot of them and they definitely have that spirit that we’re looking for.

What’s really challenging is customers. We reach our customers over the Internet, but in order to learn and iterate on our product, we need to be with our customers, and the schools where we are the most helpful are the schools that are in the biggest chaos or crisis -- lots of immigration or lots of students or lots of budget cuts, lots of diversity, all the things you don’t find here. We have to travel, so that is definitely a tradeoff.

How big a drawback is travel?

DS: I’ll tell you about last week. I needed to get down to Florida to meet with two resellers, and I didn’t want to be away for very long, so I had a 6 a.m. flight out of Logan and a 7:15 p.m. flight returning that night out of Orlando.

Of course, there was a snowstorm and an ice storm, so I woke up at 2, I was out the door at 2:30, and I get to Logan around 5, took off at 6, flew down there had my meetings, got the 7 p.m. flight back and landed at Logan at 10. Another ice storm/snowstorm. Drove back to Hanover. If I still lived in Cambridge, I could get to Logan in 12 minutes from my house. I can’t do that anymore.

But then you add up all the tradeoffs. As someone who boot-strapped my last company, which I started in the Upper Valley in 2006 and sold this past year, I remember when I got my car insurance when I first moved up here. We had two cars in Cambridge, and it cost thousands of dollars to insure these nothing-special cars. We moved up here and got the car insurance, and it was barely noticeable. Maybe it was the service fee for mailing the envelope -- I don’t know. When you add up all the things like that, it’s definitely worth it, especially for me family-wise. That’s part of the equation.

PF: Where you need to come together and innovate and create technology-based businesses -- whether it’s software or bioengineering -- you just need to recruit the right talent around the right intellectual property. Where do you find talent and intellectual property? One place clearly is around universities.

Dartmouth and the medical center have a constant influx every year of a lot of smart people, whether they’re students, grad students or professionals. Then you have the additional recruiting into the area for the companies. All you have to do is move a relatively small number of smart people to come together here. You don’t have to depend on hydropower or natural resources to be based here, and transportation of bits and bytes and bioengineering samples -- that can happen through the Internet or FedEx pretty well. Being here is not a problem for knowledge-based businesses.

Combine that with increased funding for life science advancement research, the whole Internet explosion and the fact that Dartmouth has always had a very strong computer science background, going back to (former Dartmouth President John) Kemeny and Basic. The Norris Cotton Cancer Center created some additional innovations and then a nucleus developed around those endeavors. I think that is why they’re here and why it seems so prominent here in the Upper Valley, because it’s a relatively small community, but it’s got high leverage around intellectual property.

GF: There’s an underside to this new accessibility to labor elsewhere, which is you don’t get the same economic development pop from business starts when people can work anywhere. So where it used to be, you start a company and you grow to 50 people, you’ve got 50 jobs and the jobs that live off those jobs and they’re right there because that’s where the company is. Now, he’s got people all over the world that he’s hiring to do those jobs, but they’re not here. So a company can be here by head count -- that’s exciting, you’ve got another company. But in terms of job creation, it’s not what it once was.

I’m not sure the economic development infrastructure is quite caught up with that dynamic yet. It is still focused on trying to start businesses and investing a lot of money in starting businesses thinking they will get the big job growth, and then it doesn’t happen.

There’s this whole thing about environmental determinism. In biology, everybody agrees that those trees grow out there because there is a certain biology and geography. Anthropology is a little more controversial. Economics -- people aren’t so sure. But the fact is, certain kinds of businesses are going to locate here because of quality of life and because they can do this distance thing and others don’t.

That’s the other underside. At the same time GlycoFi was founded, there was a company that came out of Tuck called EnerNOC, and they felt they had to hire a bunch of people that they couldn’t move here, so they went to Boston.

We started a company in solid state semiconductors in 2008, and we recognized you were going to have to have a hot bed of very specialized hardware engineers. They’re in Cambridge, they’re not here. That company has an office in South Station. It started here, but the minute we had to hire those specialized people, they were not going to move to the Upper Valley knowing if the company failed and they needed to find another job they would have to move again.

There are plusses and minuses to this ability to operate in these kind of bucolic environments, and I’ve looked pretty closely at a number of these, and we all share these characteristics. You get a little cluster around specialties you have and the ability to move people out, but you don’t get that jet takeoff in employment growth that you used to see 15 to 20 years ago when you would start companies.

What kind of businesses are here in the DRTC?

GF: We have software businesses, Internet-based businesses, we have a nonprofit that’s a leader in med education, there’s major biotech activity going on downstairs that’s a follow-on to what GlycoFi created. We have a couple of biotech-oriented startups developing diagnostic and medical devices, even therapeutic technologies -- very, very early stage. There are two of those and a third one coming into the building. We’ve got algae -- a guy who’s cultivating algae to make omega 3 vitamin. They were really going to use it as something of a commodity but they realize there is a higher value there.

That’s the whole goal with these kinds of programs -- try to take them small and run them through the process and have them move out. Two of our bigger biotechnology companies have moved out. One, Mascoma, has a building down on 120 here and one of them, Adimab, is around the corner here.

What are some of the challenges being faced?

GF: Phil and I and some other people back in the middle of the decade spent some time really looking at this and had a national conference on where are the gaps in creating new and more opportunities.

It was a working conference. There was no program -- we were going to get together and decide what the problem is. Out of that we thought we were just going to talk about the funding gap and how to get early-stage funding, but we really concluded very quickly that there are two gaps. There’s not enough money that launches businesses -- everybody wants them up and running, some of the risks removed closer to the liquidity event because you’ve got to be able to get your return.

But we also found that there was a knowledge gap and that the vast majority of people who have these ideas at these hotbed incubators at universities have no idea how to take those ideas into execution. There are very few Vince Berks of the world that kind of have it in their blood to be an entrepreneur and figure it out and not be afraid to learn by doing it.

VB: We went around a couple times before we sorted out what it was we needed to really be doing. When I started out being frustrated that the academic research was never going to bring the innovation and get people to use the innovations that you’re trying to make -- that’s really the biggest problem I felt with academic research. You get funded, you produce an innovation, you deliver it to the funding agency, which is usually the U.S. government, and they shelve it and no one ever really reads the thing for content. That was hugely frustrating for someone who has no idea what they were doing.

Not only is it a knowledge gap, but somehow you need to figure out how to keep going until you learn. You have to somehow scrape by, so that’s an equally large problem that you’ve identified there.

GF: That’s the point. They are mutually reinforcing negative forces. There’s not enough money to stay in the game and not enough knowledge to stay in the game early. So there’s this very high attrition rate in basic innovations -- people don’t know how and they don’t have the resources. And you can’t blame any particular finance community because you can’t make money doing this early-stage funding with a lot of this stuff. You get killed and that’s exactly what we found.

TN: Do you still think those gaps still exist? Or worse?

GF: The funding gap has gotten worse because there’s no window open for liquidity. It’s getting harder and harder than it used to be. In the boom days, it was overnight, now it’s two years, five years, seven years from investment to liquidity. Now even seven years is fast – it’s 10-plus. So think of the multiples you have to get if you’re Phil trying to get commercial investment for your partners when you had to wait 10 years from start to finish.

So if you can’t change the exit, you’ve got to change the entry, which means you got to get closer and closer to the liquidity event. Now you can’t just look for proof of market – you’ve got to look for not only revenue, but you’re close to cash flow break-even in order to really put the big dollars to work.

That leaves behind the early-stage stuff that is very hard for people to make money in because what that does is bring in the smaller guys, but then the smaller guys can’t stay in because they don’t have the money to stay in, and they get crushed.

What’s the solution?

GF: Try really hard. In the med tech area, we actually proposed a solution, part of which made it into the health care bill, part of it missed it by 10 minutes. But really it’s a tragedy of the commons problem. It’s a social problem to support this early-stage stuff. If we don’t socialize the support for this, the government basically has to say somehow we’re going to provide enough incentive to help people through that first stage.

PF: Borealis Ventures is typically an early-stage investor. We typically invest in the first institutional round -- sometimes there’s not even a company yet, it’s not even in formation. So it’s not a matter of finding something that’s already growing and trying to make it grow faster. Part of it is guys who have great technologies, great ideas and insights into market. They solve a problem for a customer and we’re going to be a partner in helping grow a business around that.

What you’re not seeing as much is the funding for the earlier pre-commercialization research. That makes it tougher for the labs here to run and to advance the ideas to the point where maybe early-stage risk capital will step in. That’s a big challenge.

DS: In response to what Gregg was saying with the funding issues, the lean startup movement is this idea that you need to figure out your formula for business before you come talk to Phil. You need to have already provided or proved that you can provide a service to a customer that they will pay you for and that it’s ready to scale.

I think personally that the Upper Valley is ideal for that because there are a lot of people here who would love to work starting up a new business and work for equity or work for not a lot of money or something on the back end.

Lean is really the idea. Don’t spend a lot of money until you’ve gone through the trials and tribulations that Vince or I have gone through and you have an idea what the solution is.

I think the Upper Valley is a great environment for that because when you’re in Silicon Valley or Cambridge and everyone is getting funded and there is all this money, then you wake up every day thinking that’s what you need -- a lot of money. But when you wake up in the Upper Valley, you don’t feel that way. You feel like you need to go provide a value for my customer. The company I recently sold, we completely bootstrapped with credit cards and focusing on getting quickly to market with a solution for the customer who would pay us to improve the product so we could acquire more customers. That probably isn’t as possible in the biotech field, because if you really want to solve a problem, you’ve got to come in with a bigger solution. But there are many business-to-business and consumer-focused businesses where that’s possible.

VB: We bootstrapped, and I ended up making some deals with some people that were programming for me. I said, “Look I can’t pay you now, but I’ll buy you a laptop or something.” Seriously, I did this just to get some feet on the ground. After that it’s just a matter of persistence. That’s my belief when it comes to figuring out how your business is going to operate and how you’re ultimately going to make money. There’s nothing that is as important as staying on top of the problem.

You can be smart, you can have intelligent people around you, you can have lots of money, but if you give up too soon, you’re never going to make it. I’m not getting philosophical as to whether the Upper Valley is a better environment to do that, but the environment is conducive to trying again. You have to have the ability to get back up and try again.

GF: If you think about it, there’s only three ways you get economic development -- you either grow what you’ve got or you steal it from somewhere else or make new ones. We do what we can to grow what we’ve got. That’s a long curve in a place like this. Who in their right mind would try to move a 200- to 300-person company to the Upper Valley? Everything on the checklist would be red – housing, schooling, cost, tax, etc. You’re really reduced to grow and create new ones, and then there is this attrition factor -- can you keep them here and how fast can they grow?

That’s where I think there’s a mesh. Certain companies have to leave, and certain companies have to stay. That explains pretty clearly when you look around why what is here is here. Can it grow as fast as some areas? Probably not. It’s also a very small base, so you can get a decent growth rate because there’s just not a lot here to begin with, and you have this big critical mass that just happens to be here.

PF: I do think sometimes when it comes to economic development, you could try to start 10 small businesses of the non-tech sort, and probably even if they are successful, they may or may not scale ever to a certain trajectory of their potential growth, based on the nature of the business. If you do 10 technology businesses that are creating new industries, new markets and new platform technologies, they have the potential -- it may not be overnight ­-- to scale ultimately at a much higher rate and to create spinoff or related businesses. So I think the time scale at which you value the economic impact of some of these technology businesses is critical.

If you invest a million dollars, you can create a lot more non-high-tech jobs for that million dollars than you could if you put it into bio-engineers or computer programmers. But if you look 10 years down the road, what would be the return on that investment in terms of the economic value and the creation of number of jobs created total? My money would be on the technology investment. Part of it is by definition you’re going after growing markets, you’re going after innovations that you think will have high expectations.

Another thing: Technology workers in high-growth companies tend to be highly skilled from the start. The market rewards them well. When we did some analysis of two of our companies, one was up here and was in Manchester at the time. The average salary per FTE was $90,000. I think at that time the New Hampshire household median was $65,000 and individuals I think was $45,000. Compared to the economy the U.S. at large, it was significantly above average.

That’s real wages. So smaller head count, high economic impact, that’s why I said the multiplier effect of these jobs is high because of the restaurants and shops and the service businesses that they seek and are going to help support.

TN: What have you guys seen in the Upper Valley or what haven’t you seen in the Upper Valley that you would like to see to make your life easier? Other than, say, Logan two hours closer. What do you guys wish was here that’s not or could be changed?

DS: It’s not a big wish -- basically everything is here that we need. But there’s’ not a community of startups, people who are here on Saturdays and Sundays till 11 at night. I don’t know how important that is, but I noticed that.

My family and I are connected to the community and the state of New Hampshire, driving all over the state playing hockey games with my son or karate tournaments with my daughter and we hit the slopes and all that. We’re 100 percent a part of the community that way.

The travel is definitely a hassle. but it’s the barrier that gives you a lot of nice qualities as well.

VB: I actually must say that I can’t really come up with something easily, and it might be because I’ve gotten used to making the drive to Manchester and Portsmouth and Boston. It got all better when the cellphone reception worked almost the whole ride to Boston because I could do a lot of the calls I have to do on the drives.

Would it be convenient if the airport were 12 minutes from my house? Yes, but it’s not that big of an inconvenience that I would be willing to trade the Upper Valley for. Other than that, most of our work is really done through the Internet.

Next question is, can you find the people you want in the area? We’ve already implied that it is difficult, but when I talk to people from Dyn they’re having just as big of a problem and they’re in the middle of Manchester. People from Silicon Valley are constantly fighting and asking why won’t I come and move there. Everybody is struggling to find the talent they need in the area that we’re in, so I would say that’s a universal problem, not a problem from up here.

Besides that, I like the power to stay on and I like the Internet to keep working because it is an absolute necessity. When you’re sitting there and you’re working really hard and you’re really trying to convince these people that the problem is about to be solved by your software and all of a sudden, the power goes out because some guy downstairs flipped the wrong switch, that’s when you strangle people. Things like power and broadband are very important to our business, especially in the way that we have learned to do business.

PF: There are towns around here that even in their core still don’t have access to broadband. Obviously my business is here, and I have broadband, but as this is a relatively small community there are limits to growth and people have to reach farther and farther out as we continue to recruit. Part of it is economic, part of it is zoning and how much room is available.

As a result, if you live further and further away, they are less likely to have broadband right now. If they can’t get broadband out there, then they don’t want to live there -- they want to be closer in and it’s going to be more expensive. They can’t afford it and all of a sudden it creates economic pressure on businesses hiring here.

The tradeoff for them is being in Manchester or Boston. That’s a different dynamic. Right now, it’s pretty good, but I do see that becoming an increasing challenge if the outer communities don’t have broadband.

GF: I still say that every day I see these ideas trying to get launched, there’s a gating resource of who’s going to help someone who doesn’t know what they’re doing to at least get in the game and be functional.

It’s a little like an emergency room. You’ve got to triage on any given day. Some people are going to make it anyway -- you do a little bit and send them on their way. Some people are going to fail, and you just let them fail. The ones in between you try to intervene with some intensity and get them over the hump.

Then there’s the issue of funding. There is not enough funding, not early-stage funding. There’s not talent. If Vince would have had an experienced partner to tie up with, he probably would have taken two years off his launch and added 10 years to his life. For a lot of people, particularly let’s say professors, who want to start companies, they don’t know how to do this and they never will. They need to partner up with someone, and there are not nearly enough of those people.

TN: Also recognition -- it’s sort of success begets success. Because as you guys recruit for your companies, the individual is not only thinking about that job, but thinking about if that job doesn’t work especially in the high-tech, high-risk area of a startup. Well, what am I going to do then? Very often now they come with spouses that are working. This is a great opportunity and perfect for me, but what’s my spouse going to do? What if that doesn’t work out for my spouse what is she/he going to do after that?

The college is in that same boat, because when they attract faculty, what is the spouse going to do? I think there needs to be a recognition that everyone is in it together and that it benefits everyone by growing. I don’t know what the answer is, but I think the college has got to be part and parcel of the solution because they have a lot to gain from really growing the community here.

PF: We talked about some of the challenges. Some of them are big-picture challenges in terms of research funding and other broader macro challenges. But in this region and even within this state, the opportunity looking forward for continued tech-driven entrepreneurial growth compared to what it looked like 10 or 15 years ago is a night-and-day difference.

Picture what we’ve been able to achieve over the past decade here, and at Dyn in Manchester and so forth, compared to what I think will happen over the next 10 years is exciting.

I think we have the engine in place, and we’ve talked about some of the different drivers of that engine. We have the success stories. We have more faithful, committed troops to help lead the charge and support each other, and we have the programs in place to help do that.

I think the flywheel now is going and it’s sustainable, whereas 10 or 15 years ago you didn’t know if the success was repeatable, sustainable or isolated.

What’s interesting and gets people excited is they may be local, but they are all trying to do something that is impacting people around the world. We are serving global markets, and it’s exciting and motivating.

GF: They say if you try to do everything, it’s hard to get anything done. When we started out we had one key focus. We want to focus on businesses that have a technology basis, because that’s the leverage factor, and where you can apply knowledge and have a potential for significant social impact.

People will fire up and sacrifice and do it for the cause. When David is helping these teachers actually teach instead of filing all these reports all the time, someone is actually better off, and that’s one of the things that we just have to get up every morning and keep doing. I don’t think there is a magic solution -- just get up and do it again.

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