Schafer: Minnesota loses when tech firms head west

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: July 30, 2014 - 10:07 AM

Lee Schafer says it's painful but hard to argue with Twin Cities tech companies that head for Silicon Valley and San Francisco. File photo of a rendering of the new Google headquarters nearing completion in Mountain View, Calif.

Zach Supalla hasn’t always found it easy to explain why the high-­potential little company he founded, Spark Labs, just quit Minneapolis for San Francisco. It’s easy to accidentally sound like an elitist jerk.

The decision to head west, concurrent with the closing of the company’s first venture-capital financing, has the Twin Cities entrepreneurial community sighing. Spark is in a hot market, “the Internet of things,” and had enough real achievements that it became easy to get excited here about its potential.

Now it’s San Francisco-based. While disappointing to a cheerleader for the Twin Cities area, it’s hard to argue against Supalla’s reasoning.

The rent may be more than double Minneapolis rates, but relocating into San Francisco’s vibrant network of investors, advisers, like-minded entrepreneurs and potential customers just increased Spark’s odds of long-term success.

It’s worth noting that Spark is far from the first company to head west. One of the recent ones was called Zencoder, a producer of cloud-based software for publishing video files. After its 2011 move, it found additional funding and later was acquired for $30 million.

Zencoder co-founder and CEO Jon Dahl said that when he got there he soon learned that his landlord had himself been a successful entrepreneur of cloud-based technologies. The landlord promptly became an adviser.

“That is the kind of thing that is much more likely to happen there,” Dahl said. “It’s actually a pretty helpful place. Everybody there got help on their way, and generally they are willing to help out the new people.”

Finding a savvy industry adviser down the hall in your new building is just the sort of “cluster effect” that Harvard Business School Prof. Michael Porter popularized nearly 25 years ago. It’s the reason a dynamic industry can come to thrive in a place such as ­Silicon Valley.

It works mostly on the basis of personal relationships, not LinkedIn or Facebook. What Dahl described was coffee meetings followed by lunch meetings and what the technology community invariably calls “meet ups,” informal gatherings organized around topics or interests.

It’s common in the Bay Area for an entrepreneur to get introduced to another entrepreneur who introduces him or her to investors who introduce him or her to a blogger who suggests a potential customer. That doesn’t happen as easily in Minneapolis. Or nearly anywhere else.

Supalla certainly knew about technology start-up communities when he was leaving graduate school at Northwestern University. He and his wife had been considering New York City, as she sought a career in retail. However, New York is one awfully expensive place to live, and he explained, “There was no way for us to get by on her salary while I started a company.”

It was Target Corp. in sen­sibly priced Minneapolis, coming through with a good job offer for his wife, that caused Spark Labs to get its start here. After going through an accelerator program and completing a successful crowdfunding campaign on Kickstarter, the next step for Supalla was raising the money to build a staff. That meant going to Silicon Valley.

The name Silicon Valley, beginning more than 40 years ago, has meant the computer and information technology industry of the Santa Clara Valley south of San Francisco. But more recently Silicon Valley has spilled into San Francisco itself, with hundreds of technology-oriented young companies in the city.

Surrounding all that feverish activity is a network of angel and venture investors, many of them former entrepreneurs who sold their companies and have the money to fund the entrepreneurs following in their steps.

But in conversations about investing in Spark, he said, “all of a sudden they would turn into something else. They would be about business development deals, or potential customers. I met other entrepreneurs, and people who might acquire us someday. It was all happening because people were coming to San Francisco to have the same kind I conversations I was.

“The thought occurred to me that as soon as we were done raising this money, I’m not going to be flying to San Francisco every week anymore,” he said, “And I’m going to miss out on these ­conversations.”

Supalla said his new West Coast investors, including Lion Wells Capital and O’Reilly AlphaTech Ventures, didn’t insist upon relocation, only advised it. With fewer than a dozen employees, now was the time to move. Supalla this week was working out of borrowed space at another San Francisco company, and when we talked he was shopping for furniture.

What’s most interesting about conversations with entrepreneurs is that the move to San Francisco was largely about what they needed, as the entrepreneur and CEO. They are the biggest bene­ficiaries of a rich network. If it’s only about hiring smart people to write software or work with customers, then there’s no reason to leave the Twin Cities area.

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