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STRATEGY

Know Your Place

When it comes to entrepreneurial vitality, is geography destiny? Are some places really better than others for starting and growing a business? And if you live in a place that's 'wrong,' can you do anything about it?
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Is geography destiny? Are some places really better than others for starting and growing a business? And if you live in a place that's "wrong," can you do anything about it?

Don't look for towns in Montana at the top of the "most entrepreneurial cities" lists. To the extent that the state is mentioned in such rankings at all, it's a near footnote to entrepreneurial oblivion. Not long ago, David Birch's think tank, Cognetics, placed Montana 49th among the states in its annual "Entrepreneurial Hot Spots" ranking. The regional rankings of rural areas showed western Montana trailing the Appalachian Mountain region of West Virginia.

Not so good.

Yet Bozeman, Mont. -- a college town of just 28,000 people some 90 miles north of Yellowstone National Park -- is home to a cluster of photonics companies, a handful of nascent biotech businesses, a couple of Internet-software outfits, and a growing list of small manufacturing concerns (including Vision 1, which was #153 on last year's Inc. 500 list). So maybe there's hope for Montana. Maybe entrepreneurial vitality is achievable in unlikely places.

Then again, do we really know what kind of place is unlikely? Is Bozeman?

I happen to live in Bozeman, which could account for my particular interest in such questions. But I have a better reason to care, which a few months ago began to drive me with increasing urgency to try to really understand what was going on here. The health of the local entrepreneurial economy, you see, has a large impact on my business. I'm what some people call a "venture catalyst," which means I help start-ups get the resources they need to grow, from capital to managerial advice. So understanding why new businesses do or don't emerge in the boondocks is essential to my career and the well-being of my family.

How, I began to wonder, did my location affect my chances of success? How would it affect my chances as an entrepreneur who was trying to build a company by helping other entrepreneurs build theirs? And would understanding the relationship between place and entrepreneurial vitality guide me to doing my work the right way?

I needed to see.

The personal importance of place
I never expected to find myself engaged in this kind of inquiry. Although I did most of my growing up in Montana and graduated from college in Bozeman, I, like a long line of Montanans before me and since, promptly left the state. After being validated with an M.B.A. from Northwestern in 1985, I landed a "real" job at the old Continental Bank in Chicago as a wet-behind-the-ears second lieutenant of commerce. My first task was to make loans to the entrepreneurs who were creating the cable-TV industry.

My lending career was doomed. Almost from the start I was inextricably drawn toward ever-smaller, earlier-stage businesses. I morphed from a banker into a venture capitalist during the decade I spent in Chicago and then in Dallas, where I cofounded a private-equity firm called Hoak Capital.

Then, in late 1995, something quite unexpected happened. At the time, I had been toiling away for a couple of years managing an undersized fund that had been raised during a downswing in the venture-capital industry. One day I looked up to realize that my partners and I were a draft away from releasing an offering prospectus for "Fund II," a $100-million-plus institutional round. Real money. That meant I'd be doing larger and even later-stage deals. It was a get-seriously-rich-on-the-back-end kind of opportunity.

An M.B.A.'s dream come true, right? Um...no, at least not for this M.B.A.

Until then my partners and I had been attempting to do roll-ups with a $20-million equity fund, which took a certain amount of creativity. Out of necessity, I had spent the early 1990s hanging around grassroots (by VC standards) entrepreneurs. By 1995 I knew that those were the characters I wanted to spend more time with. And that's not where Hoak's Fund II was headed. So I resigned from Hoak before the fund's launch. (Signing on as a partner of a venture fund is kind of like joining the marines: you don't change your mind after enlisting.) I had only a vague idea of what I was going to do next and no idea where I was going to do it.


"I happen to live in Montana. How, I began to wonder, did my location affect my chances as an entrepreneur who was trying to build a company by helping other entrepreneurs build theirs? I needed to see."


In the year before all of that transpired, my daughter was born. My wife, Shelley, had completed her own M.B.A. at Southern Methodist University and had continued her full-time career at AT&T. My parents, who had spent the previous 15 years on the West Coast, had relocated to Dillon, Mont. My youngest brother (who did much of his growing up in southern California) had made his way to Bozeman. Shelley's parents lived in the mining town of Butte, and her only sister lived in Bozeman.

Nevertheless, Bozeman -- so help me -- was not on our radar screen, other than as a preferred destination for holidays, ski vacations, and mountain-biking excursions. We enjoyed the urban life and had numerous friends in Dallas. But then serendipity intervened.

I had called one of my limited partners -- who had coincidentally migrated from Texas to Montana in order to hunt, fish, and live the good life -- to explain my departure from the fund. That conversation led to a series of events resulting in my getting an offer to join a high-end, "soft adventure" specialty-travel company based in Bozeman. My role would be to help engineer the restart of the business, whose product had an international reputation but was only marginally profitable.

What did we have to lose? I'd already torpedoed my budding VC career, and Shelley informed me that she had her sights set on child number two. If we were going to be poor, at least we could be near family and have a great view of the mountains. Even if the worst happened, we were only in our midthirties and felt confident of our ability to reenter the "real" world if necessary.

So I accepted the job, and we headed off to Bozeman. The stint with the travel business, however, lasted less than a year, since I discovered that the company was an amazingly effective not-for-profit dressed in for-profit clothing. For a for-profit kind of guy like me, it just wasn't right. However, I learned that I did indeed have something useful to contribute to small businesses. From close up, I also recognized that Bozeman was becoming a much more interesting and vital place than it had been in 1983, when I had left it, even though change had brought with it urban sprawl and social stress.

For the next four years I used Bozeman as a base from which to wander the country. During that time I successfully served as an adviser and interim-management-team member of a handful of young companies in Silicon Valley, Denver, and Washington, D.C., as well as Montana. I failed in an attempt to launch a company aimed at promoting partnerships between start-ups and large corporations. Even so, business as a fly-in consultant was pretty good. I was making a better-than-average living while having a fulfilling life.

So you might think there was no reason for me to take an interest in Montana's economy. After all, I was a wired guy, a lone eagle living the Rocky Mountain fantasy lifestyle. I took phone calls from the East Coast in the morning, scooted up to the local ski hill in my all-wheel-drive for a couple of hours on powder, and made calls to the West Coast by early afternoon. The Internet, my cell phone, and Delta Air Lines took me to my clients, wherever they might be. I simply lived here. It was my God-given right as a new-economy American to ignore the notion of place, except as it affected my lifestyle.

What a crock.

I've recently come to realize that I've been a mere consumer of place, investing nothing in and giving little to the various communities that I've passed through. In the past my lack of connection showed in my aversion to buying a home -- I didn't want to be tied down by one, just in case I felt the itch to move on. I even denied the Montana of my youth, referring to it as "home base" rather than "home" (and then only when pressed). Besides -- I told myself -- Shelley was covering for me. Though my relationship with the communities that had provided me with opportunities over the past 15 years was superficial, her commitment was meaningful. In addition to working on her own career, Shelley had managed both to be from Montana and to be a real member of the Chicago and Dallas communities. She had lived in those places. I had done little more than use the airports.

Now I wanted it to be different. I'd come to need a sense of place in deeply personal ways. How ironic, then, that I had to wonder whether "place" might sink me economically. In a slowing economy, my competitiveness as a Montana-based venture catalyst was likely to diminish rapidly. When the deal flow slows, those closest to the deals win. The personal cost of my gold frequent-flier card had been high, and I wasn't excited about the prospect of picking up the pace of my travel schedule to stay in the game.

So, you see, I was at a crossroads. On one hand, my family and I loved living here, and I felt a pressing need to contribute in a meaningful way to my community. On the other hand, economic storm clouds were on the horizon, and I had to concede that it was quite possible that those of us who had managed to make a pretty good living here in Bozeman had simply been the lucky beneficiaries of an unprecedented national economic expansion. Notwithstanding my newfound commitment to this place, I was first and foremost responsible to my family. If I was to stay here, I needed to find satisfactory answers to a couple of key questions. First, what were the forces behind the recent emergence of entrepreneurship in Bozeman -- and were they lasting? Second, how might I adapt my venture-catalyst role to stimulate or otherwise exploit those forces to achieve my financial goals? In short, getting a better grip on the relationship between entrepreneurial energy and place -- this place -- had pretty dramatic, practical consequences for me.

So I had an increasingly urgent research project on my hands. I set out to learn what others had discovered about how place and entrepreneurship affected each other. And I hoped that what I learned would help me know what to do.

"Best places" as benchmarks
First I turned to the "best places" lists that seem to turn up in every business magazine in the country. Such lists are popular and compelling. They have an inherent dichotomy that is appealing: there are winners and losers. Emulate the winners, the thinking goes, and you can be one, too.

So what did the lists and rankings tell me about the factors that determine the single best place to start a business? What factors should I focus on?

Well, I have to admit that I was perplexed.

Inexpensive real estate was hugely important. But then there was Palo Alto. A dense network of specialized workers was a must. After all, it worked for Detroit -- for a while. No, specialization was bad. There shouldn't be a single, dominant industry. Hmmm...the oil industry was pretty good for Houston for a time, FedEx didn't exactly hurt Memphis, and the coffee flowed in Seattle when Boeing sold a bunch of 747s to China. It went without saying that low taxes were essential. See New England. A major airport was a must-have. So why wasn't Cincinnati higher in the rankings? A large workforce was what was important. Which explained the enormous advantage that, say, Philadelphia had over Austin? Local sources of venture capital were increasingly a requirement. Though that didn't explain why a mere 4% of last year's Inc. 500 received venture capital as seed money.

And what did it mean to say that Oklahoma City was better for business than New York City? For whom? And if Seattle could drop 22 places in just five years, as it had in Inc.'s latest rankings, what should we attempt to glean from these lists?

Well, if there was no single best place, maybe there was a best type of place.

Unfortunately, the search for a useful model didn't get any easier. The rich taxonomy of regions includes, among other things, boomtowns, science cities, networked neighborhoods, world capitals, population magnets, Rustbelt revivals, urban boutiques, frontier towns, and retreats. Big cities have ceded their economic crown to edge cities that, in turn, are losing out to "nerdistans" like North Carolina's Research Triangle. Just don't tell that to urbanists who trumpet the virtues of Silicon Alley in New York City, the resurgent Near North Side in Chicago, and Deep Ellum in Dallas.


"Wasn't it my God-given right as a new-economy American to ignore the notion of place -- except as it affected my lifestyle? The Internet, my cell phone, and Delta Air Lines took me to my clients. I simply lived here."


The quality of life in various places seems for many observers to be of preeminent importance in the knowledge economy. It's just that there are differences between what, for instance, a twentysomething is looking for and what we middle-aged guys seek, so quality of life can be a pretty slippery concept.

Illumination was eluding me.

Even if I were less dense, what could I do with this stuff? I was no Oz. I didn't have the power to turn tiny, often frigid Bozeman into a sun-caressed urban mecca blessed with world-class research institutions and a large, well-trained workforce -- even if I wanted to.

At that point the smart money was apparently telling me to move. But that wasn't an option that I was ready to exercise without more evidence. (Fortunately for me, I -- unlike academics, analysts, and jurists -- didn't have to accept circumstantial evidence, even if it was overwhelming.)

Time to ditch the magazines and reach for the bookshelf. What might I learn there about the origins of entrepreneurial life?

Back to school
For starters, I found out that place really does matter. Jared Diamond won a Pulitzer prize for his book Guns, Germs, and Steel, which makes the case that geography was the single most significant factor in determining the course of human history over the past 13,000 years. Book summary: The East-West orientation of Eurasia meant that the Europeans had the guns, germs, and steel that allowed them to run roughshod over resident Americans and Africans, and not the other way around.

OK, so where was all that information when I was completing my two degrees in economics?

Economic geography has been a big issue in academic circles but was apparently pushed aside until recently because it was thought to be impossible to explain with math. The basic ideas of economic geography, however, are pretty intuitive. On one hand, the ability to tap into "externalities" -- such as the ability to share specialized providers of resources, a rich labor market, and the spread of knowledge through personal interaction -- tend to promote agglomeration of businesses, or clustering. (Agglomeration? Sounds like something that sticks to one's shoes.) Add to that the notion of increasing returns -- when a place achieves critical mass, it tends to attract businesses even faster -- and you find out that the rich do indeed get richer.

In other words, having a lot of vendors around to service your business, a bunch of qualified workers, and the ability to swap war stories translates into economic advantage. Cities are the big economic innovation of the past few thousand years. And success breeds success.

However, as with everything in economics, there is a set of countervailing forces -- in this case, those that promote dispersion. They include the cost of congestion (crime, road rage, theme restaurants, and the like), the bidding up of prices, and the mobility of labor.

In other words, cities can become less than pleasant or affordable. When cities start to suck, people do their best to leave. Thus, from the interplay of those centrifugal and centripetal forces, cities are born, spawn suburbs, collapse, and are reborn.

So what of the vaunted "death of distance" wrought by the Internet? Hasn't technology increased labor's mobility and diminished the importance of physical proximity? Is the cluster dead?

Maybe. Maybe not. As researchers such as Catherine Dibble at the University of Maryland have found, the specific characteristics of place actually become more important as technology shrinks the world.

Joel Kotkin (who contributes to Inc.) writes in his recent book, The New Geography, of "Valhallas" (such as Aspen) and so-called nerdistans -- places shaped by a new technocentric, mobile aristocracy. "The growth of a given ... region now depends increasingly on the decisions of specific groups of individual entrepreneurs or workers to locate there," he writes. Journalist Michael Malone anticipated that trend in his 1994 article in Upside magazine titled "Is Silicon Valley Over the Hill?" In it he wrote, "The new cities, like the entrepreneurial companies they hold, will remain vital only as long as they continue to attract that small fraction of the population who are the innovators, the leaders and the trendsetters." Today the people who "matter" can work from any place that has Internet access and regional jet service, and those elites are going to migrate to places that tickle their (varied) fancies.

Not so fast, warns John Seely Brown, former head of the famed Xerox Palo Alto Research Center; the death of distance has been grossly exaggerated. Unlike mere information, which can be transmitted effortlessly, knowledge -- the fuel of the new economy -- requires "shoulder-to-shoulder" proximity to be transferred. Brown speaks of communities of practice that are lubricated by mutual trust and sharing. Trust -- at least in one another's ability to perform professionally -- doesn't require proximity (nor is it guaranteed by it), but it sure does seem to help. A lot. Hence, the advantage held by Silicon Valley, for example, may be more pronounced than ever.


"I'm in awe of Bozeman's rise, but I'm also terrified of the fragility of our newly vital, but very isolated, economy."

-- David Bayless

Matt Harris, CEO of Massachusetts-based Village Ventures -- who is having success stimulating native venture capital in such cities as Boise, Idaho, and Middlebury, Vt. -- concedes that "critical mass is important." He acknowledges that one of the problems facing many otherwise desirable locations is "the lack of a broad peer group." To mitigate the need, Village Ventures felt that it "had to instigate quarterly face-to-face meetings" with its local and regional partners to supplement the usual barrage of E-mail, conference calls, faxes, FedEx packages, and voice-mail messages.

So we can categorically state that distance matters less -- and more.

OK, economic geography does provide a framework for understanding the big picture. But it doesn't seem to be much help with specific cases. Even ubereconomist Paul Krugman admits, "If you try to explain why a particular region is home to a particular industry, you usually end up explaining it largely by describing the sequence of events that caused the industry to be there."

To borrow one of Krugman's examples: hundreds of years ago the Puritans needed a place to educate their ministers, so the cluster of universities that eventually became the basis for Massachusetts's technology industry was born.

Economic biology
If economic geography alone can't explain what makes for an entrepreneurially healthy climate, maybe a little biology will do the trick.

The study of complex adaptive systems involves biologists, economists, physicists, ecologists, sociologists, and other "-ists," all concerned with what happens when autonomous agents interact. When autonomous molecules interact, says theoretical biologist and Santa Fe Institute affiliate Stuart Kauffman, new life is "almost inevitable" -- provided that there is enough variety among the molecules, a kind of critical mass in terms of both quantity and diversity. If biological life emerges from a sufficiently diverse pool of molecules that catalyze one another, might not economic life emerge from a sufficiently diverse group of entrepreneurs and ideas that effectively stimulate one another? By gathering the right set of people together in one place, can we purposefully cultivate entrepreneurship?

In Harnessing Complexity, Robert Axelrod and his University of Michigan colleague Michael Cohen identify three factors -- variation, interaction, and selection -- that play a critical role in evolution. Those same factors might also play a part in economic development.

Maybe, just maybe, if we want to understand why and how a place fosters a dynamic, adaptive entrepreneurial environment, we should consider the variety of individuals and their ideas, how they interact, and the selection or feedback mechanisms (such as responses in the marketplace) that guide them. I strongly suspect that the application of that tripartite lens could yield useful insights into why entrepreneurial activity has suddenly emerged in Bozeman and places like it -- and also offer us clues about their future.

The emergence of Bozeman
Montana is one of the most sparsely populated states in the Lower 48. It's one and a half times the size of the United Kingdom but has 1.5% of the population. It shouldn't be surprising if the variety and interaction of people and ideas here fall below the threshold of Kauffman's hypothetical critical mass. Furthermore, distance discourages the formation of essential networks of cooperation. Mix in a culture that has been ambivalent toward entrepreneurs and a populist-flavored tax structure that some view as punitive -- two unfavorable selection mechanisms -- and Montana's entrepreneurial-culture challenges become apparent. And, therefore, deliberate nudges to the system could substantially change how well it works.

The transformation of Bozeman began of its own accord roughly a decade ago. At that time a wave of artists, musicians, professional environmentalists, and assorted misfits settled in town. They were drawn by an environment and a lifestyle that for them were idyllic. The newcomers brought a dose of much needed diversity to the prevailing culture, which historically had been eroded only by the seasonal tides of students and teachers at the local university. That's not to say that the preexisting culture was bad or inferior in any way. It just wasn't enough to sustain vibrant economic life.

Then came a jump in tourism (led by fishermen who had seen the movie A River Runs Through It) that justified an expansion of Bozeman's air service, culminating in multiple daily nonstop jet flights to Seattle, Salt Lake City, Denver, and Minneapolis. More variety and interaction resulted.

Five years ago the Internet came to town. Soon thereafter came the first identifiable wave of business builders -- artists in their own right -- who were drawn by the environment, the community, the budding culture, and a couple of seriously improved restaurants. Little companies started to bubble up, and local versions of the roundtables, lunch clubs, and networking organizations so prevalent in Silicon Valley and other metropolitan areas started to form. The variety and velocity of ideas were increasing steadily, even if they were still barely measurable.

Selection mechanisms started changing; in subtle ways, entrepreneurs began being recognized and encouraged. The local newspaper started running regular features on business and entrepreneurs. Politicians started becoming aware that something was stirring. Even area economists began conceding that their statistics might not have been adequately capturing the (dare I say it?) buzz that was slowly growing in the Gallatin Valley. Acknowledgment is an enormously powerful form of feedback, particularly when it's been withheld for a long time.

Some entrepreneurs even began to attract venture capital and investment bankers.

We in Bozeman, collectively, are emerging from the primordial ooze to begin life as newly emergent economic organisms. In effect, there has been no meaningful plan to promote entrepreneurship here. No competitive analysis. Entrepreneurial life is springing up here of its own accord.

There are no sterile forces behind the boom of company building in Bozeman. Just real people -- real entrepreneurs -- acting, interacting, succeeding, and failing. Coevolving and learning rapidly.

I'm in awe, but I'm also terrified of the fragility of our newly vital, but very isolated, economy. I also don't discount the potential for us to screw up the community and the environment that give our economy context and meaning.

Yes, Bozeman is a beautiful place. It has a respectable university, Montana State, that is becoming increasingly well known for its research. The population is well educated. We have surprisingly good air service. The climate is great (for at least 10 weeks a year, anyway).

But that was all true 18 years ago, when I left Bozeman with no thought of returning except for the occasional ski vacation. It was true when thousands of other Montanans like me left.

However, distance is less important today than it was five years ago -- even though, somewhat paradoxically, the characteristics of place are more important than ever.

So we come to Bozeman, expatriates and new immigrants both. And we bring with us diverse life experiences, contacts, networks, and respect for other places where things work differently and, in many cases, better. We come to a place and a community that are painfully important to us. We mix with the people who did not leave and who made and maintained the place that we love. Change and growth have been the result.

What I've learned
To chart my personal course, I set out to answer two questions: What factors were behind the entrepreneurial changes in Bozeman? And how could I, as a would-be venture catalyst, stimulate and take advantage of those factors?

Changing values seem to have played a role. Bozeman's evolution has been stimulated by newcomers seeking more balance in their lives, a renewed connection with nature and community, and a good place to raise their children. There's a lifestyle here that isn't available in Seattle, Boston, or San Jose. That said, people also need to make a living, so entrepreneurship has become an increasingly popular option.


"Paradoxically, the specific characteristics of place actually become more important as technology shrinks the world."


However, it's still true that it's much more difficult to effectively participate in the knowledge economy in Bozeman than it is in Silicon Valley. The pioneer entrepreneur who would build a business in this out-of-the-mainstream place still faces significant challenges:

1. Peers -- much less mentors -- are hard to find. Once made, relationships are harder to maintain given our geographic isolation.

2. There is no deep, broad pool of expertise to be found locally.

3. It's not clear that appropriate forms of capital are readily available. High-growth knowledge-based businesses are not generally amenable to bank-debt financing. Furthermore, given their relatively high commitment to place and community, pioneer entrepreneurs tend not to find venture capital appealing, since it requires a near-term cash-out of some kind.

If I'm going to make a living while contributing to my community, I would do well to consider how to profitably address those continuing shortcomings.

What I'm going to do

I left Bozeman to learn how to be a financial engineer. I returned to Bozeman, I've discovered, to help pioneer entrepreneurs be more successful.

So here's what I'm going to do from this place, so long the forgotten stepchild of the economy: I'm going to build a platform that will give entrepreneurs improved access to peers, expertise, and appropriate capital. The foundation will be composed of top-notch facilities and technological networks that will aid ongoing collaboration and facilitate critical social networks. In order to ensure access to new ideas, we'll seek to be a "do tank" that unlike a think tank actually helps people turn their ideas into companies. Given the understanding we'll develop of our entrepreneurial customers, we'll be positioned to profitably design and deliver a form of mezzanine capital better adapted to our community of company founders. Though we'll be rooted in Bozeman, our target market will be national and, eventually, international.

It should work. However, I'll try to remember that dynamic systems -- including businesses -- are inherently unpredictable. Doing everything right is no guarantee of success.

On the other hand, as historian David Landes concluded in The Wealth and Poverty of Nations, "In this world, the optimists have it, not because they are always right, but because they are positive. Even when wrong, they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right."

I'll continue to make my life and living here in Bozeman. Look for us in future editions of the "best places" lists.

David Bayless is a recovering venture capitalist who lives and works in Montana.


Please e-mail your comments to editors@inc.com.

Last updated: Aug 1, 2001




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