Trading Places

Steve Rosa still remembers the day he knew he had to go home to Providence. It was July 14, 1992, his father's 70th birthday. "My dad's not getting any younger," Rosa thought. Rosa lived just 60 miles away, in Boston, but he was putting in 80-hour weeks at the four-person advertising agency that he'd started there three years before. He just didn't have time to drive an hour or more for dinner with the family. So at age 28, Rosa moved himself and his business, Advertising Ventures Inc., to Providence. He figured he would still be within easy reach of the high-tech clients that he had attracted in Boston. The best of both worlds, right?

Wrong. What he didn't realize was that his clients would see things just a bit differently.

Heidi Lang, however, knew a little something about relocation long before she moved her company. She had emigrated from her native Germany to Canada when her husband was transferred to Toronto, in 1987. That's where she started her photo-frame business, Transatlantic Marketing Group (TMG), in 1995. With backing from a venture-capital firm, she built a small factory in a Toronto suburb, where the company made private-label frames for retailers. By 1999, TMG had revenues of $3.4 million (U.S.) and had twice made Profit magazine's list of the 100 fastest-growing companies in Canada.

But practically all her customers were in the United States. Lang, who was bringing in 80% of the company's sales, was spending a lot of time on the road; sometimes four or five days a week. So she decided to move the company to the States. Her VCs suggested suburban New Jersey. She considered Atlanta. Finally, she settled on Jacksonville, Fla. "We looked at all three of them, and I said, 'Well, I tell you, I like the beach!' " Lang says.

Her investors thought she was crazy.

Then there's George Liebmann Jr., whose six-year-old company, Permafresh Corp., is based in Santa Fe, N. Mex. The place has been good to him, but it's not where Liebmann started out, and it probably won't be where he ends up.

Liebmann was a 24-year-old consultant in New York City when he developed the product that would lead to Permafresh: a cork system that preserves the wine in opened bottles with a layer of argon gas. Tired of flying cross-country to meet with wine producers in California's Napa and Sonoma valleys, he moved to Santa Fe in 1997. In that small state (population 1.7 million), it wasn't hard to make connections. The state economic-development department and the staff of Senator Pete Domenici aided Liebmann in many ways, from getting him oriented to putting him in touch with the state's European and Asian trade representatives.

But New Mexico simply doesn't have many development programs available for businesses. Nor does it have a great supply of the sort of business-support services that Permafresh needs as it grows: investment banks, accounting firms, package-design firms, marketing consultants. "I'm spending an enormous amount of time on airplanes, flying to the East Coast," says Liebmann. But where should he move? Back to New York -- where some of his angel investors are? It would make sense, but there's a problem. New York City just is not Liebmann's kind of town.

Why do entrepreneurs and CEOs move their businesses? After all, running a company is hard enough without the stress of relocating it. But location can make a big difference in the success of a company, even though most entrepreneurs tend to start a business in a particular place simply because they live there. That's fine -- for a while.

Consultant David Birch of Cognetics Inc., in Waltham, Mass., has studied the effect of location on growing businesses for eight years and annually compiles our lists of best cities. He says that two kinds of considerations come into play when a CEO decides on a location for a company: business reasons and personal ones. "They're often in tension with each other," says Birch. "As the company grows, I think, the business considerations start to swamp the personal ones." Maybe it's increasingly important to be closer to customers or suppliers, he says. Or to be near a bigger or better labor pool. Maybe the costs of doing business are significantly lower somewhere else.

If there's a poster child for what can go wrong when personal considerations take precedence, it might be Rosa. He didn't do much planning before relocating his agency to Providence. He just picked up and moved. He expected his Boston clients to barely notice the difference, but within a few months he saw that they were not renewing their contracts. Worse, Rosa couldn't find enough new clients to replace them in Rhode Island, a smaller market suffering from a recession and a statewide credit-union crisis. He remembers calling on one Rhode Island manufacturer. "The first thing she says to me is, 'You're crazy for coming here. Go back. I'm moving to North Carolina,' " he says.

It's a different story with Heidi Lang. She's thrilled with her company's new home, in Jacksonville. "Building a company is a tremendous stress," she says. "Now I go home, and I'm going to open my convertible as soon as I hit that one bridge and I see the ocean. I'm like, Yesss!"

Unlike Rosa, Lang based her decision on what made business sense as well as on her desire to live by the beach. She takes pride in knowing her retailer customers inside out -- the look and feel of their stores, what kind of consumers shop there -- so that she can recommend a line of frames tailored to their markets. It was hard to do that from Toronto when most of the chains she sold to had stores across the United States. "You have to do a lot of homework on these stores, and we had none of these stores in Canada," she says.

Besides, starting fresh in a new city gave Lang a clean break, an opportunity to make over her rapidly growing company and prepare it for the next level. "We were very much aware that we needed to change managers," she says. "After you grow to a certain point, you have a set of managers at that time, and then you go to the second plateau of the company and then you require a different type of manager."

The plan was to start over in the United States with a brand-new team: a chief financial officer instead of a controller; a sales manager; and an expanded sales staff. In particular, Lang wanted managers who had experience with small growing companies and knew something about mergers and acquisitions and initial public offerings.

Lang's venture-capital backers were less than thrilled by the relocation plan. Why not stay put and enjoy a slower but safer growth rate -- say, 20% a year? they asked.

But Lang, determined to head south, put a plan together for the move and started selling it to her investors. Luckily, she controls 60% of the company and had the leverage to make the decision stick. "It took a lot of convincing for everybody," she says. "I just felt that if we don't do it now, it might be too late for us, and our company might not grow as quickly as I want it to grow."

Of the three sites under consideration -- New Jersey, Atlanta, and Jacksonville -- Lang leaned toward Jacksonville, a place that she knew from sales calls to retailer Stein Mart Inc. Jacksonville seemed to be a modern southern city and had those Florida beaches. It was only a 30-minute flight from Atlanta and within easy striking distance of many of her customers. And it was the cheapest of the three options when it came to rent.

She learned soon enough that sunny, inexpensive Jacksonville had some drawbacks, too. Once she had found space in an office park there -- at $4.50 a square foot, which included the majority of the buildout -- she gave her administrative staff in Canada five months' notice, with the promise of bonuses up to $6,000 if they stayed until the end. (Almost all of them did stay, she says.) But finding replacements in Florida was harder than she expected -- perhaps because the Jacksonville unemployment rate was then hovering around 3%. When TMG advertised its openings, "I had a good response, but they were in lines that were not related to what I was looking for," Lang says. Fortunately, she had allowed herself enough time to keep searching. She ended up hiring managers not just from Jacksonville but from neighboring Gainesville and St. Augustine, 70 and 40 miles away respectively.

TMG's Jacksonville office opened for business last May, and the final phase of the move took place in September. It's too early to tell whether Lang's bet on Jacksonville will pay off. But she says that TMG's revenue growth -- projected at 45% to 55% for 2000 -- has stayed right on track since the move. So far, she says, her VCs don't have anything to complain about.

Liebmann of Permafresh would agree with Lang that a company needs to be in different places during different phases of its life. But his business is nowhere near as large or established as TMG. When Liebmann made his move from New York to Santa Fe, he was specifically looking for a city that would nourish a start-up.

Living in Santa Fe was a lot cheaper than living in New York, and the flight time to the California wine country was just two and a half hours. Plus, Santa Fe offered a culture and a lifestyle that appealed to him as an entrepreneur. For several years before the move, Liebmann, who has an extracurricular interest in chaos theory, had been making regular visits to the Santa Fe Institute for seminars and other events. He was wowed by what he calls the "amazing minds" that he met in New Mexico -- the academic and scientific community centered around Los Alamos National Laboratories, including a number of scientists-turned-entrepreneurs. "It gets pretty lonely -- in New York I was probably the only inventor-entrepreneur that I knew about," he says. "So I had peers here."

And to some extent, that network has paid off. A lunch Liebmann recently had with the CEO of a biotech company in Albuquerque, for instance, yielded some ideas for industrial applications of his product. Liebmann has joined business networking groups (Santa Fe's Safari Club and Albuquerque's Home Run Club) with some good results. Last February, he found his chief financial officer, Dallas Renner Jr., former director of investor relations and financial services at the spice company McCormick & Co., through the Home Run Club.

Other connections have remained elusive, though. Theoretically, Santa Fe has scads of potential investors in the form of seriously moneyed retirees and vacationers, the so-called hill and valley crowd. Liebmann has made a lot of visits to Los Alamos's Coronado Ventures Forum, which aims to match such angels with local entrepreneurs. But in three years, he says, he hasn't been able to tap into any of that wealth.

New Mexico's relative lack of business services also presents a problem. Permafresh works with a bank in Washington, D.C. The company's patent lawyer is in Princeton Junction, N.J. Its industrial-design firm is in New York City. So for the next stage of Permafresh's growth, with the rollout of its first product scheduled for 2001, business considerations are going to trump personal ones. Liebmann wants to move Permafresh's executive offices back to New York, where he can find the services and the talent pool needed to take Permafresh to the next level.

Yet he doesn't need to move the whole kit and caboodle to New York. As with a lot of growth companies, it makes sense to relocate only certain key operations. Splitting up a business in that way can help a CEO track down scarce resources, such as labor, more easily. So here's Liebmann's plan: The assembling and packaging of Permafresh components will probably stay in New Mexico, specifically in Albuquerque, where labor and space are relatively inexpensive. Liebmann will move to New England for at least part of the year. He's not hot on returning to New York, so after hiring a president to take over the day-to-day running of Permafresh in New York, Liebmann will probably move to Vermont, close to his alma mater, Dartmouth College, to concentrate on research and development and strategic planning. Splitting up the company probably would have been impossible when it was still a start-up, when the founder was running the business practically single-handedly, but now that Permafresh is established, that arrangement should work fine.

Lang has taken a similar tack. Although she has moved her company's executive offices to Jacksonville, she's decided to leave TMG's factory operations in Canada. Given the volume of orders these days, she says, it would be far too risky to lose her experienced manufacturing workers and have to retrain new ones.

Relocating only part of a company can free up an entrepreneur to pursue new opportunities more easily. Take Tom Hursman of Spectrum MedSystems Corp. He wasn't even thinking about moving any of his medical- and safety-products business out of Irvine, Calif., where he had been based for five years. He just wanted funding to launch a new line of business: producing a new plastic insert for work boots. Then he found out that by relocating part of Spectrum's manufacturing operations to an economic-development zone in Syracuse, N.Y., the company could really save money. It would be able to qualify for low-interest loans from the state of New York, buy discounted electricity from Niagara Mohawk Power Corp., and even get free land for the factory from the city of Syracuse.

The move made sense from a logistics standpoint, too, since Syracuse was closer to Hursman's insert customers, mostly boot makers based on the East Coast. The rest of Spectrum, however, stayed in California, although Hursman has moved his remaining manufacturing operations to a smaller space in Pomona.

Relocating isn't for everyone, though, as Lori Northrup can tell you. For 20 years the CEO ran a tool manufacturer called Stride Tool in the village of Ellicottville, N.Y. Ellicottville, which is about 50 miles south of Buffalo, is a pretty Victorian ski town that Northrup had fallen in love with as a teenager. In that rural area, with its relatively high unemployment, she found inexpensive space and plenty of labor. By 1998 Stride Tool had revenues of $40 million and was growing so rapidly that it earned a spot on the Inc. 500 list.

But by then Northrup was at work on a new venture. As early as 1995 she had become interested in creating an online brochure and using the Internet as a marketing tool for the industry. Then she realized that she could actually sell products over the Internet. The result was

Northrup figured that an Internet start-up belonged in Silicon Valley, ground zero of the dot-com revolution. Then came the clincher: an almost-rock-solid promise of funding from a Silicon Valley venture-capital firm, on the condition that ToolSource relocate to San Francisco. In early 1999 Northrup hired an executive recruiter to put together a management team and started dividing her time between Ellicottville and San Francisco. "It was exciting there," Northrup says of the Bay Area. "It certainly felt like you were in the center of what was happening."

But the new company had to face the usual Silicon Valley hiring woes: skyrocketing salaries and rapid turnover. At the direction of the company's potential VC backers, Northrup and her team spent much of 1999 trying to refocus ToolSource on the ever more crowded consumer market. Then, at the end of the year, the promised VC investment failed to materialize -- just as the company's landlord announced that he was about to renovate the building ToolSource was in and triple the rent. "It just seemed like the crowning blow," says Northrup. "Everything out there was hostile."

So she went home again, and everything began to come together. There were no more landlord problems: Northrup owned a building that had once housed Stride Tool. And within a month of her return, she landed funding from Buffalo's Seed Capital Partners. As it happens, one of Seed Capital's partners has a second home in Ellicottville; he and Northrup meet regularly on Sunday mornings at a local deli.

Although she worried about whether she would find enough technical talent in Ellicottville, Northrup found she could attract IT workers willing to make the commute from Buffalo. The village itself became her "secret weapon" as job candidates were won over by some of the same small-town factors that she loved. Her executive vice-president, David Lokes, had reduced his role to the level of a consultant instead of relocating while ToolSource was still in San Francisco. He couldn't envision moving his family out from his home in Connecticut (from which he was commuting to San Francisco while still executive VP), he says. Once the company was back in Ellicottville, however, Lokes reconsidered. Now he lives in New York State, half a mile away from work. He can go home for lunch. He doesn't miss Connecticut at all.

The sojourn in San Francisco wasn't entirely wasted, Northrup says. It gave her firsthand experience in what running an Internet company was all about, from the accelerated pace to strategic partnerships to employee ownership -- the kind of exposure she could have gotten only by being there. "I'd grown up in very midwestern, traditional manufacturing," she says. "It was a whole different way of doing business."

Then there's Rosa, who decided to stick it out in Providence. In the end he has shown that sometimes an entrepreneur can make even an unpromising city work -- if at least some of the pieces are in place and if he or she has some luck, creativity, and patience.

Although Providence lacked some things that Rosa needed -- like customers -- it did offer other resources, such as a talent pool of creative professionals, thanks to the Rhode Island School of Design and Brown University.

When he first moved his company to Providence, Rosa shared space with some designers, photographers, and other ad people, and soon he figured out how to operate as a virtual ad agency, hiring freelancers on an as-needed basis. He relied on Providence's convenient airport to make frequent trips to Chicago, where trade journalists pointed him toward some potential clients, and he cold-called his way into landing work from them. By taking advantage of Providence's lower expenses, he could sell himself to New York clients as a low-cost alternative.

A referral from a company in Chicago brought Rosa his first major client in Rhode Island. He hung on, and eventually the Rhode Island economy recovered and boomed -- in part because of the revitalization of downtown Providence. Today Advertising Ventures has 15 employees and draws 50% of its clients from Rhode Island.

It's quite possible, of course, that Rosa's ad agency would now be even bigger and more successful had he stayed in Boston. But he has no regrets. From his office in a now-chic neighborhood of renovated factory buildings, he can drop by for lunch with his parents. He runs into people that he knows on the street or in restaurants. He feels grounded, he says. And that makes him better at running his business, he thinks. "I wouldn't be the same person [somewhere else]," Rosa says. "I don't think I'd be as valuable to my clients. I became complete here."

Emily Barker is a senior staff writer at Inc.

Movers and Shakers

Big cities that blasted up the list

Since 1993 these large metro areas have shown the most improvement in their business climate.

City 1993-1994 rank 1999-2000 rank Change
Phoenix, AZ 26 1 +25
Dallas-Fort Worth, TX 29 6 +23
Memphis, TN-AR-MS 25 7 +18
Detroit, MI 46 32 +14
Kansas City, MO-KS 33 21 +12
Baltimore, MD 39 29 +10
Boston, MA 44 35 +9
San Antonio, TX 27 20 +7
Tampa-St. Petersburg, FL 34 27 +7
St. Louis, MO-IL 36 30 +6

Source: Cognetics Inc.

Rank in 1999-2000: 1
Change in rank since 1993-1994: +25
Big reason for rise: Rapid population growth

Phoenix is the country's second-fastest-growing large metro area, with a 34% increase in population from 1990 to 1999. Phoenix also enjoys an overall operating cost advantage of 7% to 13% over cities of comparable size, according to Rick Weddle, president and CEO of the Greater Phoenix Economic Council. And the region's high-tech roots are paying off. Large manufacturers have formed partnerships with local universities to create a more educated workforce, and refugees from companies like Intel have provided a ready source of employees for many start-ups, according to Tim Riester, president of Phoenix-based ad agency Riester-Robb. Plus, "you wake up every day, and it's beautiful," says Riester. --Mary Kwak

Movers and Shakers

Big cities that plunged down the list

Since 1993 these large metro areas have shown the biggest decline in their business climate.

City '93-'94 rank '99-'00 rank Change
Greensboro-Winston-Salem, NC 12 40 -28
Seattle, WA 15 37 -22
Los Angeles, CA 17 34 -17
Portland, OR-Vancouver, WA 13 28 -15
Milwaukee-Racine-Sheboygan, WI 7 22 -15
Miami-Fort Lauderdale, FL 11 24 -13
Nashville, TN 5 16 -11
Cleveland-Akron, OH 30 39 -9
Bridgeport-Stamford-Norwalk, CT 37 44 -7
Rochester, NY 43 49 -6

Source: Cognetics Inc.

Rank in 1999-2000: 40
Change in rank since 1993-1994: -28
Big reason for drop: Being overshadowed by boomtowns Raleigh-Durham and Charlotte, N.C.

What North Carolina's triad area -- Greensboro, Winston-Salem, and High Point -- seems to be missing is critical mass. Yes, the Triad has universities, venture capitalists, incubators, entrepreneurial networking groups, and other small-business support organizations. It just doesn't have as much as the neighboring Raleigh-Durham-Chapel Hill nexus has. "There is a sense of a brain drain from the 25- to 39-year-old demographic: people graduate from school, spend a couple of years here, decide it's a lousy place to find a mate, and move to Charlotte and Raleigh," says Michael Dougherty, president of Kindermusik International, which teaches music and movement to children. --E.B.

Movers and Shakers

Small cities that blasted up the list

Since 1993 these small metro areas have shown the most improvement in their business climate.

City '93-'94 rank '99-'00 rank Change
Portsmouth-Dover-Rochester, NH 99 31 +68
Corpus Christi, TX 123 60 +63
Fort Collins-Loveland-Greeley, CO 88 27 +61
Flint, MI 126 69 +57
Fargo-Moorhead, ND-MN 55 2 +53
Portland, ME 115 63 +52
Duluth, MN 121 71 +50
Brownsville-McAllen, TX 93 43 +50
Huntington, WV 111 67 +44
Waco, TX 128 85 +43

Source: Cognetics Inc.

Rank in 1999-2000: 31
Change in rank since 1993-1994: +68
Big reason for rise: Scenic, lower-cost alternative to Boston's high-tech corridor

As the Boston area fills up, companies are heading north to the "E-coast," where prime office space can cost $20 to $24 a square foot -- as much as 50% below the rates along Boston's famous Route 128 technology belt. But Portsmouth isn't just cheap; it's becoming cool. "If we located down in the Route 128 area, we'd pretty much be just another company somewhere off an exit," says Jack Serfass, cofounder of Bowstreet, an E-commerce software company. "We wanted competitive differentiation to attract the first 100 people, and Portsmouth proved to be a great area to do that." The outdoor lifestyle is a magnet for work-hard-play-hard new-economy employees. -- M.K.

Movers and Shakers

Small cities that plunged down the list

Since 1993, these small metro areas have shown the biggest decline in their business climate.

City '93-'94 rank '99-'00 rank Change
Honolulu, HI 3 105 -102
Lancaster, PA 41 116 -75
Spokane, WA 23 95 -72
Salinas, CA 56 127 -51
Reading, PA 38 107 -69
Melbourne, FL 14 74 -60
Allentown, PA 80 125 -45
Hickory, NC 6 48 -42
Santa Barbara, CA 58 97 -39
Tallahassee, FL 13 51 -38

Source: Cognetics Inc.

Rank in 1999-2000: 105
Change in rank since 1993-1994: 102
Big reason for drop: Hawaii's economic doldrums

The Hawaiian economy wiped out in the recession of the early 1990s. Then the Asian crisis of 1997 slowed the flow of tourists. "Unlike the mainland, we're not in a boom," says Jim Richardson, associate professor of management at the University of Hawaii at Manoa. Entrepreneurs also face some indigenous challenges: high real estate, energy, and freight costs combined with a small market and labor pool. "If we were in California or Kansas, we could drive further down the road to find new customers. We can't do that here," says Bernie Boltz, founder of Intech Inc., which makes products from recycled paper. But Hawaii is looking to the high-tech sector to diversify its economic base. --Emily Barker

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