Escape From Silicon Valley
Broadband is inspiring refugees from tech's meccas to build businesses where the living is easy and startup costs are low.
(Business 2.0) – You'd think it would be every nerdy country boy's dream. Kord Campbell, a 38-year-old coder from Oklahoma, started a search engine company called Grub back in the day and sold it in early 2003 to a San Francisco-based dotcom called LookSmart for $1.3 million. Suddenly he had money, and he was moving to the very cradle of geekness, the holy shrine of tech, Silicon Valley. "It was like going to the mothership," Campbell says. "You could run into someone in the grocery store and discuss how to install Linux on a PC."
Thrill though that must have been for a techie like Campbell, the Valley wound up not quite living up to expectations. Microsoft dumped LookSmart as a partner, wiping out 70 percent of the dotcom's revenue. And there was the sticker shock. "I lived in a 532-square-foot apartment, and the rent was more than my mortgage in Oklahoma," he recalls. In December 2003 he cashed out and headed back to Tornado Alley, wondering whether he'd ever have the same opportunities again.
He needn't have worried. Something had happened in Oklahoma while he was away. By late 2003, cable operator Cox and phone company SBC Communications had brought total broadband access to Oklahoma City and the little towns sprinkled around it, sparking a mini business boom on the prairie. Now he could pursue an idea he had for an online photo-sharing startup, using the new high-speed connections to the Internet to manage the masses of data needed to run a Web-based service. He could work with engineers anywhere over the Web, or hire locally—for up to 30 percent less than in the Valley. His startup, Zoto, is hard at work on a product. He figures he's spent $450,000, half what his project would have cost in California. "There's nothing in Silicon Valley you can't get here," Campbell says. "Other than traffic."
More than ever, launching a business today is all about connections—starting with broadband connections. In the past 24 months, there's been a quiet surge in the geographic spread of high-speed Internet networks, and that has dramatic implications for economic development, jobs, and entrepreneurial opportunities. About 51 percent of U.S. Internet users now have high-speed connections, up from about 33 percent in early 2003. More important, the government estimates that 93 percent of American communities have access to broadband; if people aren't hooked up, it's because they choose not to be.
Much of broadband's spread comes from telecoms picking up the postbust pieces and building out networks to midsize and smaller cities—places like Bend, Ore., Overland Park, Kan., and Albuquerque, N.M. In dozens of smaller rural towns, local governments are setting up municipal broadband networks, recalling the bygone days when many little towns built their own power utilities. Some 217 communities have fiber networks either up and running or under construction. Truckee, Calif. (population 16,000), for example, will spend $24 million on fat pipes. In all, about $500 million has been invested to date in municipal broadband.
The burrowing of broadband into the far corners of the country, many experts say, is decentralizing the opportunities for business expansion and startups, particularly in the tech industry. It gives communities far from the bright light-emitting diodes of Silicon Valley, Boston's Route 128 tech corridor, and other big-city tech showcases a real shot at luring tech entrepreneurs. At the same time, it gives entrepreneurs new, low-cost launching pads for their ideas—not to mention exit ramps from the rat race.
And it's already proving a powerful economic force in some areas. In Cedar Falls, Iowa, a study shows that the town has attracted 11 businesses since its $9 million network went live in 1996, including a $100 million Target distribution center with 1,100 workers and a $25 million payroll. All the newly arrived businesses cited fiber as a major lure.
Broadband, of course, isn't always a panacea. For the telecoms, and even more for small communities, the buildout carries serious risk if they can't attract users fast enough. Already, Marietta, Ga., lost $35 million on its muni network before it was sold. But for entrepreneurs, broadband's spread is a godsend. "People are realizing that bandwidth equals startups and jobs," says James Carlini, a Northwestern University adjunct professor who studies broadband's impact. The mantra of those trying to figure out where to start or expand businesses used to be "location, location, location," Carlini says. "Now it's location, location—and connectivity."
The telecom gold rush of 1996 t0 2001 may have led to one of the greatest financial catastrophes in history—losses from failed telecoms eventually totaled $750 billion—but it had its good points. More than 80.6 million miles of high-bandwidth fiber were laid down between major U.S. cities. But the buildout largely bypassed midsize cities and completely ignored rural America. If you think of those miles and miles of pipes as the throbbing main artery of data circulation, what's happening now is the development of the capillaries that reach into ever smaller places. Today there are more than 105 million miles of fiber in the country, hooked up to a growing spiderweb of digital subscriber and cable lines into homes and businesses. They are nourishing entrepreneurial opportunities in places where they may have been sparse before.
Take Overland Park, Kan. That's where John Flowers wound up in February 2003. The founder and CEO of nCircle Network Security, based in San Francisco, Flowers was another disillusioned Silicon Valley refugee. His company was hanging on, but he was burned out, and he stepped down. "There was a new revolution every minute, and you couldn't focus," he says. "This group hallucination of Silicon Valley was not for me."
Soon, however, the entrepreneurial itch cropped up again. He had an idea for an improved search engine that would narrow the number of responses to a query. Some potential investors encouraged him to head back to the Valley and tee up again. But one day, as he was looking out the window of his spacious three-bedroom house, Flowers had an epiphany: He could launch his company right there in Overland Park. The reason? Sprint had totally wired the town. "What I needed for this company was lots of bandwidth," he says. "And we were sitting on a sea of fiber." For the cost of two 1.5-megabits-per-second T-1 connections in San Francisco, Flowers bought 10 times as much bandwidth and started building his startup, called Kozoru. It doesn't hurt that the cost of living in Overland Park (population 149,000) is about half what it is in Silicon Valley. "I went through $13 million in venture funding with nCircle in 18 months," says Flowers, 34. "Here I have $3 million in funding, and it's going to last a lot longer than that." Flowers says Kozoru, now with 14 employees, expects to have its product completed by mid-2005.
The spread of broadband also serves as a means to tap into a broader pool of underutilized national technical skill. Matt Wells lit out for Silicon Valley after graduating in computer science from the New Mexico Institute of Mining and Technology and worked at Infoseek, a search engine company. But he says he missed the wide-open spaces of his old college town, so he moved back to nearby Albuquerque. It was his good fortune that the local cable company, Comcast, had recently wired the city. So he bought a high-speed connection and got to work on an idea for a new search technology called Gigablast.
Wells, 33, worked out of his den and lived off his savings, but within about two years he had developed a product and begun to line up customers. Now he has 40, and the revenue they bring in enabled him to hire four programmers from New Mexico's plentiful government research centers (Los Alamos and White Sands Missile Range, for instance). "People forget how much talent there is outside of Silicon Valley," Wells says. Does he feel he's missing out by being far from the action in the Valley or another traditional tech center? Nah. "If my growth were based upon my geographical location," he says, "then I'd have a really weak business to begin with."
From an entrepreneur's standpoint, one of the beautiful things about broadband in the heartland is that the lower cost of everything there—from engineers to office space to steak dinners—can sometimes spare you from having to grovel for VC funding. Not many people enjoy that process.
Rick Ellis was dead set on avoiding it. A sound engineer in Los Angeles who moonlighted as a website designer, he'd developed a content management system for webpages. He named it pMachine, posted it on the Web, and watched in amazement as thousands of people downloaded it for free. He thought it could become a business, but he was leery of chucking his day job in the music industry, and the thought of scrabbling for VC cash, he says, "turned my stomach." He had saved enough to keep his family going for about six months if they stayed in L.A. His wife suggested that they move to a cheaper town and give pMachine a little more time to find its footing. In 2002 they took off for Portland, Ore. "Cheap, nice, and highly connected," Ellis says. He quickly set up shop in his home and today has four employees.
Now he's looking for even cheaper digs. The Ellises plan to move inland to Bend, a town of 52,000 on the eastern flank of the Cascade Mountains that has been wired since 2003. "The fact that broadband is everywhere has made pMachine happen," Ellis says. "And Bend is a beautiful place to live." He expects sales of more than $1 million in 2005—and says he hasn't had to ask for a dime of VC money: "I can't tell you how happy I am about that."
One question hangs over the long march of broadband: What if its advocates are once again getting ahead of themselves and providing more fat pipes than people want? Though the big telecoms are building out more cautiously than they did in the boom, capacity still overwhelms demand in some places. The bet is that broadband adoption rates will keep moving rapidly higher. If they're wrong, the telecoms, many of which are still struggling, could be headed for more trouble—and the muni broadbands could fall like dominos.
Several small towns have already been clobbered by broadband losses. Marietta's network became a $35 million white elephant because of massive cost overruns; the town ultimately sold the system in September to a small telecom firm. Lebanon, Ohio, planned to spend $5 million to build its network but wound up paying $9 million, and the town has had to issue $15 million more in bonds to cover operating losses.
For entrepreneurs and established businesses alike, though, the downsides are almost nil. Once the networks are in, someone is almost certain to buy them and run them if the original builders fail. Northwestern's Carlini thinks broadband's spread could prove to be one of the most profound engines of economic—and, ultimately, social—change in history, ranking with the railroads and the national highway system. "This could open up entire new fields of commerce and bring opportunities to areas that would never otherwise have had them," he says.
This is not to suggest that Silicon Valley or other established tech centers are threatened by the trend. There will always be plenty of hungry young wizards who'll want to make it in tech's big show; the Valley in particular is unlikely ever to lose the magical nexus of brains, money, research centers, and entrepreneurial élan that has made it the center of the tech world.
Still, down in Oklahoma City, Kord Campbell continues to witness broadband's magnetic pull. In addition to his online photo-sharing service, there are several other small startups that have sprouted on the surrounding prairie. Campbell himself continues to make hay in his old Silicon Valley haunts from afar. He recently hired a marketing exec from San Francisco. Campbell is also in talks with coders who've wearied of California, and he expects to take in more Valley refugees. "I get e-mails every day from people who want to come work here," he says.
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Sources: 2000 Census, U.S. Census Bureau; Business 2.0 research
BROADBAND HITS THE HINTERLANDS
Number of high-speed lines in the United States (IN MILLION)
Homes with access to broadband
Amount spent to build municipally owned broadband networks
$500 MILLION TO DATE $1 BILLION BY 2008
Number of communities that have built or are building fiber networks 217
Number of communities that are actively considering municipally owned broadband 340
Sources: FCC; Render Vanderslice Associates