WSJ article features Columbus - High-Tech Start-Ups Put Down Roots in New Soil - WSJ.com

High-Tech Start-Ups Put Down Roots in New Soil - WSJ.com

By SIMONA COVEL

High-tech start-ups are increasingly setting up shop in places previously not known for attracting high-tech firms.

A number of cities, such as Kalamazoo, Mich., and Toledo, Ohio, are offering grant money and tax breaks to high-tech start-ups, just as the usual venture-capital hot spots, such as Silicon Valley and Boston, continue to see a pullback in venture lending. Many of the nontraditional cities require that start-ups receiving grants invest in their area, leaving companies little choice but to locate -- or relocate -- their businesses.

Firms also are being lured by the lower cost of doing business in such cities. And, as the number of high-tech start-ups increases in these areas, existing companies find that as they grow, they no longer have to leave Ohio, Michigan and other states that traditionally have had less to offer in the way of high-tech communities and investors.

"In the last 90 days, we've seen 50 or 60" start-ups that are willing to relocate in order to secure funding, says Ron Kitchens, chief executive of Southwest Michigan First, a privately funded economic-development company based in Kalamazoo. "Companies in Boston, San Jose -- they wouldn't have given us the time of day and now they're calling and asking if we have interest. He says the number of deals the company is considering funding has doubled in the past 120 days.

Peter Gingras founded medical-device maker Proxy Biomedical Ltd. and set up shop in Galway, Ireland, in 2003, partly to take advantage of the area's cluster of related companies and because of incentives the nation offered. But as the company grew, he wanted to establish a presence in the U.S. -- the world's largest market for medical devices.

To ease communication with facilities in Ireland, Mr. Gingras wanted to set up shop in the Eastern Time Zone. So last year he began looking into Boston, a logical choice given the city's established medical-technology community, and Cleveland, where a consultant he worked with was located.

He says he didn't know just how aggressive Ohio had become in doling out funding and tax breaks to lure high-tech businesses. Before Boston officials even responded to his funding query, Mr. Gingras says, "the State of Ohio, the City of Cleveland and the Cleveland Clinic stepped up and put a competitive package together. In the end, it was an easy decision."

The company plans to open its Cleveland office in June. Mr. Gingras wouldn't say how much funding he received, but did say the package included two Ohio Department of Development grants, relocation assistance from the Cleveland Clinic and funding from the city.

Baiju Shah, president and CEO of BioEnterprise, a Cleveland-based nonprofit devoted to accelerating the growth of biotechnology in Northeast Ohio, says since the money comes from both government intent on fueling long-term growth and private investors who often have histories in these towns, "regions like Cleveland that have been heavily investing in new industries aren't bearing as adverse an impact" from the downturn. By contrast, Silicon Valley has been pummeled by a sagging venture-capital industry, where traditional investors have become more risk averse and have backed off markedly.

Officials at venture funds in areas like Ohio say they make sure applicants aren't just following the money in hard times. "They'd have to establish a commitment [to the region], sign a lease," says Steve Weathers, managing director at Toledo venture fund Rocket Ventures, a division of Regional Growth Partnership, a nonprofit development company. He says a successful West Coast start-up has called Rocket Ventures seeking funding, but hasn't offered to move the company headquarters or make a real investment in Toledo. The company "just wants us for our money," Mr. Weathers says.

Some companies are happy they don't have to abandon their roots in order to grow. Over several decades, Philip Eggers has started six medical technology companies in his hometown of Columbus, Ohio. The first five companies moved to the West Coast as they grew and needed investors and business partners. But last year, as Mr. Eggers prepared to bring his latest company, Cardiox Corp., into the commercial phase, he hoped to stay local to bring jobs and money to his hometown.

Mr. Eggers knew Ohio had stepped up its commitment to technology development. Still, he says, as he sought investors for the company, which focuses on noninvasive detection of certain heart defects, he "still had some skepticism that there weren't the [same] opportunities here."

Mr. Eggers approached TechColumbus, an organization dedicated to creating a technology-based economy in the region, where officials assured him that the local venture community was much more robust these days and he could raise the money he needed. TechColumbus has committed $500,000 to Cardiox.

According to TechColumbus, venture investments in Central Ohio, which includes Columbus, totaled $172 million in 2008, up from $158 million in 2007 and $129 million in 2006.

Other companies still worry about not having a connection to traditional venture-capital hubs. Last September, medical-device maker Freedom Meditech Inc. received $380,000 in seed funding from JumpStart Inc., a Cleveland-based venture organization. Freedom Meditech's research and development is based in the Cleveland area, to take advantage of the low cost of doing business, tax breaks and the region's several hospitals and universities. But Craig Misrach, the firm's president and CEO, decided to keep the sales side of the business in San Diego.

"When it comes to raising larger amounts as the company grows," he says, "it remains to be seen if the financing infrastructure [in Ohio] is up to par with the operational side. I think it would be a mistake if we ceased connection to the West Coast."

Write to Simona Covel at simona.covel@wsj.com

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