Austin ascends: High tech transforms Texas capital into a star

Austin has an edge over cities vying for tech industry, but Pittsburgh could improve taxation and incentives

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AUSTIN, Texas -- As East Coast cities shake off the remnants of a frigid, snow-crusted winter, this college town and capital city is soaking up its annual moment in the sun. With Friday's kickoff of the 2013 South By Southwest Festival -- one of the most highly anticipated music, film and technology events of the year -- aspiring moguls from across the globe have converged upon Austin hoping to create coming-out parties of their own.

And that's not just a blue sky dream: Social media phenom Twitter, the Academy Award-winning film "The Hurt Locker" and Grammy Award winner John Mayer all were either introduced or gained traction after becoming highlights of their respective SXSW festivals.

At moments like this, it's hard to imagine Austin as it was in the 1980s -- a city with a burgeoning tech industry, struggling to promote a national image beyond country music and the Texas Longhorns. Austin was a marginal financial player when Dell Computer was founded in 1984, growing to become the nation's eighth-best city for venture capital investment in 2012, according to the National Venture Capital Association.

A combination of public policy, entrepreneurs-turned-investors and the cultural and financial desires of in-demand tech professionals give Austin advantages over other mid-sized cities -- such as Pittsburgh -- vying for the tech industry's attention. The difficulty for those trying to learn from Austin's example is recognizing what can and should be copied, and then figuring out how to build political and social momentum around such changes.

In Pittsburgh, where 79 venture capital deals totaling $167.9 million bumped the city from the 23rd highest in venture capital investment in 2011 to 13th highest in 2012, not everything needs to change. And Pittsburgh's stakeholders know that competing with Austin and San Francisco for professionals who are seeking the heat of Western weather and authentic Tex-Mex cuisine is a losing battle.

But when it comes down to dollars and cents, some professionals familiar with both Austin and Pittsburgh say Western Pennsylvania could stand to get a little more creative.

Josh Baer, founder of the Austin-based startup accelerator and co-working space Capital Factory, thinks Pittsburgh officials could learn something from the Texas attitude toward taxation and incentives.

In a state that boasts of everything being bigger, it's no secret the adage doesn't apply to Texas' tax rates.

With no corporate or individual income taxes and a franchise tax that tops off at 1 percent, the state is attractive to entrepreneurs of all stripes.

Additionally, the Texas Emerging Technology Fund grant program provides funding for commercialization, distributes matching funds for public and private partnerships, and gives direct funding to Texas' university initiatives.

"When talking about what creates that virtuous cycle of success, the most important thing is having examples of successful companies and creating those first examples," said Mr. Baer, a Carnegie Mellon University graduate who founded the Capital Factory in the late 1990s.

"That's where I think it's worth it for governments or other community organizations to help catalyze that and get that going because it is a virtuous cycle. Success builds on success," said Mr. Baer. He credits local Texas legislators with helping draw in heavyweights such as Apple and Facebook by offering direct tax incentives for moving.

From Pittsburgh to Austin ...

It's not just the household names that have found a home in Texas. Pittsburgh-born big data analysis company Black Locus thrived in Austin.

Rodrigo Carvahlo and Lukas Bouvier founded their company while completing graduate studies at Carnegie Mellon University's Tepper School of Business. Their business grew with early-stage funding through a university accelerator program, the Oakland-based Idea Foundry and as part of the South Side-based Alpha Labs technology accelerator program.

But when it was time for the company to move up, it moved out of Pittsburgh.

The co-founders met their Series A investors, DFJ Mercury and Silverton Partners, in Houston after winning the 2011 Rice Business Plan competition and they moved to Austin shortly afterward.

Black Locus was acquired by Home Depot in December for an undisclosed amount.

Mr. Carvahlo said Pittsburgh could benefit from an incentive that pushes investors to put up the millions of dollars often needed for second-stage growth.

"Startup companies aren't making tons of money, so having a tax incentive there doesn't make a difference," he said. "But if you have tax incentives directed to the venture capital industry, that makes a big difference because they are more willing to invest in early-stage startup companies if they have a good tax break."

There's no discounting the value of creating a culture that supports entrepreneurs, either.

Standing at the center of the Capital Factory headquarters, a gleaming 22,000-square-foot penthouse with floor-to-ceiling views of downtown Austin, Mr. Baer said the space was the result of collaborations typical of Austin's tech community.

A team of entrepreneurs, including Mr. Baer, worked together to put $800,000 toward the space while the Austin Chamber of Commerce promoted the project to up-and-coming entrepreneurs. Today, the Capital Factory is home to 200 entrepreneurs representing more than 100 companies.

The Capital Factory eventually will become self-sustaining through rental fees paid by companies, but another downtown startup program, the Austin Technology Incubator, is designed to build sustainability into the cycle of developing new entrepreneurs.

Sponsored by the University of Texas' IC Squared Institute, the program has helped more than 200 companies raise more than $1 billion since 1989. And while the incubator charges companies a small fee, it also asks them to donate a portion of their equity to the Entrepreneurs Foundation of Central Texas or to another initiative meant to spark new business.

Kyle Cox, director of IT/Wireless and University Development at ATI, said the cycle of entrepreneurs funding entrepreneurs in Austin goes back to Dell's founding in the 1980s and the slew of entrepreneurs that came along for the ride.

"In the early phases of the dot-com boom, Dell and other startups kind of got going and those startups just brought an immense amount of talent to Austin. Those startups spawned other startups and things kind of grew there," he said.

'Just a really exciting place'

The cycle of nurturing entrepreneurs isn't limited to Austin city limits. The Capital Factory's "Move Your Startup to Austin" initiative will give a company $100,000 to be used for anything from server hosting to groceries if it wins the contest at the end of the South By Southwest festival.

And that reflects only a portion of the region's recruitment efforts.

Adam Lyons, co-founder of the insurance comparison site Insurance Zebra, relocated his company from Pittsburgh to Austin because his key investor, Silverton Partners, saw his pitch during a presentation for last year's Alpha Labs Demo Day at the South Side's Circuit Center.

Add the fact that Mr. Lyons' vice president of marketing, Elliott Pittman, was based out of the Texas region and the move became an offer he couldn't refuse.

"Austin made a lot of sense. Silverton was here, Elliott was here, it's just a really exciting place to be for a startup company right now," he said.

Mr. Lyons, a Squirrel Hill native, said he loves his hometown and gladly would have grown the company there if presented with a similar opportunity.

He said the Pittsburgh incubators' approach of helping companies to mature a few at a time is a key to putting Western Pennsylvania on the map as a place where startups thrive.

Tim Kern, a startup entrepreneur located in the Capital Factory, couldn't agree more. He launched his first idea in Alpha Lab in January 2011 because of the program's reputation as an accelerator dedicated to the success of a few companies at a time.

"We actually looked all across the Internet for all of the incubator programs, made a fancy spreadsheet and Alpha Labs was the one that seemed like the best program and also was one of the ones that was moving up as quickly as possible. It seemed like it was the best place for us to finally take that leap," he said.

Pittsburgh's continuing role

If you ask Rich Lunak, CEO of state-sponsored technology investment initiative Innovation Works, Pittsburgh is a great place to leap into entrepreneurship at any stage of the game.

While some companies have left the region and the Alpha Lab program in search of funding, he said only a handful of the 170 companies in the program's portfolio have relocated.

He pointed to restaurant reservations app NoWait, online shoe company Shoefitr and low-water dialysis company Renal Solutions as examples of companies that relocated to Pittsburgh to take advantage of the Alpha Lab program or other qualities specific to the region.

He noted that state legislators had considered tax incentives, but said some of the most important work being done to draw investors had little to do with lawmakers.

"What we're trying to do here is create a really vibrant ecosystem for entrepreneurs to thrive and funding is only a piece of that," he said.

Mr. Lunak gave nods to major media outlets and national business publications that tout Pittsburgh's status as a top destination for startups, but some of the strongest endorsements of what's happening could come from Austin's tech community, which says the Steel City should keep marching to its own beat.

"There are all kinds of cities that become known for technology like Austin, San Francisco, New York, Chicago. I think what that creates is an opportunity for cities like Pittsburgh to stand out in their own right," said Mr. Kern.

"I think Austin is really well known for the events space, really well known for enterprise. What Pittsburgh can do is look at what's being left out, look at the unserviced market and cater to that, and I think they're already doing that with the medical industry and other industries."

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Deborah M. Todd: or 412-263-1652. First Published March 10, 2013 5:00 AM


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