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Move Over, Silicon Valley: Utah Has Arrived

November 10 2014 - 10:53 am

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By: Ilan Mochari

When it comes to staggering sums of venture capital raised in 2014, there’s Utah, and then there’s everyone else

There’s a reason HBO called its TV-series parody of startup culture Silicon Valley and not Utah. Silicon Valley, in every sense, is still where it’s at, if the “it” in question is a preponderance of venture-capital-backed tech startups. Take, for example, these VC stats, courtesy of the Associated Press. The dollar amounts indicate VC funds invested in tech startups in the first nine months of 2014:

1. San Francisco, $9.32 billion, 506 deals
2. San Jose, California (Silicon Valley), $3.78 billion, 237 deals
3. New York City, $3.05 billion, 272 deals
4. Boston, $1.05 billion, 158 deals
5. Los Angeles-Long Beach, California (Silicon Beach), $768 million, 105 deals
6. Oakland, California, $510 million, 41 deals
7. Seattle-Bellevue-Everett, Washington, $471 million, 56 deals
8. Provo-Orem, Utah, $462 million, 9 deals
9. Washington, D.C., $456 million, 77 deals
10. Chicago, $402 million, 57 deals
11. Austin-San Marcos, Texas, $315 million, 58 deals
12. Salt Lake City-Ogden, Utah, $275 million, 16 deals

Who’s number one? San Francisco. Who’s number two? Silicon Valley. Surprise, surprise. But why did I bold the Utah regions? Mainly because in Utah, the dollar-per-deal averages were staggering. Look at it this way:

1. Provo-Orem, Utah, $51.3 million per deal average
2. San Francisco, $18.4 million per deal average
3. Salt Lake City-Ogden, Utah, $17.2 million per deal average
4. San Jose, California (Silicon Valley), $15.9 million per deal average
5. Oakland, California, $12.4 million per deal average
6. New York City, $11.2 million per deal average
7. Seattle-Bellevue-Everett, Washington $8.4 million per deal average
8. Los Angeles-Long Beach, California (Silicon Beach), $7.3 million per deal average
9. Chicago, $7.1 million per deal average
10. Boston, $6.6 million per deal average
11. Washington, D.C., $5.9 million per deal average
12. Austin-San Marcos, Texas, $5.4 million per deal average

It paints a different picture, does it not? Mind you, paeans to Utah’s entrepreneur-friendly culture are nothing new. Nor are the leadership lessons you can cull from Mormon principles. Yet the astronomical per-deal averages in Utah indicate something bolder is afoot.

One entrepreneur in an ideal position to assess how Utah has (and hasn’t) changed in recent years is Todd Pedersen, founder and CEO of Vivint, a provider of smart home-security technologies based in Provo. Pedersen, 45, started his first company when he was 22. After dropping out of Brigham Young University, he sold pest-control products out of a trailer. Within a year he had 80 employees.

Seven years later, Pedersen–armed with firsthand wisdom about running a company and selling technology into homes–founded APX Alarm. APX eventually became Vivint, a $527 million business with more than 7,000 employees. In 2012, the Blackstone Group acquired Vivint for more than $2 billion, an acquisition Pedersen’s bio calls “the largest tech buyout in Utah history.” Moreover, the Vivint Solar division went public a few weeks ago.

I asked Pedersen for his take on why Utah’s 2014 VC deals were so ginormous. “The companies that get funded here are actual companies,” he says. He cites Qualtrics, Vivint’s neighbor in Provo, as an example.

Specifically, Qualtrics–a maker of customer analytics software founded in 2002–received $150 million in Series B funding in September. Its Series A round of $70 million came in 2012. In other words, Qualtrics was around for a decade before it took a cent of VC loot. The VCs weren’t even knocking until 2009. That long wait is a far cry from anything you’d see parodied on Silicon Valley.

“They’re getting VC money, but they’re way beyond startup phase,” observes Pedersen of Utah’s VC recipients. This, he adds, is what often happens to Utah tech companies: The VC heavies only show up after you’ve established years of revenue, profit, and happy customers.

The per-deal sums are huge because the companies–by the time they receive them–have major payrolls and products to support. Qualtrics, for example, had $48 million in revenue and 300 employees when it received its Series A round. It was well beyond napkin-scrawled ideations and fail-fast iterations. Thus it was also a safe bet for any VC to make.

Another entrepreneur who’s been down this road is Josh James. In 1996, he co-founded Omniture, a web analytics and online marketing company based in Orem. Omniture went public in 2006. It was sold to Adobe for $1.8 billion in 2009. In 2010, James founded Domo, a maker of business intelligence software based in Silicon Slopes, Utah.

While Domo has raised $250 million in capital thus far–including $125 million in Series C funding earlier this year–James believes Utah is “a long way from VCs spraying and praying” like they should be, given the promising startups in Utah’s midst. He believes these startups “could be growing so much faster,” but in the blink of an eye their Silicon Valley competitors have raised millions–and the race is effectively over before it’s begun.

James has no qualms with how things turned out for Omniture. But leaving aside that successful outcome, he cannot quite forget how Omniture–when it was a startup–endured a needless three-year wait before receiving the venture capital it warranted. He knew he was hardly the only Utah entrepreneur who felt slighted by the Silicon Valley VC mainstream. So he founded Silicon Slopes, a promotional nonprofit to help with the branding of Utah’s tech community, “as a way for us to highlight how much is really going on out here,” he says.

“Ten years ago, [the Utah tech scene] wasn’t getting any of the press,” he adds. Despite the successes of Vivint, Qualtrics, Omniture, and others, James still believes there’s a general ignorance about Utah’s entrepreneurial ecosystem. To underscore this notion, James cites the list I included at the top of this article. “Even ranking Provo-Orem and Salt Lake as separate entities highlights that there’s still a lacking in people’s understanding,” he says.

To his point, not one entrepreneur or investor I spoke to for this story even remotely considered Provo-Orem and Salt Lake City as distinct or separate metro areas. Unanimously, they asserted that Utah’s entrepreneurial community was statewide. To wit, Orem and Salt Lake City are only 40 miles apart. Los Angeles and Long Beach, treated as one entity on the fundraising list, are about 25 miles apart.

James adds that had Utah’s two metro areas been considered as one entity, it would’ve ranked sixth on the list, ahead of Seattle, Chicago, and Washington, D.C.

Taken from a national perspective, Salt Lake City, in particular, has emerged as whatCBRE, the commercial real estate company, calls a “high-value” market. “There’s a large pool of high-tech companies and employees in that market, and you have a relatively low cost of labor and of commercial office rent,” summarizes CBRE’s Colin Yasukochi.

As a comparison, San Francisco rents are roughly three times higher and wages are 50 percent higher, he notes. Here, per CBRE’s data, is how Salt Lake City’s commercial rents stack up to those of a few other metro areas (prices are per square foot):

Manhattan: $65
San Francisco: $59
Silicon Valley: $43
Boston: $32
Los Angeles: $32
Seattle: $30
Salt Lake City: $20

Of course, the cost of office space is but one factor in determining an ideal startup location. You also need to be near top tech talent. To that end, Utah has a few distinct advantages. For one thing, it is now on what many consider to be its third generation of serious tech entrepreneurs.

The first generation spans from the late ’60s through the ’80s, with Adobe, Iomega, Novell, WordPerfect, and Evans & Sutherland leading the way. The second generation, companies emerging in the ’90s, includes and Omniture. The third generation is today’s A list: Vivint, Qualtrics, and Domo, to be sure, not to and Pluralsight and several others.

All of which means there’s now an abundance of experienced, local tech talent. As for young employees, the state universities and BYU have become a reliable feeder system. Pedersen, for one, believes he might have stayed in school had the BYU of his youth offered the entrepreneurial courses and resources it does today. The University of Utah, for its part, just broke ground on the Lassonde Studios, which it describes like this:

Opening in fall 2016, the facility will merge 400 unique residences with a 20,000-square-foot “garage” for all students to attend events, build prototypes, enter competitions, launch their futures–or just hang out. The facility will be the hub for innovators, “makers,” and entrepreneurs.

And yet, for all of the activity, part of what continues to drive both Pedersen and James is the proverbial chip on the shoulder. Like unsung players on a small-market baseball team, they’ll always feel motivated to compete with–and outdo–the high-priced, glamorous talent from the New York Yankees, which in this case is the Bay Area.

Then again, one of Utah’s chief draws as an entrepreneurial setting just might be how it remains, for all it has achieved, full of small-market charms. Theo Zourzouvillys, CTO at Jive Communications, a telecom company based in Orem, is originally a native of England. Formerly a Skype employee, he joined Jive and moved to Utah in large part because he was lured by the state’s serene setting and family-first ethos.

Prior to joining Jive, he says, he was recruited by 15 to 20 high-tech companies over a six-month span. “But nothing really caught my attention,” he says. “They were always the typical VC type of idiots. Just obnoxious.” Specifically, Zourzouvillys was turned off by founders who felt that they, alone, were the reason their previous companies had succeeded.

Furthermore, not one of the companies recruiting him (prior to Jive) had acknowledged his two young daughters or his girlfriend in the process–even though, as a family of four, they’d all be potentially moving across the Atlantic together. “Jive was the only one that said, ‘We’d love to fly you and your partner out to meet us,” he says.

At that point, Zourzouvillys, 31, knew little of Utah “besides lots of snow and Amish people,” he says, admitting that “somewhere along the line” he’d confused the Amish and the Mormons.

In January 2013, he and his girlfriend made their initial visit. They were dazzled by the view of snowy mountains outside their hotel window. At the Jive offices, Zourzouvillys asked for a cup of coffee. “They all just looked at me strangely,” he recalls.

He started one week later. He says that in Utah he’s found “the most awesome people I’ve ever met in my life.” When he and his family arrived at their first residence in Orem, the entire neighborhood, it seemed, showed up to help him unload boxes and move in. Three months later, when they moved to a larger house in Orem, the new neighbors showed up to help with the move.

On neither occasion did he or his family ask for help; the help simply materialized, when word got around that his family was moving. In Utah, that’s just neighbors being neighbors. “I’ve moved 20 to 30 times in my life, and not once have my neighbors helped me,” he says.

But in Utah, it’s already happened twice. It might not be the sort of thing you see satirized on TV shows about high-tech culture. But it’s the way talent wars are won. And if Utah keeps winning those wars, its next generation of high-tech companies will be the strongest one yet.