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September 2012
Grooming Gazelles
By Gene Stowe

     The disruptive shift in greater Charlotte’s economic landscape, brought on by the Great Recession, has created the climate for a thriving entrepreneurial ecosystem, with conditions favorable for the coveted high-growth companies called gazelles.

     The end of the easy years when the region flourished as a banking center has left an opening for the long-ignored, little-understood sector of innovative startups capable of creating hundreds of jobs, including some with the potential for rapid, sustained expansion.

     The need for new employers combined with the large-scale layoff of savvy, sophisticated, high-energy workers looking to redirect their talents without leaving the perks of the Piedmont’s quality of life, has left the populace hungry for new opportunities.

     “The anecdotal evidence suggests there is more entrepreneurial activity than there has been,” says Brooks Raiford of Raleigh, president and CEO of the N.C. Technology Association that recently opened an office in Charlotte. “There’s a lot of fertile ground here. The ecosystem’s pretty good.

     “With the recession and the resulting layoffs—which were sizeable—creative, talented white-collar workers have had to create their own way. A lot of entrepreneurship comes out of that. People who had been comfortably employed on a career path have suddenly found themselves not. They have begun to look more toward themselves and their own networks. All it takes is a small niche of that to create a lot of energy.”

     Charlotte’s energy cluster provides an excellent example of what is required to create job opportunities and raise the region’s overall competitiveness as well as its national visibility. Harvard Business School has chosen to feature Charlotte as a role model of dynamic local leadership in its U.S. Competitiveness Project.

     The Charlotte energy cluster relies on the concept, first proposed in 1990 by Harvard Business School Professor Michael Porter, that a geographic concentration of related firms and institutions can drive innovation, raise productivity and create jobs as well as competitive advantages for the region.

     Already Duke Energy and over 100 highly specific ‘energy cluster’ firms make our city the global hub of electric knowledge and resources in critical industry skills—design, operations, engineering, research and construction.

     Just as there are demonstrated synergies from the combination of resources and communication among energy firms, similar and substantial gains can be had from private, public and private-public combinations spurring entrepreneurial growth.

     Civic resources from the city’s Chamber of Commerce to various economic development organizations and agencies are rallying to support startups with consulting advice and angel investing, as are private associations of like-minded leaders outside the traditional government and business infrastructure.

     Just within the past two years, leaders say, a critical mass of connections and resources has developed to accelerate the evolution.

     Bob Wilhelm has been a seminal leader and spokesperson for the combination of public and private resources as UNC Charlotte’s vice chancellor for research and economic development and executive director of the Charlotte Research Institute (CRI). CRI is UNC Charlotte’s portal for business-university science and technology partnerships.

     Wilhelm says the accelerated pace of high-impact startups is the payoff for decades of groundwork, including vital research enterprises established at the 60-year-old university since the late 1980s.

     “We’ve been in the incubator business for more than 25 years,” Wilhelm says, speaking of the Ben Craig Center, one of the nation’s first university-affiliated business incubators. “We’ve always been a university that looked to connect with the urban region around Charlotte.”

     Charlotte in the last few decades grew and grew rapidly because of the strength of the banking and financial services that developed here,” says Paul Wetenhall, president of Ventureprise, the renamed Ben Craig incubator at the university.

     “As a result, Charlotte only recently was confronted with, ‘Oh, my goodness, what are we going to do?’ Places in the Midwest and the Northeast confronted those issues earlier,” he explains knowingly, having come to Charlotte by way of Rochester, where he was involved in entrepreneurial development after the failure of Kodak and Polaroid. He is helping the incubator transition into its new moniker and mission to be a catalyst for entrepreneurial innovation.

     “The Charlotte region has many great assets and networks that directly support an entrepreneur’s ability to succeed. Our joint planning with groups across the region identified a gap in strategy, coordination and communications leveraging these resources. That is what the re-launch of the Ben Craig Center as Ventureprise is meant to do.”

     “The whole entrepreneurial community and momentum and drive literally started in 2008,” says Terry Cox, CEO of the Business Innovation and Growth Council (BIG). “The last 18 months to two years is when I’ve seen serious growth, serious increase in activity.”

     BIG’s first annual survey this year showed that 94 high-growth companies enjoyed an average revenue growth of 25 to 30 percent for each of the last three years—a rate they expect to maintain this year, projecting revenues eclipse $650 million in aggregate and total employment surpasses 3,000. Cox estimates the total for all Charlotte-area gazelles tops $1 billion.

     The goal, of course, is to help launch the next Lending Tree, Yap, Jigsaw or Peak 10, famous local examples of soaring entrepreneurs, the so-called gazelles that show up in about four of every 100 startup companies.

 

Heard of Gazelles?

     Gazelles were identified by economist David Birch in 1994 as companies whose sales double every four years—accounting for 70 percent of new jobs despite their relative rarity—in contrast to less agile big-company “elephants” and steadily small “mice.”

     “It’s kind of the Holy Grail—everybody wants to support high growth entrepreneurs,” Wetenhall says. “A lot of people associate gazelles with technology because those tend to be the visible examples. In fact, the gazelles span all industry sectors.

     “They are not obvious to spot in advance. You can’t look at 100 startups this year and pick which four will become the gazelles. Sometimes it happens early on and companies get traction quite rapidly; sometimes long after the fact when something happens that causes an inflection point. You can’t determine to go out and start a bunch of gazelles.

     “You can, however, predict where they’re likely to emerge. When you look at gazelles, in almost all cases they have an innovation component to their business that comes from one of three places.” Wetenhall describes them as:

 

·      Technology innovation, including both tech companies and those that provide technology support for others;

 

·      Business model innovation, such as Staples, which transformed the office supply business by slashing two layers of distribution when it created the manufacturer-to-store process, and Lending Tree, which removed face-to-face meetings with bankers from getting a mortgage loan.

 

·      Business process innovation, such as Paychex that started in Rochester to handle payroll for small companies by collecting their information over the telephone.

 

     “When you look at the profile of the Inc. 500, which by definition are all gazelles, what they consistently report is that most of these are not venture capital-backed.” Wetenhall adds, “Most of them are not technology-based, even though they may be technology-enabled.

     “What Inc. finds is that a lot of fast-growing companies are in services as opposed to products. It’s more scalable. You can build a fairly big company without hiring a lot of employees.”

     Nor is presence or absence of activity of venture capital activity a significant plus or impediment to gazelle hunting, he says, although the traditional reliance on bank loans calls for a learning curve over other types of financing.

     “Generally speaking, technology-based companies need a lot of capital up front,” Wetenhall says. “Others need less. They generally need risk capital, not debt capital. That’s an issue in a place like Charlotte, which is a banking town. People think in terms of lending rather than risk investment.”

     Research shows that in recent years angel investors, rather than venture capitalists, have been key to startups, with the notable exception of expensive pharmaceutical company deals, Wetenhall continues. He says that although each transaction is smaller, the 30,000 to 40,000 angel deals involved more total dollars than the 3,000 to 3,500 venture capital deals.

     “Angels are a key part to that risk capital. We have a spotty history on the angel thing,” he says, including three groups that closed after the dot-com bust.

     “We don’t have as much organized angel capital as you would expect in a city of this size,” although Inception Microangel Fund and WED 3 Inc. were started a few years ago. “We’re getting another round of energy on this point.”

     The BIG survey showed only one company financed with venture capital, 12 percent with private equity, 22 percent had angel investment, 20 percent were bank-financed and 45 percent were self-funded. Half the companies were less than five years old, and 80 percent were less than 10 years old.

 

Care and Feeding

     Greater Charlotte ranks high on many features that foster gazelles.

     “When you look at the ecosystem that supports the gazelle dynamic, No. 1, you have all the regular business attractiveness components—good airports, a well-educated workforce,” Wetenhall says. “By definition, high growth entrepreneurial companies cover a broad geography.

     Charlotte also has a substantial presence on the global stage, with more than 4,000 foreign-owned entities in the region that enhance its reputation around the world and help attract energetic international innovators.

     “In addition, there’s a highly connected entrepreneurial segment,” Wetenhall continues. “You tend to find a lot of places where people who are part of this entrepreneurial ecosystem come together.

     “There is a richness of that sort of network connection; there’s generally a strong research university involved. That’s always the case around technology-driven entrepreneurship. It generates so many ideas.”

     Organizations such as Ventureprise, where Charlotte Mayor Anthony is one of the group’s board members, links grassroots initiatives to the city’s highest structures. BIG provides connections for entrepreneurs and is part of the Charlotte Entrepreneurial Alliance, an informal gathering of two or three dozen business owners.

     Cox, who started BIG in 2006 with the support of CEO David Jones of Peak 10 and some 15 other high-growth entrepreneurs, moved from San Francisco in 2003 and took over the Metrolina Entrepreneurial Council, which had flourished in the late 1990s but suffered after the dot-com crash.

     “Nobody really cared about entrepreneurship to be really honest,” she says. “In San Francisco that’s all there is—high growth entrepreneurship. It was a bit of an education process.”

     A partnership with Inc. magazine helped BIG attract interest for the first couple of years, but the Great Recession propelled the agency to bigger success.

     “Since 2008, it hasn’t mattered at all,” she says. “We’ve grown on our own. BIG took off when the economy went down.”

     The member-supported organization focused on high-growth entrepreneurial companies from startup to revenues of $25 million has some 100 members and more looking to join.

     “I put on a lot of events,” Cox says, including old-fashioned social networking where entrepreneurs meet face-to-face. “I try to provide relevant and meaningful content for a high-growth entrepreneur. We’re very deliberate about the content we deliver.”

     Jones, an impassioned entrepreneur, has a vision for what Charlotte could be: a regional hotbed for growing companies. As CEO of Peak 10, a data-center company he founded that’s now worth more than $400 million and is one of Charlotte’s largest success stories, he hopes to help others find similar success.

     Other major successes include Yap, a voice-to-text technology company sold to an Amazon affiliate last year; Jigsaw, the business crowdsourcing company sold to Salesforce.com after cofounder Garth Moulton moved to Charlotte; and LendingTree.com, sold to IAC/InterActive Corp. and now returned as Tree.com Inc. to its Charlotte founder, Doug Lebda.

     “We became sort of the poster child for a lot of the entrepreneurs,” says Jones, a member of BIG whose 12-year-old company has 24 data centers and 330 employees in 10 cities. “When we came to Charlotte, we were just a small company with 20 employees.

     “As we grew as a company, my interest was in helping other people avoid the mistakes I had made. I became engaged with younger entrepreneurs in Charlotte; they were sort of unsung. We were not the type of guys that would go out and beat our chest in a mix of personal modesty and competitive paranoia,” he says.

     Jones was convinced that Charlotte is a hotbed of entrepreneurial activity and, as past chair of BIG and a strategic adviser, organized the first annual survey as a means of confirming what he already believed and what was even more evident as a result of the recession, that “business growth comes from small companies.”

     “The BIG survey confirmed the role and got the entrepreneurial community much more on the map. Through BIG, we’re able to amass the information; it brought a lot more visibility to entrepreneurs,” he notes.

     “There is a lot of activity percolating. There seems to be more structure around it than just talk. I think Charlotte has done a lot more now to give exposure to entrepreneurs,” he says, including ways small companies can do business with large recruits such as Chiquita.

     Traditional business-supporting organizations such as the Charlotte Regional Partnership and the Charlotte Chamber of Commerce are encouraging and collaborating with the movement that has grown mostly from grassroots.

     Keva Walton, a senior vice president at the Charlotte Chamber of Commerce, says the chamber aims to support the burgeoning entrepreneurial community with services while respecting entrepreneurs’ inherent free spirits.

     “An organization like the chamber doesn’t necessarily fit with who and what they represent,” he says. “It’s not about the chamber, it’s about the collaborative spirit of building this entrepreneurial ecosystem. How do we make sure there’s a voice in the room for the entrepreneur or the gazelle?

     “They’re creating jobs. They’re attracting new creative, innovative people. They’re reusing some of the talent that has been outplaced. They’re part of our overall economic ecosystem.”

 

New Breed in Town

     Walton views the current surge of entrepreneurship in the context of a history that includes the founding of such companies as Lance and Family Dollar and the early initiatives of North Carolina National Bank under Hugh McColl to seize the opportunities of banking across state lines.

     Charlotte has always been entrepreneurial,” he says. “Creativity and innovation come together in Charlotte. It’s not that we’re launching. It’s more like we’re re-launching, or causing a greater awareness of who we’ve always been.”

     Charlotte, founded at the intersection of Native American trading paths, has always been a commerce center and, beyond its homegrown banking sector, depended mostly on the harnessed power of the Catawba River to attract industry from outside—first textile mills and, thanks to air conditioning, other Northern businesses in the last 40 years.

     But with the state’s textile and furniture and tobacco industries decimated by offshoring, financial services hard-hit by the recession, and business recruiting unable to create the needed number of jobs, attention has turned to entrepreneurial startups at an unprecedented level.

     Among other things, UNC Charlotte and Central Piedmont Community College are taking greater roles in the entrepreneurship ecosystem.

     Renee Hode, director of Central Piedmont’s Institute for Entrepreneurship, says 80 percent of clients are just starting a company while 20 percent are business owners coming for help with new ideas.

     “We’re more of the gateway or the entry block for those who are looking at entrepreneurship as a career option,” she says. “They’re looking for opportunities. We work with them in that startup capacity, honing in on opportunity exploration, developing the process of getting their business launched,” often sending them to the next step at the Small Business Technology and Development Center.

     Wilhelm says UNC Charlotte has developed 19 Ph.D. programs since it started the Ben Craig Center in 1986 and expects to have 25 within five years.

     “We see that our opportunity is to be the urban research university for North Carolina,” he says, with advanced manufacturing, energy, medicine, computing, information security and informatics, including bioinformatics, among leading research topics.

     The university spends $30 million on research, part of a total of more than $50 million including its collaborators—a fraction of the more than $1 billion in the Research Triangle Park Area, but an efficient engine that launched five startup companies just this year.

     “We’re very oriented to translation and commercialization,” Wilhelm says. “We put a lot of emphasis on licensing the inventions our students and faculty come up with.”

     One success is Digital Optics Corporation, started by electrical engineering Professor Michael Feldman to make a cellphone camera component, which sold to Tessera Technologies for some $60 million in 2006 and still operates in Charlotte.

     Today, 15 companies, mostly startups or small businesses, work on campus with faculty, staff and students, and construction is underway for a 90,000-square-foot building that will provide room for many more by 2014.

     “We’re looking to attract more companies, larger teams of companies,” Wilhelm says.

     Yi Deng, dean of the College of Computing and Informatics, says the Charlotte Informatics Partnership aims to create an informatics industry for the region, a leader in the emerging field of big data with application to such fields as business intelligence, business analytics, health care, financial services and energy.

     “We’ve been working on that for about three years. Now it’s become a national movement,” he says. “As we’re doing that, it will naturally stimulate the entrepreneurs, the job growth, the business competitiveness.”

     The effort could become the core of an informatics cluster that could serve banking and finance, health care and other sectors. Such clusters, gatherings of businesses within an industry, stimulate a multiplying synergy that benefits the gazelle ecosystem.

     Keith Luedeman, who founded goodmortgage.com in 1999, recalls when entrepreneurs were largely an underground movement during the dot-com boom—and gun-shy after the bust.

     Today, some of them are sharing space in his 44,000-square-foot building, a diverse collection that includes groups working on telecommunications, commercial bond trading, bamboo cloning, and ancillary devises to enhance television watching.

     “I’m just giving back to try to help people get to that next stage,” Luedeman says. “Entrepreneurs are kind of built differently. I like working with them. There’s a lot of entrepreneurial activity going on in Charlotte.”

     Adam Hill, executive director of the downtown Packard Place center that helps support startup companies, says an informal Charlotte Entrepreneurs’ Alliance formed last year and meets monthly, sometimes with the mayor.

     Charlotte’s really hit a critical mass,” Hill says. “We meet as a group rather than let it explode in any random direction.”

     In addition to influencing public policy, the group is raising two funds—one of at least $1 million to assist not-for-profit entrepreneurial support organizations that help foster gazelles and one for-profit fund of $25 million to $100 million to invest in high-growth startup companies.

     Dan Roselli and his wife, Sara Garcés, owners of REDF Marketing, CustmerStream, and TargetPoint Consulting, bought the 90,000-square-foot building that became Packard Place in 2010 order to establish an entrepreneurial hub. The 1928 building was available because its owner, a condominium company, went bankrupt in 2008.

     “We host probably 100 meetings a year—startup weekends, chamber events, different networking groups,” Hill says, in free event space that can hold up to 300 people. “About 25 percent of the building we made co-share space, functionally similar to incubator.”

     Some 20 companies with one to six workers lease offices in the building, where services and infrastructure are shared. The month-to-month rent accommodates fast-growing gazelles that likely will need larger space before completing a long-term lease.

     “Within that space we facilitate groups that have different industry focuses,” he says. “It’s a launching point for different incubators.”

     Tenants include Queen City Forward, a spinout of Durham’s Bull City Forward for social entrepreneurs; Joules, an energy incubator seeking to add startups to Charlotte’s well-established energy industry; and RevTech Labs, an early-stage tech community.

     In addition to the workforce, facilities and financial opportunities, gazelles look for a high quality of life—a feature that makes Charlotte especially attractive, leaders say.

     Winn Maddrey, a communications expert and senior consultant at Fleishman-Hillard, says entrepreneurs who can live anywhere are attracted to Charlotte for its lifestyle features.

     “With technology, you’re seeing the ability for ‘place’ to be defined,” he says. “You need a warehouse, a little bit of money and an Internet connection, and people can be anywhere they want. “We’re drawing in 20- to 30-somethings and keeping them.

     “Most of them came here from what we saw then without a job but coming to an interesting place to work and play. There’s fun stuff to do. You can get to the beach, you can get to the mountains, it costs a lot less than Boston, New York or D.C. It’s a good place to be a 20-something. It’s a good place to raise a family, it’s a good place to start a business.”

     More people who already lived here are making the choice for entrepreneurship, he says, giving up the security of stock options and 401(k)s in big banks, utilities or company headquarters to own their dreams.

     “I think in the past, people would be like, ‘Why would you do something stupid like that?’” Maddrey says. “I think that mindset has shifted or is shifting. The security that has been attributed to at least the banks here locally—that got shattered in 2008.

     “There are people who are going, ‘I did the corporate thing and I appreciate the corporate thing, but there might be other things out there for me. In the last four or five years, a lot’s changed in the Charlotte market.”

     Charlotte has a lot going for it,” Hill agrees. “I chose to move to Charlotte about two years ago because I thought it was a great place to live and a great place to possibly start a business.”

     “You’ll find that most of the hotbeds of entrepreneurial activity are places that people want to live—places that attract the kind of person that is this hot-shot entrepreneur, places where people who are more reactive, more innovative, more fast-moving want to live,” Wetenhall says. “That’s a thing that Charlotte’s got. Lots of people want to be here.”

     Jim Van Fleet, a software development expert and chief technology officer at OtherScreen, says Charlotte’s longstanding attractions are attracting entrepreneurs while its entrepreneurial ecosystem is still developing, although the city is already becoming a regional hub.

     “So far, it is that kind of migratory culture that Charlotte has overall that is contributing mostly to the kind of gazelle activity that you see,” he says. “A lot of these business are beings started by people who aren’t Charlotte natives, by and large.

     “The ecosystem is not about everybody fitting one mold. There’s different things you need in an ecosystem, and sometimes they get combined together in strange ways. There’s a groundswell in this city to build this climate and this ecosystem.”

 

Gene Stowe is a Greater Charlotte Biz freelance writer.
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