Is Oregon Home to the Next Billion-Dollar Company?

A “unicorn” is a company that sells for $1 billion. In May, an Oregon company almost did just that.

(Sam Gehrke)

This spring, Oregon almost saw its first unicorn.

A "unicorn" is a company that sells for $1 billion. In May, an Oregon company almost did just that: Cura Cannabis was acquired by a Canadian company for $949 million in stock.

Weeks earlier, our city felt like the epicenter of the startup world. In April, Portland Startup Week held dozens of events across the city celebrating the entrepreneurial spirit.  Last month, Portland startup Twistlock, a cybersecurity firm, sold for more than $400 million, making it one of the larger exits in Oregon startup history.  And recently, at TechfestNW, a crop of 129 startups pitched to panels of blue chip investors. (Disclosure: WW sponsors PitchfestNW and TechfestNW.)

The standing-room-only event in the Viking Pavilion at Portland State University brought investors from across the country together with startup founders from diverse industries. The talk was punctuated with heavy ideas and intriguing lingo: "4D design," "blockchain-iacs," "silicon nanoparticles," "validator parties," "microtransactions," "social nudging effect" and "relentless optimization."

Altogether, they offered a window into the innovative, scrappy energy of Oregon's startup ecosystem.

For those who care about the future of the Oregon economy, these are all good signs. While Nike, Intel and Oregon Health & Science University are among our biggest employers, the startup ecosystem is often a better indication of the health of an economy, given the vital role small businesses play. Small businesses are responsible for creating  two-thirds of new jobs nationally since the Great Recession, according to the Small Business Association.

Left to Right, Marceau Marcel, Jon Maroney, Raven Zachary and Angela Jackson, with Tiny Dancer (front) and Elmo (back). (Sam Gehrke)

"I think it's fresh, it's new, it's virgin," recent Pittsburgh transplant Adam Klunder said of the local startup ecosystem at a recent meetup. "There's room to experiment, not unbending pressure of costs of living."

Last year, a record 73,151 new businesses were registered, the Oregon secretary of state says. The average startup valuation is $4.1 million, the Technology Association of Oregon says. Portland has been making the lists of top startup cities in national publications, including Forbes and Inc.

So all is rosy, right?

Not so fast.  Some observers see Oregon's startup ecosystem struggling. We've never had a small company bring a drug to market, and our state universities get scant R&D funding. In a recent interview, Josh Lehner, a state economist, even described the ecosystem as "moribund." Oregon's historical strength in hardware manufacturing is no longer creating lots of jobs, he says.

Even the state's first almost-unicorn comes with an asterisk: Cura Cannabis' sale comes amidst a glut of speculation that some skeptics say is a weed bubble.

Which raises the question: How strong is our startup ecosystem?

The truth may be inscrutable. For every evangelist, there's a critic. For every number trending skyward, there's a flat line.

In an effort not to end the debate but to shed light, WW interviewed two dozen founders, venture capitalists and officials who form the connective tissue of Oregon's startup ecosystem. What we found is a healthy economy filled with lots of entrepreneurs and big challenges.

Kaia Hubbard, Abbey McDonald and Ryan Nguyen contributed reporting to this story.

Related: 11 Portland Entrepreneurs Talk About What It's Like to Start a Business Here

New businesses registered in Oregon: The number of new businesses started each year in Oregonkeeps growing. (Source: Oregon Secretary of State)

According to Josh Lehner, a state economist, one way to look at the health of the ecosystem is to look at the percentage of startups as a share of total businesses in the state. Using that lens (what Lehner calls the "startup rate"), Oregon's ecosystem looks much less healthy.

"The startup rate is at or near historic lows," he says. "In Oregon, the total number of new firms divided by the total number of firms is low." Much of the country is feeling this, he adds. "I don't know if the word 'moribund' is the correct terminology, but saying it's at or near historic lows is 100 percent accurate."

Another way to measure the health  of Oregon's startup environment is the amount of venture capital flowing into those startups. While small businesses are often funded by founders themselves, traditional banks, or friends and family, many startups—because they are risky and have little or no track record—depend on venture capital. These VC dollars come from high-net-worth individuals, networks or funds who are willing to make risky bets in return for a piece of the company. Given that access to capital is often a huge stumbling block for new companies, the amount of VC funding is a good indicator.

And the amount of VC funding in this state has definitely grown.

According to the National Venture Capital Association, Oregon saw venture capital deal flow worth $528 million in 2018—the strongest since the dot-com boom. "We've had excellent exits, and the deal flow is strong [in Oregon]," says Diane Fraiman of Voyager Capital, a Washington-based firm now investing its fifth fund of $100 million in Oregon, Washington and British Columbia. "In the 12 years I've been doing it, it just has gotten healthier and healthier."

Then again, during that same period of time, California  —whose population is nine times Oregon's—saw deal flow 146 times Oregon's. The Beaver State is a "quiet backwater," says retired serial entrepreneur Pete Grillo, who helped found three startups in the dot-com era, including WeSync and Iterasi. "Why come up here?" asks Grillo. "The deals are always smaller. I don't think the jury's out, I think the jury's decided: [Portland's] a rough place to form a business." One of the state's more prominent VCs and founder of Elevate Capital agrees. "We live in a little pond, but we think we're big," Nitin Rai says.

Voyager's Fraiman doesn't think this is a problem. "There's a belief that you should have more resident venture capital firms here in order for us to fund more deals, and that's just false," Fraiman says. "In all honesty, raising money should be hard. If it were easy, that's where you get into the problems that the Bay Area has now. Almost every company that should be getting funding is getting funding."

Others disagree.

"That's just a super-convenient thing to say," says Marceau Michel of Black Founders Matter. Michel, a New York City transplant raising a $10 million fund to help startups founded by people of color, and Nick Lawson, a Pittsburgh transplant who founded Sqwad Sports, say there is not enough "seed" or early-stage funding available in Oregon. The state's startup ecosystem, like its populace, is a "very homogenous space" in which people of color are getting "locked out," Michel says. He hopes Black Founders Matter will rectify that by writing checks starting at $50,000.

"He is solving a massive problem," Lawson says. He left Portland in 2016 to return to his native Pittsburgh for seed funding after not finding it here. Lawson came back in 2017, but any money Sqwad Sports makes from that investment will return to Pennsylvania.

Research & Development: Rank, Total Expenditures: for 2017, most recent year available (source: National Science Foundation)

One sign of a healthy a startup ecosystem is the ability toattract talent. Skip Newberry, president and CEO of the Technology Association of Oregon, a trade association, says: "We continue to be essentially a net importer of educated, experienced talent from all over the place. At the same time, says state economist Josh Lehner, we could do better: "One thing that would help would be increased skilled immigration: people moving from elsewhere in the world to Oregon, particularly skilled immigrants."

Oregon appears to rank poorly when you consider the larger role that higher education plays in nurturing startups. Crunchbase recently compiled a list of the public universities that graduate the most startup founders. No Oregon university came close to cracking the list, while University of Washington ranked fifth.

It's probably not unrelated that the combined R&D expenditures of Oregon's top four state universities—OHSU, OSU, UO and PSU—are about half the University of Washington's alone: $760 million, versus $1.35 billion, according to the National Science Foundation. The lack of a well-funded "top tier" university often means less talent around. "It's widely recognized that a healthy university system is a basic requirement for any innovation ecosystem," says Jonathan Fink, a professor and director of the Digital City Testbed Center at PSU. "Not only does Oregon not fund its research universities at comparable levels to other demographically similar states (e.g., Washington, North Carolina, Indiana, Ohio), there's little tradition in Oregon of the Legislature or business communities viewing the universities as economic development engines."

On the plus side—Portland and Oregon's quality of life continues to be a magnet for talent. And despite rising rents, Portland is still attractive to startups because of costs. Ajay Malhotra, CBRE vice president and a leading broker for tech companies and startups in Portland, says, "We have a massive advantage over San Francisco and Seattle in terms of everything: costs of commercial real estate, costs of residential real estate, salaries, and a lower attrition rate, and that translates to lower costs."

Angela Jackson, co-founder of the Portland Seed Fund, says Portland has an X factor that helps with talent and a hard-to-measure "collaboration quotient. You don't get that in Silicon Valley or New York City or Boston."

Angela Jackson (Sam Gehrke)

The Kauffman Indicators of Entrepreneurship, a nationally recognized study of new business creation, listed Portland in 2017 (the most recent year available) as the 21st most entrepreneurial city, a 10-rank increase from the previous year and one of the largest year-by-year increases.

Oregon either meets or is just under national averages for the foundation's entrepreneurship metrics, such as its rate of new entrepreneurs (0.32 percent compared to the U.S. average of 0.33 percent), the average number of jobs created by first-year startups (5.24 compared to 5.27) or the percent of startups still active after one year (78.44 percent compared to 79.78 percent).

One bright spot in the startup scene may be bioscience,  which is among the fastest-growing parts of the ecosystem.

Jennifer Fox runs the state-funded Oregon Translational Research and Development Institute, a bioscience accelerator, and the Oregon Bioscience Incubator. OBI offers local bioscience startups a high-end lab, with specialized equipment like fume hoods and tissue culture cabinets.

It began with six startups in 2013, and now has 24—all paying rent. "I thought the demand was six companies, and I was very wrong," Fox says. The current wait list of 12 suggests demand is "robust," and the new Innovation Quadrant has plans for a privately funded lab on the eastside. Her portfolio includes OHSU spinoffs Virbio, developing new vaccines for infectious diseases like HIV and hepatitis B, and Aronora, creating new drugs for stroke and heart disease.

"Now, the economists will say, 'How much money in revenue are these companies making?'" Fox notes. "They're all pre-revenue. So in the economist's eyes, these are all zero."

Some think Portland and Oregon would be better off  if the startup ecosystem were less decentralized. "There's no one place to go, or one person to talk to to get stuff done in Portland," says Zach Babb, a former GlobeSherpa employee and CEO of Planet Nine App, a startup now in beta testing that hopes to launch this fall. "Our resources are diffuse and scattered, says TAO's Skip Newberry. Ian Bell, cofounder of Digital Trends, a Portland media startup that has grown to nearly $50 million in annual sales and 120 employees, thinks the ecosystem is "fragmented."

Ian Bell

"All the dots need to be connected, and they're not connected yet," Bell says. Too many startups have yet to "surface," he adds.

Kate Delhagen, founder of Oregon Sports Angels, believes the ecosystem's fragmentation affects "angel" stage seed funding, and hurts female founders, who received 5 percent of VC dollars in 2018. "There's not really a common starting point [for female founders]," Delhagen says. "They're bouncing around sort of like pingpong balls."

A number of institutions are working to create a "center of gravity for innovation" in coming years. It's called the Portland Innovation Quadrant, "a front door for where startups and entrepreneurs can go to find resources," says Fox, who is on the board of the "IQ," as it is called. The quadrant is still in the concept stage, but would be centered on the Willamette River from Burnside south, with stakeholders that include OHSU, PSU, PCC and UO, Autodesk and PIE, OMSI and Benson High. Included in the city's 2035 comprehensive plan, the IQ would be anchored in space by four major new developments its website says will shape its identity: the ODOT Blocks in the heart of the central eastside; OMSI's redevelopment; the Zidell Yards; and OHSU's South Waterfront campus.

Some view the health of a startup ecosystem very simply: by the number of companies that have sold for big bucks. Critics of Oregon's startups point out that the state is without a unicorn, a privately held startup company with a current valuation of $1 billion or more. There are more than 300 unicorns globally, but none from Oregon. Zapproved's Monica Enand says, "If you want an initial public offering, you've got to live in a place where there's IPOs." Mike Rogoway, the state's leading tech reporter, for The Oregonian, agrees. "We don't have the resources here to help a company grow really large," he says.

Others suggest the relative lack of large-scale capital and unicorns here is not a problem, but an indication of Oregon going its own way. Dylan Boyd, Portland-based director of new programs for R/GA, an international innovation consultancy, investor and startup incubator, says Oregon's ecosystem shouldn't try to be Silicon Valley's. "Are we here to build giant 10,000-person machines or great companies?" Boyd asks.

"I think we're more of a smart, sustainable, slow-growth [ecosystem]."

Jon Maroney (Sam Gehrke)

Jon Maroney, a general partner with Oregon Venture Fund, agrees. "We're never going to be Silicon Valley," he says, "and we don't want to be. The idea of 'go unicorn or go bust' isn't the ethos of the Oregon ecosystem."

Rick Turoczy, who has been an evangelist for startups for more than two decades, pens the blog Silicon Florist and runs the Portland Incubator Experiment, says metrics such as VC totals and jobs created describe the economics of a startup ecosystem, while the health of the ecosystem is best understood through the people who volunteer time and knowledge while expecting nothing in return: its mentors.

"The more startups, the more opportunities for mentors," Turoczy
says. "The more mentors, the stronger the connections and cohesiveness of
the community … [and] the healthier  the ecosystem."

Rick Turoczy (Aaron Hockley)

While the relative health of Oregon's startup ecosystem is up for debate, what is not in dispute is how important startups are to Oregon's future growth and job creation—perhaps now more than ever. A recent report issued by Oxford Economics predicts that advances in artificial intelligence and machine learning will mean that up to 20 million jobs in the United States in the next 11 years will be lost to robots. The state the report calls the "most vulnerable" in the U.S.? Oregon.

Related: 11 Portland Entrepreneurs Talk About What It's Like to Start a Business Here

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