From Missoula to New Orleans, how aspiring tech hubs are fighting to survive COVID-19
A GE departure, layoffs at ClassPass and other shocks raise a question: Will smaller cities become attractive tech centers in a changing economy — or will they suffer the most?
The day General Electric announced it was coming to New Orleans was a good day for Michael Hecht. It was 2012, nearly six years after Hurricane Katrina had decimated the town, and for the better part of those years, Hecht, CEO of the Greater New Orleans economic development agency, had tried to lure tech companies away from San Francisco and New York to his "low-cost, high-culture" town. GE was by far the city's biggest get.
But last month, as yet another disaster swept through the city, GE announced it would shut down its New Orleans tech center and lay off 100 employees who worked there as part of a $2 billion company-wide cost-cutting response to COVID-19. "This is a difficult decision, particularly at this time," a GE spokesperson told Protocol, noting that the company is extending 60 days of pay and benefits.
To Hecht, the tech center's demise — and the prestige that went with it — was a sign of just how vulnerable smaller tech hubs like New Orleans may be during this crisis. Now, like counterparts around the country, he is closely watching the economic landscape, seeking to ensure that his region's emerging tech sector can withstand the loss of its biggest player and that the pandemic won't undo years of hard-earned progress.
"It was also one of our first significant wins," Hecht said of GE. "We have a lot of personal and professional pride attached to the project."
As coronavirus forces cuts across most sectors, nascent tech hubs like New Orleans face a precarious future. The benefits they offer — they're often cheaper, while boasting prolific research universities and untapped talent — may be even more alluring as companies shift to remote work and look to cut costs. Yet they have more to lose when even a handful of marquee companies or local investors scale back.
The question now is whether these aspiring Silicon Valleys will be able to mitigate fallout by pitching themselves as attractive alternatives in a changing economy, or if they'll suffer the most when big companies pack up and startup funding shrivels.
For U.S. cities, tech has traditionally been a "winner-take-most" industry, said Mark Muro of the Brookings Institution. Last year, San Francisco, New York and Boston accounted for upwards of 60% of all venture capital investment. Another recent study by Atlanta-based Valor Ventures found that while the American Southeast has 25% more startups than California and 75% more than New York, less than 30% of those startups have successfully raised seed funding since 2008.
Muro believes that the coronavirus pandemic will only exaggerate the economic gap between winners and losers. "If you thought big tech was big before, it's gonna be even bigger," said Muro, senior fellow and policy director of Brookings' Metropolitan Policy Program. "For the most part, the big tech hubs will remain dominant, in part because their main industry will be even more dominant."
This is Margaret Bradley's fear, as she considers the future of a Philadelphia region stocked with universities and medical centers. The vice president of strategic initiatives at Ben Franklin Technology Partners, a government-sponsored economic development group that invests in Philadelphia tech companies, said most startups in the firm's portfolio are faring relatively well. But she knows that if even a couple of significant investors decide to hold off on deals this year, those young businesses would have far fewer funding options than they would in, say, Boston.
"As there's hesitation, the cost is going to be huge to Philadelphia," Bradley said. "It doesn't take a lot of hold-back to feel it."
In Missoula, Montana, ClassPass laid off 69 employees and furloughed 90 last month, dealing a major blow to the growing tech sector there. The New York-based fitness studio subscription service had opened the Missoula office in 2018 after a nationwide search for a city where it could find an educated workforce, passionate about fitness, without having to compete with Google and Facebook for talent.
After running more than 500 cities through a model of desired attributes, ClassPass landed on Missoula. In 2018, the state of Montana delivered $300,000 in grants to put toward hiring 40 employees, and the company eventually expanded to around 250. Last year, in its annual economic development report, the governor's office touted ClassPass as one of the state's "big wins," writing that it had expanded in Missoula "beyond what anyone anticipated."
Then coronavirus hit, flatlining ClassPass' revenue. The company laid off or furloughed half of its total workforce, including all but 80 of its Missoula employees.
"We played and are playing a leading role in the development of Missoula as a tech hub," said Tom Aveston, ClassPass' chief operating officer. "But because of such precipitous and rapid decline in our revenue, which has essentially fallen now to zero dollars within the space of about a week, we were forced into taking quite painful and drastic action, reducing our employee base in Missoula and worldwide."
Grant Kier, CEO of the Missoula Economic Partnership, an economic development group backed in part by city funding, said the layoffs at ClassPass were "a big loss" for Missoula. At the same time, he takes comfort that ClassPass hasn't given up on the city entirely. In fact, Aveston said the COVID-19 crisis is likely to accelerate the company's future hiring in the city as it looks to cut costs. "Missoula is a long-term home for ClassPass in the U.S.," Aveston said. "When we're in a position to start bringing employees back from furlough, I anticipate Missoula will get an outsized share of those employees."
Kier said the crisis may also present opportunities for Montana that had eluded it before. As home to both a former GlaxoSmithKline lab and Rocky Mountain Laboratories, a National Institutes of Health research facility, the state has nurtured a rich biotech sector. Now, Kier said, some of those home-grown startups are pivoting to work on COVID-19 diagnostics and vaccines.
Indeed, Muro predicts that the tech centers best positioned to survive are the ones with strong research universities and clusters of companies or researchers working on in-demand health tech.
Then there's the fact that Montana is among the states least affected by coronavirus. While New York is still seeing hundreds of cases every day, Montana cases are down to zero. Given the uncertainty around when New York, Massachusetts and other hard-hit states will be able to open back up, Kier said Montana could become a compelling option for tech leaders eager to get back up and running.
"If you are somebody trying to figure out where to put a company, and you're looking at a map of the country, or of the world, Montana looks really good right now," he said. "We are seeing tech companies here get back to business-as-usual faster than other companies and other communities."
Clio, which has its headquarters in a retrofitted IBM campus in Vancouver, has bet on a longer-term shift to a more decentralized tech industry. Photo: Courtesy of Clio
Kier isn't the only one who sees a window to poach tech talent from other cities. Later this month, One America Works, a nonprofit founded by California-bred tech entrepreneur and investor Patrick McKenna, will host a virtual job fair for companies hiring in Pittsburgh, including language app Duolingo, space tech startup Astrobotic and AI company Petuum. In the first few days of signups last week targeting recently laid-off workers in the Bay Area, more than 100 people expressed interest in making the move, organizers said.
"COVID has changed the world. We're not going back," said McKenna, a managing partner at two national venture capital funds. "The culture of having everyone in one place has changed."
In Vancouver, George Psiharis and his team at legal tech startup Clio bet their company on this longer-term shift to a more decentralized tech industry. Psiharis, now the firm's COO, said he could count the number of founders in the city "on one hand" when Clio rejected investors' advice to move to Silicon Valley and put down roots in the seaport city in 2011.
But Clio has since raised more than $276 million and watched as tech giants like Amazon and Microsoft opened offices nearby, and as fellow Canadian companies like Hootsuite and Shopify experienced their own rapid growth. Clio is still hiring for both remote and in-person jobs, and Psiharis is still optimistic that Vancouver's tech scene will survive, even if the downturn means it will take longer to build.
"Where we are right now is seeing a sprint turn into a little bit of a marathon," Psiharis said. "There's going to be difficulty driven by the economic conditions."
Muro remains skeptical that some great tech diaspora is coming. The idea of companies decamping for lower-cost pastures, often with the potential for big incentives, is nothing new. Despite a decade of encouragement from tech boosters like AOL founder Steve Case, venture capital "safaris" through the Midwest and large-scale local investment in economic development, Muro found in a report earlier this year that 90% of U.S. tech jobs in the past 15 years were added in five cities: Seattle, Boston, San Francisco, San Diego and San Jose.
Muro acknowledges, though, that the shift to remote work is a new and unpredictable factor. "I think we shouldn't discount that we don't know where things are heading," he said. "There clearly could be a degree of movement outward of some more mobile parts of the economy. I don't think it will be so strong that the big cities are cast into economic drift, but we may well see more people trying to move into the heartland."
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For New Orleans, the news is not all bad. According to Hecht, GE's presence in the city helped legitimize the market and attract other tech companies, like the IT services giant DXC Technology. Many of these entrants are, at least for now, holding strong. GE's incentive package also included $5 million for the University of New Orleans to set up a software engineering apprenticeship program, which minted a new generation of local tech workers. Hecht said GE's departure is "bittersweet," but he's grateful it made the investment at all.
"That being said," Hecht added, "I think they would have had a great future in New Orleans."