Region’s start-up engine slowly regains power

Atlanta’s start-ups are playing catch-up.

Experts say homegrown businesses are critical to a region’s economic future, but metro Atlanta’s start-up engine threw a rod during the recession. Not only did the number of start-ups drop, it dropped farther than in other metro areas.

Now, there are signs of a rebound: The willingness of metro Atlantans to take the entrepreneurial leap has picked up, according to both government data and anecdotal evidence.

“An effort to promote startups may be materializing in Atlanta,” said Josh Russell, research assistant at the Kauffman Foundation, which studies entrepreneurialism.

That’s important, even for those without an ounce of entrepreneurial blood in their veins. Kauffman says start-ups are a key source of job growth, and the recent weakness helps explain years of slow hiring overall.

Startups in metro Atlanta peaked at 11,665 in 2006, then fell to 8,020 four years later. It bounced back to 8,399 in 2012, the last year for which data was available.

The trend is borne out by everyday observation, said Richard Montricul of Atlanta, who has worked in four start-ups and now is getting ready to launch his own.

“The biggest barrier to doing a start-up is that people don’t think they can,” he said. “There are definitely a lot of people trying to increase the number of start-ups. Georgia Tech is really stepping up its game. And the community itself, of start ups, is getting bigger.”

Lack of support

For years, entrepreneurs complained metro Atlanta lacked a support system for start-ups — and the capital needed for lift-off. But its schools — especially Georgia Tech — have pushed hard to support companies getting started with campus-grown technologies.

Local venture capitalists have also grown increasingly experienced, and they have been joined the past couple years by the addition of a venture fund under the auspices of the Georgia Research Alliance.

Montricul says he’s an engineer but is more of a software designer. The new company, Third Lounge, will produce a mobile app that handles chat. There are two other employees, but Montricul hasn’t even tried raise any capital yet.

That would be an encumbrance, he said, adding “We are trying to avoid it.” Which means paying themselves out of their savings.

Not everyone can do that.

Alex Weiss and Ruwan Subasinghe, two recent Georgia Tech grads, think they will need between $10,000 and $100,000 to nurture their company, Replantable, into growth. The idea is to sell small, automated systems that will let consumers grow much of their own produce at home.

“It’s the epitome of growing local,” Subasinghe said.

He said a typical family could grow five pounds of produce per week by using the system, which consists of what the company calls a “nanofarm” — a small reservoir on which seeds are placed.

The company is offering the systems as part of a “beta” test and hasn’t started selling them.

“We think it has a lot of potential, both as a business and a way for people to eat in the future. We are trying to solve the problem of food waste,” Subasinghe said.

Even with ideas that seem like sheer genius, succeeding in any new business is notoriously tough.

Montricul has worked at four other start-ups, none of them still going under their original names.

Failures exaggerated?

Yet the initial fail rate is not as high as many believe, according to Kauffman’s research: More than half of the post-recession start-ups in Atlanta have lasted at least two years, and about 45 percent of new employer firms survive at least five years.

Kauffman’s research found that companies more than five years old have destroyed more jobs than they created in most of the past three decades. In contrast, companies less than one-year-old have created an average of 1.5 million jobs per year.

Relatively weak new business creation could help explain the weak recoveries that have followed the past several recessions.

“What makes America great is our ability to be creative and innovate,” said Atlanta-based Brendan McGuire, senior vice president at the corporate banking group of PNC Bank. “New company formation has been declining over time, since the 1970s.”

He thinks that may be changing, in part because of shrunken job opportunities for young adults.

“I am of the belief that new company start-ups are cultural,” he said, “not just a matter of job growth, productivity, creativity. And millennials want to be their own boss.”

Metro Atlanta has become a cauldron for new work in sub-sectors like cyber security, supply chain logistics and payment technology.

“In general, the most common start-ups tend to be software oriented because you can do it on the side while you are doing something else, and because there is a lower barrier to entry,” McGuire said.

Local climate a key

Fueling the trend depends in part on the local climate. Atlanta benefits from the presence of Georgia Tech, an oft-cited cradle of technology business plans. Emory and the University of Georgia both spin off technologies and processes that become companies.

Groupings of new companies aim to add to a create vibe. One local example is the Advanced Technology Development Center near Georgia Tech, which offers office space, coaching and other services to a collection of “like-minded entrepreneurs,” according to its website.

And of course, there are venture funds – private and public – seeking good investments. No one pretends there is the kind of money here that a start-up can find in Silicon Valley. Yet in some ways, a history of short-handed funding has been good for efficiency, said McGuire.

“In metro Atlanta, things look pretty good. Atlanta companies are always starved for capital, so the culture has always been pretty frugal.”

The 25-year-old Georgia Research Alliance is a non-profit that uses state and investor money as leverage to recruit companies and scientists but also invest in promising technologies.

“We are trying to do de-risking,” said Mike Cassidy, GRA president and CEO.

Typically, GRA invests between $250,000 and $1 million, and sometimes comes back to inject a second round. Some of its investments are still in the lab, some are start-up companies in the ATDC.

When things go well – as they did with Pindrop Security – outside money gets interested. GRA invested in Pindrop and its technology for phone security back when it was an idea from Georgia Tech researchers.

Earlier this year, venture capitalists pumped $35 million into the company Pindrop. The company was valued at $200 million and plans to add scores of engineers to a staff that is still shy of 100.

“You have to provide a value proposition to the investors,” Cassidy. “This is not philanthropy. For us, as a community, you are trying to create high-value jobs.”

Tech start-ups are highly coveted because they have potential for huge growth and often generate high-wage jobs. But most growth ventures in the U.S. are retail and service businesses, said Erik Pages, president of EntreWorks Consulting in Virginia, who has studied small business growth.

Blending old and new

Starbucks, for example, grew a global, multi-billion dollar business without inventing products or cutting-edge software, he said.

“Innovation doesn’t have to be technical. It can be service. It can be new ways to go to market,” Pages said.

Some ideas blend new technology with old challenges.

Lumense, one of the Atlanta companies that has received GRA investment, developed sensors that monitor water purity, air quality or various industrial processes. Its first set of clients are poultry producers, who need to make sure ammonia levels in the air don’t rise dangerously high. And one of its investors is a global company with a keen interest in keeping its processes safe: Coca-Cola.

The company licensed the technology from Georgia Tech in 2012 and took the product to market this year.

The company, located now in the ATDC, has 15 employees and plans to double in size within 18 months, said Michael Slawson, co-founder and CEO. “We’ll be hiring mostly engineers – electrical engineers, mechanical engineers, software engineers.”

From his perspective, the environment is right.

“Atlanta is an energetic place,” he said. “It’s a good place to grow a company.”

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