Business Report

An Innovation Case Study: Pittsburgh

Can a midsize Rust Belt city compete with Silicon Valley?

Shortly after Luis von Ahn helped launch Duolingo, his popular language-learning app, he started to receive the same piece of well-meaning advice from investors and fellow entrepreneurs: Why don’t you move from Pittsburgh to Silicon Valley, where you can really grow?

Presumptuous? Sure. But not that surprising. The Bay Area is the center of the tech world, a siren for software developers, fat-pocketed investors, and enterprising businesspeople. Companies based in San Francisco and San Jose pulled in $22.6 billion in venture capital funding in 2014, dwarfing the cities’ closest competitors, Boston ($4.4 billion) and New York ($4.2 billion). Pittsburgh firms scored a paltry $338 million.

Smaller tech cities do have a serious downside when it comes to the tech world: they often lack big-time venture capitalists and the pool of startup-savvy business and marketing talent that can help a small company grow.

This story is part of our January/February 2016 Issue
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Von Ahn and other startup CEOs, though, are beginning to push back against this argument.

They make the case that Pittsburgh and other second-tier tech cities—including Raleigh, St. Louis, and Minneapolis—are places with strong university pipelines, affordable living costs, great quality of life, and collaborative tech ecosystems. “Despite the fact that a lot of people have told us to leave,” von Ahn says, “we’re happy here.”

Expanding the tech economy beyond the West and East Coasts could support inventors tackling problems that those based in the Bay Area might overlook. “The culture of Silicon Valley is really a bunch of twentysomethings solving twentysomethings’ problems,” says Matt Zieger, the vice president of the Forbes Funds in Pittsburgh, which has invested in local startups that fight human trafficking and provide voice-based apps for the visually impaired.

Pittsburgh “has a culture of a broader purpose,” says Zieger. “We have a legacy of building things.” Some of the hottest companies in the city today are working on complex technologies with real-world applications, including advanced robotics, low-cost batteries to store renewable energy, and self-driving cars.

Pittsburgh has not always evolved smoothly. Thirty years ago, it was a hollowed-out, crumbling Rust Belt city whose economic engine had seized with the meltdown of the American steel industry. As unemployment soared and home values plummeted, young people left to find jobs and lives elsewhere.

Today, that’s history. Neighborhoods are undergoing building booms, industrial wastelands on the riverfronts have become bike trails and parks, and the city’s percentage of educated 25- to 34-year-olds is among the highest in the country. While a strong manufacturing base remains, health care and technology have become the twin economic engines of the region. They’re supported by the neighboring urban campuses of the University of Pittsburgh, which pulls in over $400 million in National Institutes of Health funding annually, and Carnegie Mellon University, which has top graduate programs in computer science, engineering, and robotics and tight connections to industry. Duolingo’s von Ahn remains a CMU faculty member, as does Jay Whitacre, the founder of Aquion Energy, a battery company based on his invention. Andrew Moore—who ran Google’s Pittsburgh office for eight years—recently returned to academia and is now the dean of CMU’s computer science school.

Campus talent has been a draw for major companies, including Apple, Disney, Intel, and IBM. Google arrived in 2006 and now has 400 engineers on site.

Carnegie Mellon University’s computer science and machine learning departments have spawned a number of promising Pittsburgh startups.

This past February, Uber announced it was partnering with CMU to open a 53,000-square-foot research and development facility focused on designing self-driving cars. It also hired away more than 40 of Carnegie Mellon’s researchers, prompting grumbles about the big tech companies swiping the best local talent. But most people are glad to have them here. “As you’re recruiting executives to move here [for a startup job], Google provides a sense of stability,” says Sean Ammirati, a partner at Birchmere Ventures, a local investment company. “If the startup doesn’t work out, there is a place to transition to. And a lot of people who work at those big companies get bored pretty quick, so they look for something different to do.”

The Pittsburgh sell to out-of-staters: despite being relatively small (the population hovers around 300,000), the city boasts top-notch sports, arts, culture, and outdoor attractions. Within driving distance of Philadelphia, Washington, and Baltimore, it is well positioned for companies needing to distribute physical products. Also, housing costs 10 times more in San Francisco than it does in Pittsburgh.

One piece of evidence that Pittsburgh’s profile is rising in the tech community comes from Silicon Valley: more than 100 national venture funds have invested in Pittsburgh companies in the past five years.

There are cons to a smaller tech city, too. Finding nontechnical talent—from lawyers to salespeople to marketing staff—remains a challenge, and even securing a flexible workspace from landlords can be tough. “We have 55 employees right now, and next year we will have 155,” says Duolingo’s von Ahn. “It’s impossible to convince someone here to sign a lease that makes sense for a startup. We cannot sign a lease for 10 years—by then, we will either disappear or we will be 10 times larger!”

Getting direct flights to San Francisco to woo investors or talent can be tough; for three months in 2015, there were actually no direct flights from Pittsburgh to the Bay Area. There are also few tech employers here with the HR and legal know-how to secure H1B visas for international employees.

And the region’s affordability, in many ways a virtue, can also cut the other way. “The sense of urgency here is not as apparent as it is in the Bay Area,” says Phil Marzolf, a Silicon Valley veteran who now works as a Pittsburgh-based advisor to startups. “When somebody has an idea in California, you have to run nonstop. Here, too many people get complacent.”

The largest challenge, though, is the lack of big-time investors. Duolingo raised all its money outside the region, while other companies that started in Pittsburgh, like Anki (a robotics company) and BlackLocus (a business software startup), have followed investments out of state. The founders of Modcloth, a clothing retailer that started out selling vintage styles online, found that while Pittsburgh was a great place to bootstrap their company and find affordable warehouse space, they eventually outgrew it. When they raised their second round of venture capital, they moved their headquarters to California to tap into their investor networks in the Bay Area.

“Pittsburgh is a great place to have a startup,” says cofounder Susan Gregg Koger, “but it’s not a great place to keep scaling yet.”

“What we really need is for someone to become an icon,” says Dave Mawhinney, the co-director of CMU’s Center for Innovation and Entrepreneurship. “Harvard has Facebook, Stanford has Google, and Carnegie Mellon has … fill-in-the blank.” Without that, Pittsburgh lacks the abundance of tech wealth that gets reinvested in new startups so regularly in Silicon Valley. Observers say there are a handful of local companies that have the potential to get there (see sidebar), but they are all still a few years away from the point where a public offering might make sense.

Local entrepreneurs, though, say that a large IPO is only a matter of time. “When that happens,” says von Ahn, whose company is on the short list, “that’s when we’re going to see a big change.”

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