When the City Council approved a $10 million fund for high-tech investments last month, Sacramento joined a handful of municipalities across the country hoping to buy their way into the economy of the future with public money.
Philadelphia, Portland, Ore., – and now Sacramento – don’t expect to turn themselves into the next Silicon Valley. But the idea is to leverage taxpayer dollars to spark innovation specific to local industries, creating a high-tech hub uniquely tied to the region.
For Sacramento, that likely starts with looking at how government, agriculture and biotech sectors need help, according to the city’s interim chief innovation officer, Abhi Nemani. Drones for farm work, software for streamlining state bureaucracy, sensors for tracking air pollution for asthma research – solutions in areas where expertise and customers exist.
Mayor Kevin Johnson, who will leave office in December and sees the fund as a legacy, hired Nemani on a seven-month, $81,000 contract to put together a plan to make that vision happen. Nemani came up with a two-part approach that initially focuses on grants to give local entrepreneurs resources and training. Once that happens, he envisions the city getting into the venture capital business to grow those nascent companies – and keep them from getting poached by other places.
If the ambitious and long-range plan works, Johnson believes Sacramento will shed its stodgy government-town past and become a youth-centric city of big ideas and thriving startups.
But that’s a big if. The fund is a bet with unknown odds and unexplored risks.
“Nine out of 10 of these things fail,” said Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University in Cleveland, who has examined similar efforts in other states, counties and cities.
Shane warned that it takes more than money to create a high-tech economy, and that the biggest challenges for funds backed by government are politics and goals.
“One of the things you’ve got to do is get government money without government involvement and that’s really hard to pull off,” he said. “Governments are trying to achieve different objectives than the private sector.”
Sacramento’s Innovation Fund isn’t short on government entanglements. Council members will vote on grants – which could turn political – and existing city rules regulate any type of contract.
The city’s Economic Development Department along with council members, particularly Eric Guerra and Jay Schenirer, want to hold the program accountable for a promise to bring jobs – and not just to the urban core. Companies receiving grants must report back with data proving they’re hiring locals, among other criteria, according to Veronica Smith of the Sacramento EDD.
But that focus could be “wrong for creating successful startups,” said Shane. “Jobs are a cost for companies, so people don’t want to have a startup that necessarily creates a lot of jobs.”
The money for the fund comes predominantly from the sale of surplus city-owned land. In 2014, the city sold about 350 acres at the former Army Depot site for just over $9 million.
Schenirer suggested using that money to replace economic development funds lost when the state dissolved redevelopment agencies in 2011. City Manager John Shirey supported that idea.
Subsequent land sale revenue was added to the fund, including $255,000 from a property at Fair Oaks Boulevard and Howe Avenue and $597,112 from selling 921 10th St., according to public records. The Economic Development Department also counts a $76,000 land sale at McKinley Village as fund proceeds.
The account is expected to receive ongoing money from so-called “boomerang funds,” annual property tax dollars that formerly flowed to redevelopment accounts. Shirey said that source now adds between $1 million and $2 million to the account each year.
In 2014, the City Council tagged the city reserve with its new name – the Growth and Innovation Fund – and purpose during budget deliberations at the behest of Johnson.
The mayor created an Office of Innovation and Entrepreneurship within his own office, where as many as three full-time employees may eventually oversee the project. Nemani is looking for a staff person to take over his job when his contract expires in December, while another full-time project manager was recently hired.
The fund has an annual operating budget of just more than $2 million, Nemani said. About $425,000 will go toward salaries and other operating costs, and $500,000 is allotted to the Economic Development Department to draw technology companies to the area. An additional $125,000 is marked to help the city streamline its internal technology to aid business in areas like permitting and planning.
The largest current expense is up to $1 million in annual grants to local programs that help nascent tech companies through leadership training, work-share spaces and other support – the groundwork for achieving the first part of Nemani’s plan.
The initial round of grant funding is underway, with applications accepted until July 22. Anywhere between seven and 15 hopefuls will be chosen by a group of as-yet-unknown city and private advisers for final City Council approval as early as August.
If the first phase goes well, the plan calls for the city to consider two forms of capital funding in coming years.
One would try to draw local investors into a pool that focuses on additional funding for existing startups. The second would look for a national venture capital partner that would make funding contingent on locating in Sacramento, said Nemani.
Keeping funding streams going is critical to the overall success of establishing a tech hub, because without it, startups that begin in Sacramento will transplant themselves elsewhere.
“If you really don’t have those venture funds, you run the risk of that company, once its gets going, (moving) on you,” said Shirey.
Johnson is counting on Mayor-elect Darrell Steinberg to continue the Innovation Fund. So far, Steinberg says he’s supportive, but wants to make sure the plan is “translated into specific ordinances and specific policy.” Nemani said he would meet with Steinberg in coming weeks to discuss the program.
Mark Cannice, department chair and professor of entrepreneurship and innovation with the University of San Francisco School of Management, said that building a Sacramento-based venture capital industry would be a “key aspect” of economic change because such funders typically prefer that companies are geographically close so they can take a “hands-on approach.”
Having a locally based venture capital industry “really creates long-term sustainability of growth in a region,” he said.
But Sacramento’s venture capital plans are still vague, and have potential pitfalls – including whether it’s enough money to accomplish the goal. While $10 million may sound like a lot, it’s pocket change in the venture capital world.
In 2015, companies in 133 regions across the country received nearly $60 billion in total venture capital investment. The lion’s share of that – $21 billion – flowed into the San Francisco-Oakland-Fremont region, according to an annual report from trade association National Venture Capital Association.
The Sacramento-Northern California area, which does not include the Bay Area, barely made a blip with about $7 million in total investment. In the first quarter of 2016, the local region has seen two venture capital investments totaling under $8 million.
Adding even the entire balance of the local fund to those numbers likely wouldn’t do much economically. It will require deep-pocketed partners to make an impact.
“I think the venture capital piece is probably the most difficult for a variety of reasons and may not be easy to do,” said Councilman Steve Hansen.
Hansen said he has reservations about the city becoming a speculative investor with taxpayer dollars, and that he is uncertain, with an affordable housing crisis looming for the city, that these funds should remain earmarked for innovation.
“The council may have to decide whether this is the only thing we’re going to spend some of those resources on,” he said. “Especially because the fund is continually getting revenues.”
But for Schenirer, the fund is an important step towards making the city’s economy more entrepreneurial, and a risk worth trying.
“None of this is easy. None of this is a sure thing,” he said. “I think we have to not be afraid to fail … For Sacramento or other municipalities, I don’t think we can do business as usual.”