Why do we have hub cities?

[Nate W.]

I have been doing some volunteer work for the Chamber of Commerce in Dallas and several advocacy groups to promote local biotech. In the last ten years, 16 biotech companies have been founded in Dallas over the last ten years. All of them have failed, been bought out, or relocated to a hub city, like San Francisco.

The basic research for these companies have been funded by state taxpayers and wealthy local alumni. Some have been founded and underwritten by local angel investors; by wealthy accredited investors (worth > 1 million) and have proud ties to this state.

One such local angel investor serves on an advocacy board to promote biotech in this state and often touts a sanguine message to job seekers. Yet he advocates to his investors to relocate a local start-up to the Bay Area and another to Chicago even though it is much cheaper to have the company here. I wonder whether his investors know this; because they probably do care given their loyalty to the state and local industry ties.

This got me mad because I see how many life sciences grads struggle to find jobs here; due in large part to poor advocacy, ambivalence, and bad business decisions. This is a trend in N. Texas.

Even the person in charge of commercial development for a large state agency for technology transfer seems to care less about whether spin-offs stay here or not as well as jobs for life science graduates. Of note, Texas probably has the largest number of life science graduates in the US.

Texas is also the second largest healthcare market. It has the most number of hospitals in the country and it conducts the most number of clinical trials. 12 medical schools, 3rd in NIH funding for basic research, and 1st in clinical trials. Yet, it has absolutely no biotech companies to speak of. VC money for biotech in TX is 235 M and in Boston that same figure is 2.0 B. Advocacy groups, TT offices, and government groups have spun-off several companies in the Dallas area only to have them leave and go to hub cities, like San Francisco and Boston. What are these VCs thinking, there costs just went up 5-10X fold? Try have your employees buy a house in the Bay Area; so they ask for a higher salary. What is the advantage of San Francisco over Dallas for a biotech company?

Every thing is here for a biotech hub in Texas, but a lack of state pride, investor money, and political will power. Wish people here cared about jobs in this sector; because they produce a considerable amount of doctors and life science graduates.

[Abby]

Thanks for this question. This has been an ongoing irritation of mine here in Colorado as well. Great universities, great quality of life, relatively affordable... Looking forward to an explanation from someone on the "winning" side...

[RSD]

I think there are a handful of reasons that make a pretty solid rationale for locating or re-locating to a biotech hub.

1. Access to venture capital. VC money is concentrated, so companies go to where the money is. Real estate costs and even cost of living/salary costs don't make up that much of a biotech's budget.

2. Access to talent. Biotech hubs tend to have lots of academic research centers and big pharma, which means access to both entry level and experienced talent. If I take a job at the only biotech in Omaha and it fails, I have to relocate again. If my startup in Boston fails there is a significant job market for me.

3. Culture. This ties in with competition for talent. In places where there are no alternative workplaces and relatively few candidates (compared to a Boston or SF), the culture can get stale. I think a bit of turnover and competition makes for a more innovative, driven to succeed culture as opposed to the punch the clock/I've gotten comfortable here and there is no place else in town culture. I think local networking opportunities with other biotech and pharma companies, employees, and academics also helps.

[Nate W.]

I think there are a handful of reasons that make a pretty solid rationale for locating or re-locating to a biotech hub.

1. Access to venture capital. VC money is concentrated, so companies go to where the money is. Real estate costs and even cost of living/salary costs don't make up that much of a biotech's budget.

2. Access to talent. Biotech hubs tend to have lots of academic research centers and big pharma, which means access to both entry level and experienced talent. If I take a job at the only biotech in Omaha and it fails, I have to relocate again. If my startup in Boston fails there is a significant job market for me.

3. Culture. This ties in with competition for talent. In places where there are no alternative workplaces and relatively few candidates (compared to a Boston or SF), the culture can get stale. I think a bit of turnover and competition makes for a more innovative, driven to succeed culture as opposed to the punch the clock/I've gotten comfortable here and there is no place else in town culture. I think local networking opportunities with other biotech and pharma companies, employees, and academics also helps.

Point#1

I can see the access to VC money. The cost of office real estate in Dallas is about $18 to 23 dollar per sq. foot and San Francisco is about $70. The same with Boston (Cambridge) at $70. Even salary differences of about 2.5X the cost of living. A modest house in Dallas might cost $300,000 and in the Bay Area it is easily $600,000 to 1M. That money will cost VCs and investors in these companies versus if it stayed in Dallas. For a start-up or mid size company, that's a lot of money. And this was Texas money that funded the basic research for these companies and it creates jobs elsewhere (non TX taxpayers)!

Point#2

Access to talent. Please, Texas has 12 medical schools and has the largest number of life graduates. Plus, how hard is it to get a senior management guy with industry experience (Boston, Bay Area, or Chicago) to move to Texas to manage a biotech here. Less taxes, lower unemployment, and cheaper homes. Public schools about the same. Many CA residents are flocking to Texas because of the taxes in CA and housing costs plus the taxes on retirement accounts. Look at the local trends in migration from CA to TX.

Point#3

I agree with the local networking angle. I have more success networking outside of Texas than locally. The culture thing is a personal preference and where you were raised. There are ambitious professionals here that are driven to success here but in the life sciences they don't have the right environment to do that (just academia).


However, it doesn't explain why these local advocacy groups and certain employees of state agencies meant to promote the interest of the state could care less (or even promote) about the migration of these companies to other states? Yet, they patronize the job seekers and life science graduates with a sugar coated message.

FYI: I have been asked to give a short presentation about this topic to some influential entrepreneurs in the Dallas business community.

What would you tell them to promote biotech in this state, especially N. Texas?

[J.B.]

The reasons for this are varied and controversial. I'll wade into what I've seen (most of which you can find yourself online too), but it wanders into uncomfortable territory that may get this thread shut down. I don't intend to be disparaging in my comments though.

First, if you look at population maps, people tend to gravitate towards the coasts. The climate is more temperate than in the middle of the country and that's a big plus. So by pure numbers, the most number of people will be towards the coasts. That includes universities and VCs.

Second, the powerhouse universities are in the hub areas you mentioned. UT Austin and Rice are good schools, but they're not in the same league as Harvard, Stanford, or U of Chicago.

Last, and most controversial, science hubs gravitate towards blue states/areas. It may seem silly, but it makes some sense when you really dig in. Texas, for example, is fiercely and proudly red (except for Austin). A few years ago, they voted to include creationism in school textbooks. They've fought tooth and nail against legalizing abortion. How do you think a company doing stem cell research is going to do in an environment like that? You can choose to hire people from Texas universities and fight with the local government over the very foundation of your company's mission, or you can go somewhere more expensive with better biotech infrastructure and higher powered universities and be welcomed open arms.

As a sidenote, your argument about property values being lower is not as much of a benefit as you imply. A lot of Californians are attracted by the low cost of housing but end up surprised with a tremendous property tax bill that ends up practically negating the low housing cost.

[D.X.]

HI all,

For me, I think there are few reasons. One is historic reasons. For whatever reasons, historically, it was certain Areas like Boston and SF area that have laid the ground as so called Innovation hubs.

Probably more related to the among the first to have a culture that drove such risk-taking, spin-off, high-Technology with Commercial valuation mentality.

Then that laid a concentrated "infrastructure" of resources, which Talent and knowledge are a part of. Many other cities have tried to jump on the band-wagon, certainly New York has but i'm not sure despite the presence of some biotechs there that I'd call that a "hub of excellence". They try, i.e. and certainly some exists but compare to other Areas.

As far as Talent, its about right Talent and alot of hub cities have that Talent, i.e. already experienced Folks. Try Setting up a biotech in a non-hub, non-popular area, good luck getting the right Talent, especially in today's world where companies really want someone to can run as soon as then join. Then there is the knowledge issue, and Access to a Network of experts that you can meet with in the same town. Even been to Boston? I love it! So much scientific engery! YOu walk into a Bar and you hear science conversations going on - there are Networking Events, etc. etc. if I had to go back to the US, Boston would be target. As an early start up you want a Network. You want right Talent, hopefully you have half-a-brain and you know the clock is ticking (tick tock, tick tock) and you Need to have a commerically viable product yesterday.

VC Investors nearby help for me its that innoviation culture, that high-energy science driven Network, and Access to right Talent.

Then the other, albiet seconary or tiertiary aspecct you Need, is Access to an international Airport and I mean a "real" international Airport with Direct Connections via a wide Network to Europe and Asia, as well as well connected Domsetic Airport, i think Boston Logan, SFO, Chicago, meets that bill. Not the ones where my parents live where "international" is defined by the one flight per week to Canada.

Not to say other places have it, but imagine you're starting your biotech..where would you seriously want to be? You do Need that culture. But i do think the history Plays a role and well then everyone else is trying to play catch up.

I'm in Agreement with RSD

DX

[Ana]

RSD, JB and DX have made great points. Clearly there are enough reasons that have resulted in the creation of hubs. Thanks Nate, very interesting thread.

[Dave Jensen]

Love and agree with the comments from DX here,

"As far as Talent, its about right Talent and alot of hub cities have that Talent, i.e. already experienced Folks. Try Setting up a biotech in a non-hub, non-popular area, good luck getting the right Talent, especially in today's world where companies really want someone to can run as soon as then join. Then there is the knowledge issue, and Access to a Network of experts that you can meet with in the same town. Even been to Boston? I love it! So much scientific engery! YOu walk into a Bar and you hear science conversations going on - there are Networking Events, etc. etc. if I had to go back to the US, Boston would be target. As an early start up you want a Network. You want right Talent, hopefully you have half-a-brain and you know the clock is ticking (tick tock, tick tock) and you Need to have a commerically viable product yesterday"

Great comment. I think it's all about talent, or mostly. As a guy who has tried to pull people into odd locations, I know that it is a losing battle.

There's some great content in this thread, thanks Nate,

Dave

[Nate W.]

I would like to stay on the economic reasons of what's driving this consolidation into hub cities when the economics might favor an alterative location from the eyes of the VCs and investors. I agree with the access to capital and greater opportunity for networking. However, I don't get the talent argument; there are talented scientists in non-hub places like Texas, NC, and Florida that are well skilled. You also have to consider that many scientists were trained in non-hub schools (then relocated to hub cities) and profitable commercial ventures were spun off from non-hub schools (with local non-hub tax dollars). For example, Harvoni (Gilead) was developed from basic research on HCV from Emory. However, many young scientists can't afford to live in these cities coming out of graduate school, especially the Bay Area. In my opinion, the Bay Area has reached its saturated point of being economically viable for most in the biotech industry. The SV IT industry has contributed to this problem of affordable. Recently, I interviewed in the Bay Area and I asked for the difference in the cost of living between Dallas and SF (~1.5-1.7X); they said no. Even if you are next to world class medical schools and successful biotechs, that's not going to make you more profitable and able to raise more capital. Also, sometimes it is advantageous to have a more centrally located distribution hub in the US for the handling of time sensitive biologics and the processing of laboratory diagnostics tests quickly. Why is FedEx in Memphis? Why does Delta have Atlanta as a hub? There is a genotyping company in the Memphis suburbs; why not Boston?

In my opinion, Boston is the quintessential biotech in that it has most of all the qualities for a thriving biotech eco-system.

My argument with Texas is that it has a larger healthcare market than CA with the most number of hospitals and clinical trials. It is far cheaper than most biotech hubs; why do the VCs want to pay more for labor and real estate in a growing cash strapped biotech start-up? Only means a lower return on investment for its accredited investors?

I'll leave you with two articles:

http://www.bizjournals.com/sanfrancisco ... using.html

https://lifescivc.com/2017/03/inescapab ... l-returns/

PS: Not to pick on SF. SF is a wonderful town but the economics just don't make sense unless companies wanted to pay more in income or the cost of living differences to relocate.

Dave, you mean you couldn't find a CEO from a hub city to manage a well financed biotech in Texas? Even if you paid him more money and equity?

[D.X.]

Hi Nate,

Interesting and I see your views re: Texas, similar thoughts can be applied. Re SF or any other hub City consider that alot of These places are offering Tax incentives that also contribute to making those cities competitive, so operating costs can be high but it can be Offset by taxible benefits. Not to say the tax Situation is better in Boston or SF, certainly New York has done so and not to say it doesn't have a biotech community it does but when compared to Boston or SF well those hub cities are on a different Level. As noted by others there are many contributing factors so there is just not one answer. Certainly as you've noted, you CAN start a spin-off anywhere you want but consider of you're too isolated from others well you can get other costs adding up, such as travel. Not sure if that operational expenditure can be written off tax wise.

Regarding cost-of-living adjustment, this is just not done on the private sector as per my experiences, I've found its not a negotiation Point many companies don't care to do such. There are other points to negotiate on, i.e. relocation expenses, and there is alot of wiggle room here if you plan it right and you can get some up-front cost-adjustments here just not specifically called out as such.

I think US Federal Jobs/Military will do such adjustments but nothing like you've quoted, its quite "incremental" as per my experiences and not meaningful in my opinion.

Re your CEO question: you can get anyone to move for the "right" opportunity - but remember for the smart ones, opportunity is not just salary/equity. In that case if you present opportunity you're on an Level playing ground because nobody will say no to a great opportunity as defined by a Company with a product that will yield some form of commerical success i.e. go to market, buy-out, or licensing deal.

All CEOs are looking to add to thier CVs or any Sound Person for that matter, they want a successful Story first not just compensation. They want to see if they have a true Chance to take the Company/product Forward, they want to see if they can be truely entreprenural.

And this touches Readers on this Forum as well - opportunity is just not a Job or salary - opportunity is what you get out of it with a though Evaluation of the risks involved.

DX