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Madison lagging behind peer cities in economic vitality

Madison lagging behind peer cities in economic vitality

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Flash back to May 2003 when Forbes magazine was hot off the press with its annual ranking of the “Best Places for Business and Careers.”

To the surprise of many who knew it for left-wing politics, a meddling City Council and disdain for the private sector, there was Madison: No. 5 in the nation. Only Austin, Boise, Raleigh and Atlanta scored higher in the annual survey based on a broad number of economic measures.

In a glowing report, the business magazine lauded Madison for its top research university, an emerging technology sector and an environment — weather notwithstanding — that could attract and retain talented young people.

But a decade later, Madison has slid all the way down to No. 89 on the list, right between Charleston, W.Va., and Harrisburg, Pa. A high cost of living and doing business, coupled with flat job growth contributed to the lower Forbes ranking.

Another scorecard, this one from the Madison Region Economic Partnership (formerly Thrive), shows Madison trailing three “peer” state capital communities — Des Moines, Lincoln and Austin — in key areas like unemployment, income growth and small business development.

Most significantly, the number of private companies in the Madison area has actually fallen by 4.5 percent over the past six years. That compares to an 11.5 percent business growth rate in Austin and is also lower than the other peer communities and the U.S. as a whole.

The Madison area isn’t totally in the tank. Medical records giant Epic Systems continues to hire 1,000 employees each year at its sprawling campus in Verona. The UW still attracts top talent from around the globe. Cellular Dynamics International, the company founded by stem cell pioneer James Thomson, just announced plans for an initial public stock offering, the first IPO here in six years.

It’s also important to note that some of the figures in the recent Madison Region Economic Partnership report include the seven counties surrounding Dane. Take out Rock County with its 8.5 percent jobless rate, for example, and the unemployment situation doesn’t appear as dire. The city of Madison’s unemployment rate is currently 4.7 percent.

And while a positive business ranking can make for a good press release for a publicity-hungry mayor or governor, most experts take them with a grain of salt.

Still, looking at the latest numbers and recalling 1995 when Madison had the nation’s lowest unemployment rate at 1.9 percent for five months running, one can only wonder: What the heck is going on here?

In some ways, the Madison situation reflects Wisconsin as a whole. The state has been among the slowest to recover from the Great Recession, ranking near the bottom in job creation and income growth over the past two years. Economists at the Federal Reserve in Philadelphia are now predicting the Wisconsin economy will actually contract over the next six months, putting the state at No. 49 for economic growth among the states.

But there’s also a perception that Madison with its many assets — good schools, scenic beauty, smart people and a major research university — should be performing better than it is.

Zach Brandon, president of the Greater Madison Chamber of Commerce, thinks the city fell into a trap a decade ago when its traditional large employers were doing well, the UW was humming along and state government was actually adding jobs amid an expanding Wisconsin economy.

“I think we maybe got caught looking at our own press clippings and thinking how great we were doing,” he says. “We thought no bad could come to us.”

At the same time, Brandon says, communities like Austin and Boulder, Colo., were supporting companies with incentives, encouraging entrepreneurs and keeping their talented college graduates around because there were places to work that paid well.

When the national economy crashed in the wake of the housing bust, old-line Madison employers like CUNA Mutual, American Family Insurance and Dean Health Systems started to trim staff. The UW instituted a hiring freeze and former Gov. Jim Doyle ordered state government to cut 10,000 jobs.

“Not only had we failed to pivot like some of these other communities, we suddenly had to realize that government was no longer going to be a growth industry,” says Brandon.

UW-Madison economist Steve Deller paints a slightly different picture of how Madison lost its luster, putting more of the blame on the austerity measures of Gov. Scott Walker — including Act 10, which cut take-home pay for hundreds of thousands of public employees — coupled with a longer-term trend of low-income people migrating from Chicago or Milwaukee seeking better public schools and less crime.

Today, the percentage of students in the Madison School District considered “low income” by the federal government stands at 55.6 percent, much higher than where it was in 2003 when 29.5 percent of Madison school kids qualified for free or reduced-price lunch.

On a shorter-term basis, Deller also notes the impact of weather — the floods in 2008 and drought last year — that has challenged the farming communities surrounding Madison.

“It has just been a painfully slow recovery for Wisconsin, and Madison is no different,” says Deller. “True, we historically had lower unemployment rates than a lot of other places, in large part due to the presence of state government and the UW. But that ‘insulation factor’ is melting away.”

Mayor Paul Soglin, taking his third and arguably most difficult crack at running the ship, says the city simply sent too many negative signals to the business community over the years. He says a common comment from developers was that they wanted to work in Madison but found the rules too expensive and cumbersome to navigate.

“The anti-development attitude really hurt, no question,” says Soglin.

Madison has also suffered from a “brain drain”: Graduates coming out of the UW — and Edgewood College and Madison College, for that matter — have taken their skills to places with more job opportunities and higher salaries. While difficult to quantify, the old joke that Madison does a great job educating other people’s kids, then sends them off to succeed in Chicago or the Twin Cities, suddenly isn’t so funny.

“I’ve seen too many of my classmates move to New York or Chicago or back home to Boston because they just didn’t see an opportunity here,” says campus area Ald. Scott Resnick, vice president of Hardin Design & Development with 17 employees and co-founder of Capital Entrepreneurs, a support group for leaders of young companies.

Unfortunately, there’s a persistent rap that Madison simply lacks an entrepreneurial spirit, with many locals content with a laid-back life spent enjoying their neighborhoods, lakes, bike paths and craft beers.

“If the majority of people are working at government jobs or in formerly stable industries like health care, they aren’t exactly rolling the dice to run a new start-up,” says Paul Radspinner, CEO of FluGen, a biotech firm with 10 employees pursuing a patented technology for delivering flu vaccine.

Whether Madison has a thirst for the so-called “new economy” is a tough question to answer. The lack of investment capital for new companies has long been viewed as a roadblock for the Midwest, leaving people like Radspinner traveling to vibrant cities like Boston, where he just landed $15 million to help move FluGen into phase two clinical trials.

At the same time — with the notable exception of Epic — the promise of high-tech development hasn’t always paid off in terms of long-term job creation. In the 1990s, Madison saw the birth of exciting companies like Third Wave Technologies, NimbleGen, Mirus Bio Corp. and TomoTherapy, but all have since been acquired by out-of-state, publicly traded firms, leaving them vulnerable to layoffs or outright shuttering.

As a result, local investors are a bit skittish about taking a risk these days, says Darrell Behnke, wealth manager in U.S. Bank’s Madison office.

“People are worried about return of their capital, not return on capital,” he says.

With its vast research dollars and sparkling new buildings, the University of Wisconsin campus makes an easy target for those frustrated with Madison’s economic underperformance.

Among the most vocal has been Tom Hefty, a retired Milwaukee-area businessman and UW alum who has advised both Republican and Democratic governors on economic issues. Hefty contends Madison and the campus in particular remain mired in a Vietnam-era view of the world where private enterprise is considered evil and those looking to make money are not to be trusted.

One of Hefty’s major beefs is the UW’s low ranking among Big Ten schools in business-sponsored research and its weak record on new company creation. The UW ranks fourth among some 200 universities in landing federal grants but in the bottom half in the number of companies launched from that research, according to the latest figures from the Association of University Technology Managers.

“Instead of blaming others, Madison needs to take a look in the mirror,” Hefty charges. “Any economic turnaround will only start with a change in UW-Madison performance and attitudes.”

That theme was partly echoed during the Wisconsin Entrepreneurs Conference held last week at the Marriott Madison West.

The event featured a panel of four UW alumni now living in California’s Bay Area who offered their thoughts on how Wisconsin can improve its entrepreneurial climate and attract more investment capital. The group is pushing a “Badger Network” where investment dollars from the West Coast can be put to work back in Wisconsin.

“Business isn’t about staying busy; it’s about making money,” said Sanjeev Chitre, who struck it rich in Silicon Valley after earning an undergraduate degree from the UW-Madison three decades ago.

Mark Reinstra, a New Richmond native who graduated from the UW in 1988 and now works as an attorney in San Francisco, says the Madison campus lacks the kind of excitement about private-sector development he sees in the Bay Area.

“It seems like a lot of (UW) professors are only concerned with landing the next government research grant,” he says. “Compare that to Stanford, where just about every professor is looking to start a new company.”

Some on the Madison campus push back against that view, arguing the UW’s role is not to serve as a business incubator or job training school.

“The university’s role is to prepare undergraduates to take their place in the ranks of educated citizens, to keep these ranks from disappearing in Wisconsin and in the country and to train graduate students for sophisticated academic and professional positions in society,” wrote neuroscientist Ron Kalil earlier this year in response to arguments that the UW-Madison needed to hire a business person as its next chancellor.

After Hefty ripped into the UW during an interview with Cap Times editor Paul Fanlund recently, vice chancellor of university affairs Vince Sweeney responded that the School of Business, through October 2011, had documented 279 direct university start-up companies, with 105 formed around a technology licensed by the Wisconsin Alumni Research Foundation (WARF).

“There are many more examples of UW-Madison’s ongoing commitment to helping grow the state’s economy,” Sweeney wrote. “And while we are always looking for opportunities to do more, I hope this information helps illustrate that the university is working hard at encouraging business relations, tech transfer and start-ups.”

Whether admitting a problem or not, the UW has taken some recent steps to work closer with the business community and burnish its image as an institution that can contribute to the economy as well as society.

In April, the Board of Regents approved the hiring of acting U.S. Commerce Secretary Rebecca Blank as the new UW-Madison chancellor. That’s a dramatic shift in direction from the last chancellor hire: German literature scholar Biddy Martin.

The UW has also ramped up efforts to work with entrepreneurs and encourage start-ups on campus.

The engineering school recently launched an organization called “TranscendENG’ to connect engineering, computer science and business students looking to develop entrepreneurial skills.

The law school offers the Law & Entrepreneurship Clinic that provides free services to small business owners, in collaboration with the Wisconsin Institutes for Discovery, Wisconsin Alumni Research Foundation and more than a dozen of Wisconsin’s leading law firms.

Among those taking advantage of the law school clinic is Madison entrepreneur Steve Glinberg, founder and CEO of Blue Moon Learning, who has developed a series of apps featuring educational children’s games, including one that allows kids to fingerpaint on a touch screen.

“I feel like I’ve gotten a lot of help all along the way, especially from the people at the UW,” says Glinberg, a former computer programmer at American Family, whose games are available through the Apple Store and were featured recently in a New York Times story on technology for children.

Glinberg is currently renting office space in the offices of PerBlue, a gaming company on Odana Road considered one of the city’s hottest tech start-ups. Its co-founder, Justin Beck, serves on the Blue Moon board of directors.

Madison is filled with scores of similar stories: inventors working quietly on their ideas, hoping to raise money from investors and take things to the next level — whether hiring employees or simply cashing out and moving on to the next big idea.

Earlier this year, Movein Inc., a Madison-based online apartment listing service headed by CEO Alec Slocum, was part of a fundraising “launch party” hosted by business accelerator Gener8tor, which has been active in both Madison and Milwaukee. Movein has raised $150,000 and is looking to take the product to other cities.

But reviving the local economy isn’t only about encouraging entrepreneurs or generating more start-ups, says Paul Jadin, head of the Madison Region Economic Partnership. It’s also about listening and helping the companies that are already here.

To that end, Jadin is looking to get the 90 active members of MREP into the field for visits with 500 or 600 companies in the eight-county region represented by the group.

“I know everybody talks about how we need to attract more venture capital but we also need to grow the capital we already have here,” says Jadin, who headed Walker’s troubled Wisconsin Economic Development Corp. before taking over at the former Thrive last September.

Jadin admits MREP needs to do a better job of listening to companies about what they need and what problems they are experiencing. “It might be something as simple as getting a bridge repaired,” he says.

Soglin, meanwhile, is encouraged by the surge in commercial development and building permits over the past 18 months, along with progress on East Washington Avenue and interest in the Doyle Square hotel project downtown. But he is also troubled by the unemployment rate, especially among teens.

“We absolutely need to make a major effort to create more jobs,” says Soglin, noting he will soon announce a program to generate employment opportunities for young people at existing Madison businesses.

Of course, talk to anyone in the business community today about economic development and they all point to Epic Systems. Sure, there is grumbling about the urban sprawl location in a former cornfield or that CEO Judy Faulkner burns out her staff, leading to a high turnover rate.

But Epic seems to hit it right on just about every measure: technology coming out of the UW, a knowledge-based company that attracts talent and, most recently, a series of spinoffs by former employees seeking to put their own mark on the world.

“You can’t say enough about Epic,” says Radspinner of FluGen. “They can be to Madison what Dell and IBM were to Austin.”

Which gets back to the bigger issue of whether Madison has the right moxie for private sector development.

During the Wisconsin Entrepreneurs Conference last week, the city and UW in particular took a beating from the Silicon Valley panel on everything from the weather here to Ph.D.s content to drive a cab for a living.

Venture capitalist Chitre — whose career includes a failed promise based on using taxpayer subsidies to site a solar research facility in Saginaw, Mich. — even borrowed a line from the movie “Wall Street” by telling the crowd that “greed is good.”

Among those in the audience who took offense was Brandon, a former Madison alder and past Commerce deputy secretary under Doyle who took over at the chamber last November.

“An economy based on greed is not sustainable,” says Brandon.

Rather than trying to reinvent itself as the next Silicon Valley, Brandon says Madison should play to its own strengths, whether than means embracing efforts like Dane Buy Local, existing old-line businesses or a new company just looking to get started. He says it also means respecting the values that are important to so many here — whether it’s a clean environment, a living wage or a family-friendly workplace.

“I see our future based on people, profit and planet,” he says. “To me, that is the model we should be aiming for.” 


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