June 16, 2016
Madison, Wisconsin: How a City Becomes an Innovation Hub
By Alex Paul and Peter Engelke
SFI staff and Qualcomm representatives visited Madison, the capital of Wisconsin, because the city is building a national reputation as a hub for technological innovation and entrepreneurship. They hosted two roundtables, each attended by individuals prominent in the local tech sector, and held several private meetings, all designed to understand Madison’s success as a tech hub and to identify the potential challenges which could undermine the city’s continued growth in the future.
On the positive side, Madison’s unique physical and cultural assets make it a very livable city, from its beautiful location on the shores of several natural lakes to its vibrant culture and low cost of living. Interviewees were unanimous about Madison’s virtues: they all expressed a deep love for the city, stating that its livability was why they wanted to put down roots there and contribute to the success of its local tech scene.
In several respects, Madison’s small size is an asset for its tech ecosystem. A high “density” of individuals means that it is easy to interact with people from across the local tech community on a constant, daily basis. One participant claimed, half-jokingly, that simply standing outside a popular downtown coffee shop for a day would enable one to meet most of the key people in the tech/innovation space. Madison’s close-knit nature also results in a high degree of trust, wherein reputation plays an important role in fostering cooperation and support across the local tech ecosystem.
It is not an accident that Madison contains one of the world’s premier research universities, the University of Wisconsin-Madison. In one form or another, UW-Madison is behind much of the activity in the local tech sector: as a source of pure research, support for commercialization of that research, and the production of highly educated people (faculty and students) who go into local private firms. It is responsible for five percent of Wisconsin’s GDP, testament to its huge statewide economic impact. The university and Madison’s tech ecosystem reap the benefits of the Wisconsin Alumni Research Foundation (WARF), the oldest university tech-transfer office in America (established in 1925). An independent 501(c)(3) organization, WARF works closely with UW-Madison faculty to patent, license, and commercialize their research, helps bring federal research money to the university, and returns royalties back to the university system. In a unique arrangement, UW-Madison faculty and students retain ownership of their intellectual property, which they often license to WARF to help fund commercialization. This arrangement is a significant draw for attracting and retaining top-tier faculty and researchers to UW-Madison.
Of the challenges facing Madison, participants warned that the local tech ecosystem is still small enough to be highly vulnerable to downturns. A consistent concern is that a sustained reduction in state funding for UW-Madison, especially for salaries and research, could erode the university’s ability to attract and retain top faculty, who might take themselves, their students, and their research funding elsewhere – eroding UW-Madison’s reputation as one of America’s premier research universities.
Inside Wisconsin, there is a clear divide between Madison and the rest of state. Some commented that in Wisconsin, the Badgers are beloved but Madison is not (here, “the Badgers” refers to UW-Madison’s mascot and its sports teams, which have a passionate and devoted following across the state). People living in other parts of the state have built up a resentment toward intellectual elites in Madison, including those who work at UW-Madison. Representing a trend that is true at the national level, this resentment has both economic and cultural roots. Despite all economic data to the contrary, a sizable share of Wisconsin citizens believe that the university is a drain on the state’s public finances rather than an investment asset for its economy. An unfortunate result is that in recent years the state legislature has reduced funding for the university, as representatives from largely rural districts chafe at funding an institution that their constituents do not view as benefiting the entire state.
Madison’s small tech ecosystem carries some negatives in addition to positives (the flip side of the benefits of small scale). Madison has a harder time drawing some types of investors, especially venture capital, with startups often relying on angel investors from Wisconsin or the Midwest. Part of the challenge for attracting venture capital is to demonstrate that Madison’s tech ecosystem can produce big hits in the marketplace, especially major IPOs by local startups. While Madison has produced commercially successful startups, to date none have become a major public company as occurs in Silicon Valley. For example, the local medical software firm Epic Systems was a classic startup when founded in 1979 (it began life with 1.5 employees working in a basement). It now employs some 10,000 people in Madison and is estimated to be worth billions, but it remains in private ownership. Yet despite this lack of big IPO hits, participants noted a slow but steady trend toward increased venture capital investment into Madison, including from funds outside the region, and most expressed confidence that this trend would continue.
Madison might well be at a turning point in its evolution. To sustain the local tech sector’s successes, UW-Madison must continue as a premier research institution, which will require that the state government recognize it as a driver of Wisconsin’s economy. One person pointed to Texas as an example, where state support for the University of Texas-Austin is based on lawmakers’ understanding of its economic benefits for the entire state. Beyond UW-Madison, Madison’s tech scene also would benefit from greater awareness at the national level, where sheer lack of knowledge about Madison and its benefits hinders talent recruitment and investment funding. However, once people move to the city they tend to stay, indicating that the biggest challenge is initially attracting entrepreneurs and innovators, not convincing them to stay. A final challenge is the city’s and tech sector’s lack of diversity, both of which are out of step with national trends toward greater racial, ethnic, and gender diversity. But despite these reservations, local tech and community leaders are optimistic that the future looks bright for Madison, providing that UW-Madison is able to sustain its reputation and that the city manages to retain the vibrancy that makes it a special place to live.