Return to Virginia Business -September 2002

by Garry Kranz

Talk about a heavy dose of irony. Bonz Hart sits behind a huge, immaculate desk in his Roanoke technology company’s office, checking e-mail while chatting with visitors. Almost imperceptibly, he glances out the window as a Norfolk & Southern Railway engine — a decidedly Old Economy vestige — wheezes into the gray, foggy distance.

The passing train could be a metaphor for the so-called New Century region, a rugged swath of Southwestern Virginia comprising 16 localities in the Roanoke and New River valleys and the Allegheny Highlands. The asset-rich region of 475,000 people could become as powerful and fast moving as a high-balling freight train. But unless high-paying technology jobs become much more plentiful, Hart worries the area will end up as the caboose, not the locomotive. “At some point, we absolutely have to come to grips with how to market ourselves,” says Hart, whose profitable 10-year-old company sells software and services to the oil and gas industry. “Twenty years ago, it would have been hard for people around here to believe that textile and furniture (industries) would go away. But they have.”

If technology-based growth takes hold more strongly here, it’s likely to center on the burgeoning biomedicine/life sciences industry. Two major biotech research institutes, one at Virginia Tech in Blacksburg and another planned in Roanoke, want to build on the region’s historical agricultural base by using plant and animal genomics to develop powerful new drugs and other health care products. The right mix seems to exist to attract growing companies here: scenic beauty, low unemployment, little violent crime, modest cost of living and proximity to Virginia Tech, regarded as Virginia’s top research school.

The challenges that remain, however, are as steep as the surrounding mountains. The chief issue: can Tech achieve its goal of becoming a top national research center? It has aimed high, but been set back by the defections of some top research professors and the planned relocation of CropTech, a pioneer in using tobacco leaves for drug production, to South Carolina. Other issues need attention, too. Air service at Roanoke Regional Airport is limited and fares are high. Local startups have fled after failing to find local investment capital. The work force is graying while a “brain drain” of migrating Tech graduates is sapping strength in its laboratories. Regional marketing groups traditionally have pulled against one another, although a new consciousness about the importance of working together may be taking hold.

The region’s future is inextricably linked to Virginia Tech. Aside from providing full-time jobs for about 6,400 people, the school is a hub of research in biotechnology, advanced materials, high-tech manufacturing, transportation, nanotechnology and other economically promising fields. Tech wants to earn national recognition as a top-30 research university by 2010. That’s no mean feat, considering it’s presently ranked 51st by the National Science Foundation and is taking on such R&D powerhouses as the Massachusetts Institute of Technology and Carnegie Mellon University. Yet, if Tech succeeds in moving to the upper echelon of research schools, the rewards could be gobs of new research dollars that boost recruiting and trigger economic expansion.

The science foundation bases its rankings on the amount of research dollars an institution wins in competitive grants and other awards. Tech needs to grow its research expenditures, currently about $220 million, by about 65 percent to match other top-rated institutions. Growing its endowment funds, which approach $360 million, wouldn’t hurt either. “We have great programs. The goal is to have more of them,” says Leonard Ferrari, the school’s vice provost for special initiatives.

Several things weigh in Tech’s favor. The Southern Growth Policies Board, a think tank in Raleigh, N.C., named it one of the 12 most innovative universities in the country for technology transfer and economic development. A good example of that is the Virginia Tech Corporate Research Park, formed in 1985, which houses about 105 companies. Many are start-ups launched either by Tech faculty or its graduate students, using technology licensed from the university. They include Applied Microbiology & Genetics, a services company; MCT Inc., which provides chemical testing tools; and Aeroprobe, a company that makes instrumentation hardware and software as well as automated lab systems for aerodynamics measuring.

Then there is the Virginia Bioinformatics Institute, started with $39 million in state funding two years ago. Its research could lead to better, more affordable drugs and to crops that vigorously resist diseases. Since its inception, the institute has grown rapidly, attracting $25 million more in external research funding and employing more than 100 full-time staff. “We’re doing mathematical models that could help researchers transform the time to market of new drugs. We need basic science breakthroughs that could result in economic development” benefiting not only the region, but the nation as well, says its director, Bruno Sobral.

Virginia Tech has other accomplishments to cheer. Its College of Engineering ranks 23rd nationally, according to U.S. News & World Report. To help Tech crack the top 30, the engineering school is gunning for the top 10. Doing so requires recruiting topnotch research faculty, increasing the number of graduate students by more than 50 percent, translating applied research into commercial products and nurturing faculty-run start-ups, says Edmund Henneke, associate dean for research and graduate studies. The engineering school has outlined ambitious plans to build an Institute for Critical Technologies, similar to research facilities at Georgia Tech, the University of California-Berkeley and the Raleigh, N.C.-based Research Triangle Institute. “We absolutely have to have this (facility) if we want to move into the top 10. It may even be necessary for us to remain in the top 25” of engineering schools, says Henneke.

Of course, these endeavors cost money, which is in especially short supply because of the state’s budget crisis. The state budget axe cut Tech deeply. Tech administrators were forced to slash $25 million in operating expenses this year and trim another $31 million from next year’s budget. About 90 faculty positions are being eliminated while other faculty members have been shifted to lower pay. The engineering school alone could lose 10 percent of its senior faculty and the institutional memory they possess. Likewise the bioinformatics facility, originally approved to hire up to 33 research faculty, is reeling. It’s now approved to hire less than half that number.

The engineering school also must rely on the generosity of Virginia voters, who will decide Nov. 5 whether to approve $900 million in bonds to fund capital projects at state colleges and universities. Given the sagging economy and the state’s budget woes, that issue is in limbo. Henneke has his fingers crossed: should the measure pass, Tech’s engineering school would get $17 million to build the critical technologies institute — about half its proposed construction cost. (Tech would receive $100 million in total if the referendum passes.) Tech also is trying to regroup after seeing prized possessions slip away. Besides CropTech, the Tech community is also losing Wireless Valley, a telecommunications firm started by former Virginia Tech professor Ted Rappaport. It moved to Austin, Texas, after Rappaport defected to the University of Texas this summer. Among the reasons the two promising enterprises left was their inability to raise funds locally.

Despite the setbacks, Tech administrators chirp optimistically that the top-30 goal is attainable. “This really is going to test our resolve,” says Leonard K. Peters, vice provost for research. “But we’re not going to make it into the top 30 on state investment alone. About two-thirds of our (research) funding comes from the federal government, and we have to recruit more of that.” Peters also notes that Tech receives about 16 percent of its research dollars from private industry, which he says is twice the national average.

While Virginia Tech gets a lot of attention, the city of Roanoke also is busy wooing technology firms. Although railroads and banking are still important local industries, change seems afoot in this city of 95,000 people. Just blocks from Bonz Hart’s office at Meridium is a corridor dubbed “eTown,” part of Roanoke’s Warehouse Row. The city spent $636,000 last year to buy a pair of warehouses there, with a view to developing them into a high-tech business incubator. Roanoke also is floating bonds to build Riverside Centre for Research and Technology, a 110-acre complex planned for another area of downtown. Thus far, $14 million in general obligation bonds have been issued to pay for the initial construction phase. During the next 10 to 15 years, city officials estimate capital investment in Riverside could approach $200 million. The first tenant already is signed up. Carilion Biomedical Institute, a not-for-profit created by Carilion Health Systems, has blueprints for a 50,000-square-foot facility to be built there. Its aim: to fund R&D activities at its two local hospitals, as well as at Virginia Tech and the University of Virginia, in hopes of commercializing biotech products. Carilion’s facility also figures to complement the Virginia Bioinformatics Institute.

Virtual IT relocated to Roanoke from Bedford County in 1999 to take advantage of a fiber-optic network that crisscrosses downtown. The 11-person company needs high-speed access to serve customers using its video-monitoring tools. Says Juliet Silver, the company’s CEO: “The climate here is changing from a railroad town to more of a technology-based entrepreneurial center.”

Perhaps. The more things change in the region, though, the more they stay the same. Even as biotech and high tech take center stage, retail and service companies continue to exert strong influence. Jobs in those sectors account for a good chunk of the region’s per-capita wage of $29,000 — roughly equivalent to the national average and only slightly below Virginia’s benchmark. That has caused some to wonder if economic and political leaders are star struck by tech companies, to the detriment of more traditional segments.

Consider the case of the New Century Venture Center, an incubator launched in Roanoke with state funds six years ago. The incubator has spawned about 20 companies that have created dozens of new jobs and produced $2 million in tax revenue since 2000. Armed with those stats, President Lisa Ison was optimistic she could persuade the city of Roanoke to pony up $100,000 to help the incubator cover operating expenses, especially needful in light of Virginia’s budget austerity. It was the first time her organization had asked for city money. To Ison’s dismay, the request was turned down. “I can’t believe we didn’t get a dime from Roanoke,” she says. “(But) the city is focusing on biotech and technology companies, and I guess we don’t fall into that niche.”

Roanoke County illustrates the strategy of mixing emerging sectors with old standbys. As a bedroom community of 86,000 people, the county wants to lessen the tax burden on residents. Last year, Novozymes Biologicals Inc. became the first company to locate in Roanoke County’s 457-acre Center for Research and Technology, and it plans to spend about $12 million on new facilities. The big payoff won’t come for several years, when the enzyme maker’s two new manufacturing plants are added to the tax rolls. Nor is the county passing up less-glamorous projects. Home-improvement retailer Lowe’s and mass marketer Wal-Mart each opened new stores in Roanoke County within the past year. The big-box retailers produce huge chunks of tax revenue: anywhere from $500,000 to $800,000 per store, says economic development chief Doug Chittum. Side by side, that’s enough to pay for a new school, he says.

Brainpower to stimulate commercialization isn’t lacking here; the missing ingredient is venture capital. To prevent a repeat of the CropTech and Wireless Valley departures, the region somehow must make local start-ups a magnet for private investment. A new study by the Brookings Institute, a Washington, D.C.-based policy research group, paints a stark picture. It concludes that “emerging as a center for biotech R&D is beyond the grasp of metropolitan areas that lack private investment capital, including venture capitalists, and the ability to convert research into commercially viable products.” Says Gary Atkinson, head of the Roanoke office of Virginia’s Center for Innovative Technology: “We’ve always had real scientists doing hard science leading to real products, so we should be attractive to venture capitalists. But it’s the same story — venture capitalists want to be near what they invest in.”

This points up another problem: a stigma of physical isolation. Despite being bisected by Interstate 81, the region is about 250 miles from Richmond, the state capital, and even farther from Northern Virginia and Washington, D.C., where most of the state’s venture capital is concentrated. That makes it too far for many investors’ comfort.
One problem has been a fragmented approach to marketing, area business leaders say. Outside investors tend to view the region as the remnant of a bygone era, not a crucible for generating wealth. Localities sometimes have competing priorities that torpedo efforts to market the region as a whole, rather than in separate parts. “The Valley has a large bundle of shared needs, but the localities might have very different and specific needs. This rose-colored glasses thing where you look at the whole region — you can’t do that if it means compromising the needs of your residents. But if the individual localities are healthy, then the whole region will be healthy,” says Chittum of Roanoke County.

To change that perception, two groups — the New River Valley Alliance and the Roanoke Economic Development Partnership — have agreed to do more trade missions together and promote each other’s localities. This is a relatively new approach; the two historically have concentrated on their own turf and not worked together on a large scale. In fact, the New River organization recently reorganized, firing its 60 board members and paring down to about 13. The cross-promotional initiative could work, although a new group recently formed to market the Allegheny Highlands adds more confusion than clarity. Business leaders and public officials also have formed a coalition to try and bring more airlines and lower fares to the Roanoke Regional Airport.

Some, like Hart, are restless for change. He notes that 65 percent of his company’s workers moved to the region, so tech-based economic development could help him recruit more homegrown talent. But there is a larger issue at stake. “If we don’t do this for ourselves,” says Hart, “we ought to at least be doing it for our children. There aren’t enough high-paying jobs to keep kids here, or to lure them back once they leave.”

As the region stands on the threshold of the 21st century, its “New Century” moniker takes on profound significance. The railroads still chug along, but new economic forces are rumbling through these pristine valleys. The region’s leaders need to get onboard or risk being left at the station.

Return to Virginia Business - September 2002