An investment boom hungry for a scarce supply can do wonders for a startup-free region that hosts this resource.
This comes to mind in considering the influx of capital to a rural town, Wenatchee, Washington, which is attracting capital and companies eager for its low-cost power for so-called cryptocurrency mining.
Before getting into the details, I have spent years wondering why only a few cities dominate the global startup scene and what the rest should do about it. That’s the subtitle of “Startup Cities,” my latest book (No. 13), which is scheduled for publication in March.
The book, which contains many case studies about Worcester, presents the idea of a Startup Common – a collection of regional resources with the potential to encourage a cascade of fast-growing startups over generations. A few cities have very robust Startup Commons, which helps explain why they have so many successful startups.
What was interesting to me was that some cities, such as Stockholm, have created very lively Startup Commons over a relatively short period of time. While Stockholm has universities that produce great technology talent, the local culture thought entrepreneurship was shady until Ericsson, one of Sweden’s biggest employers, started firing tens of thousands of great people.
The idea that working for a big company was no longer the key to a secure life – coupled with government policies that encouraged startups – led Swedes to conclude that they should try to start companies. They did, and some of those companies – mostly in gaming, music streaming, and wireless payment services — were acquired. This enriched their founders, who invested their time and money in more startups.
Now Sweden leads the world in unicorns (startups worth at least $1 billion) per capita.
As I describe in the book, regions that succeed in creating robust Startup Commons often start with talented entrepreneurs who can commercialize that region’s most significant world-class skill.
And that’s what seems to be happening in Wenatchee, which hosts a dam that turns the flow of the Columbia River into enormous amounts of relatively cheap hydroelectric power (2 to 4 cents per kilowatt-hour compared with over 10 cents nationwide, according to a Feb. 11 Wall Street Journal article).
Companies that mine cryptocurrencies, meaning they create more Bitcoins by using very powerful computers that require massive amounts of electricity to solve very difficult math problems, are flocking to Wenatchee, thanks to that cheap electricity.
Frank Kuntz, the mayor of Wenatchee (population 34,000) thus has a problem and an opportunity. The opportunity is a surge in companies locating there to mine bitcoins. According to the Journal, Mr. Kuntz said, “If you ask the guys at UPS or FedEx what they’re delivering to Wenatchee, I think they’d tell you it’s a whole bunch of bitcoin mining machines.”
The problem for Mr. Kuntz is that “If all the cryptocurrency mining operations in the works go forward, power demand could double in some areas and require expensive new infrastructure. That has become a dilemma for utilities that are figuring out how to deal with the deluge of requests without bearing the brunt of wild swings in cryptocurrency prices,” according to the Journal.
What if Bitcoin is a Bitcon? With the price of Bitcoin having surged 1,300 percent in 2017 and as of February 12 down 57 percent from its December 2017 high of about $20,000; Wenatchee would surely not like to invest in a huge amount of energy production capacity only to see the cryptocurrency collapse and the bitcoin miners fold and leave town.
As Steve Wright, general manager of the Chelan County Public Utility District, which includes Wenatchee, told the Journal, “We’re getting requests for service that are just astounding. We do not intend to carry the risk of bitcoin prices on our system.”
Yet despite the potential risk, the benefits to Wenatchee of this bitcoin mining boom are considerable. The utility has received four inquiries for 100 megawatts each since October 2017 – the total capital required to build those bitcoin mines would exceed $160 million, according to the Journal.
And these new companies are turning empty stores – “an old laundromat, a former fruit-packing warehouse, apartments, and even free-standing cargo containers,” according to the Journal, into employers. Unfortunately for local landlords, bitcoin mining operations don’t take up much space. “Shoebox-size computer servers that suck up as much power as roughly 1,000 homes can be packed into a 25-by-25-foot room,” according to the Journal.
Chelan County hosts some 30 bitcoin mining operations, which run their servers all the time. This strains local electricity systems, and can melt wires and overload transformers. In the summer of 2017, a power outage started a “grass fire in Entiat, about 20 miles north of Wenatchee,” according to the Journal.
Bitcoin mining is a two-sided coin for Chelan County. It could strengthen the local economy. But local leaders will need to be cautious not to take on too much financial risk in trying to address the bitcoin miners’ demands for more power.
They could do that by making the miners pay more for their power and by carefully screening the miners to make sure they are more likely to stick around town – especially if the price of bitcoin keeps falling.
Local leaders should also consider whether the miners’ assets, which would be left behind were the bitcoin bubble to burst, could be used in other ways to create new jobs.
Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is [email protected]