High-Tech Firms Plug Into Santa Barbara Lifestyle

SANTA BARBARA —  The golden boy of this town’s dot-com revolution is an unassuming, Levi’s-wearing man who came up with a better way for computers and humans to talk to each other.

John MacFarlane is worth about $400 million, though he says he hasn’t checked lately and isn’t sure of the exact figure. Whatever it is, it’s enough to finally move out of the 900-square-foot house he and his wife have been sharing with their infant son and two dogs.

MacFarlane, 34, can afford to live anywhere he wants. But this small-towner wouldn’t think of leaving Santa Barbara for the big city. “I’m here to stay,” he said. And he’s not alone.

For decades, the old-money elite of the Central Coast has relied on ranching, tourism and defense dollars to pay for their children’s weddings at the Biltmore and their mortgages on gated estates dug into the hills of Montecito. But in an era when brick-and-mortar companies in metro areas are less relevant than ever, that is changing.

The number of high-tech companies in the Santa Barbara area, from medical businesses to software firms, has doubled from 300 to 600 since 1997, business leaders say. One recent study ranked Santa Barbara 10th in the nation among communities with the largest number of Internet domain names per 1,000 businesses.

“Start-ups are happening by the dozen,” said Mike Noling, an advisor to new economy companies.

And why not? Santa Barbara’s not a difficult town to get boosterish about. The locals talk about its nearness to Hollywood, its ease of commuting to San Francisco, its peerless lifestyle, its lovely mountains and good restaurants.

Then there’s the knowledge resource at the University of California campus and the rich folks on the hill who can provide seed money to a kid with a good idea but an empty wallet.

Now that the new economy is here, the question occupying politicians and business leaders alike is what will this boutique tourist town of faux French sidewalk cafes and faux adobe law offices do with it? Will Santa Barbara’s powerful and well-funded anti-growth warriors allow the dot-com expansion to flourish?

Or will Santa Barbara tell the dot-com entrepreneurs the same thing they tell Hollywood celebs who move in and try to land helicopters on their front lawns: Don’t take this the wrong way, but we don’t need you.

“We are no way going to become a Silicon Valley or Los Angeles,” said Catherine Gaughen of the Santa Barbara Region Chamber of Commerce.

‘Pirates of Commerce’

If you want to see what’s going on in quaint Santa Barbara, take a walk with Dennis Cagan, if you can keep up.

Cagan, 55, a stocky, fit man with a mottled black-and-white beard, strides down the hall of his second-floor offices on a side street downtown and pokes his head into a mostly bare room where three young men are hunched over computers, trying to launch a company. Down the hall, he bursts into an office where two women and a man, one a former Bush administration official, are trying to hatch a business to supply public relations expertise to Internet companies.

This is what’s known as an incubator. Some of the companies are such infants that they don’t even have names. “Our concept is, we put the money in, bring people in and suck out all the air,” Cagan said. “We’ll get them incorporated, get their licenses, get their computers set up and networked. If they need a pizza, we’ll get them a pizza.”

The path taken by Cagan, who says only that he’s worth “less than $50 million,” is fairly typical of the way entrepreneurs wind up in Santa Barbara. After retiring from a Los Angeles computer business in 1981, he started joining boards of directors to keep busy. One was MacFarlane’s.

The rest of Cagan’s incubator is housed a block away, in a warehouse-like building that is home to Ants.com. Ants, which finds temps for Internet firms, is past the infancy stage. The company has enough money to hire cartoonist Berke Breathed to draw its logo. In the interim, a skull and crossbones flies from the balcony.

“We are reversing the industrial revolution,” said Mark Hatch, a vice president in marketing at Ants.com. “We see ourselves as pirates of commerce.”

“Hey, that’s good,” Cagan said, adding that he might steal it. He sold one of his domain names for $20,000. Henry Dubroff, editor and publisher of Pacific Coast Business Times, thinks he knows why Santa Barbara is ranked so high on the list of domain names. Too many retired business executives are sitting around bored in their mansions.

“They have nothing to do but register domain names,” Dubroff said.

Cagan would like to buy a building and consolidate his incubator, but there’s nothing available downtown.

That’s one thing the boosters don’t talk about when they praise the weather and the beaches: the available, affordable real estate. That’s because there isn’t any. The median home price in southern Santa Barbara County has hit $540,000.

That’s no problem for MacFarlane. His employees are a different story. DeAnna Wassom, Software.com’s vice president of marketing and investor relations, is still living in a rented condo after 11 months on the job. Wassom owned a ranch-style house in Boulder, Colo., and figures housing costs here are three times as high.

“You’ve got to pay a price to live in paradise, right?” she said.

Perhaps, but when MacFarlane decided it was time for his company to grow, he kept the core in Santa Barbara while also opening offices elsewhere.

“This town was designed around 50-person companies,” MacFarlane said. “If we pull in 20 people and they all buy homes, the real estate market goes up.”

High-Tech Pedigree

Even if it has come later than some to the Internet feast, Santa Barbara’s pedigree in the dot-com world is as blueblooded as any. The progenitor of the Internet was the ARPANET, which stood for the Advanced Research Projects Agency Network of the Department of Defense.

Formed amid the panic that followed the launch of Sputnik in 1957, the emphasis at ARPA was pure research. One of the first four sites of the network was UC Santa Barbara, picked because of its expertise in Culler-Fried interactive mathematics, which pioneered the core concept of a graphical user interface as the most natural way to communicate with a computer.

The knowledge resource at UC Santa Barbara has been as important to the development of dot-com companies as the presence of wealthy angels in Montecito. MacFarlane was a doctoral student there before dropping out when he got the idea for Software.com, a $3.5-billion company that he says has the world’s largest market share for consumer Internet e-mail services.

More recently, a UC Santa Barbara professor and two students started a company providing Internet expertise. The company is now valued at $100 million.

The team that helped shape that idea is Bertelsmann Ventures, headed by Jan Buettner, founder of AOL Europe. Buettner also exemplifies the movement of dot-com money to Santa Barbara.

He came to the West Coast two years ago with $75 million to invest in new tech firms. He thought about Seattle, but the weather is too much like Hamburg’s. He considered the Silicon Valley, but knew he couldn’t be a big player there. And he didn’t like the place that much. Santa Barbara better suited him and partner Thomas Gieselmann.

“When we got here there was almost nothing here,” Gieselmann said. “Now, the Central Coast is starting to get real traction.”

It must be said that it’s still not in the same league with San Francisco and Los Angeles. They ranked first and fourth, respectively, on the domain name list, with 1,368 and 992 domain names per 1,000 businesses, while Santa Barbara had 733.

“Over the next couple of years, people will be graduating from dot-com 101” into bigger companies, Gieselmann said. That is, if the housing market allows it.

Buettner has a thought about how to solve that problem. In the next round of investment, he said, “we might provide housing too.”

Old and New Economies

So how are the old-money folks getting on with the new kids on the block? Some say things are every bit as mellow as lunch at the historic El Paseo. But Monica Lenches, a real estate agent, says there has been some hostility toward the newcomers. “It’s part of what runs the political mentality about not wanting change,” she said.

And warm feelings were not inspired by the story circulating downtown about the recent house-hunting trip by a young dot-com millionaire. He took one look at a house on the market for more than $1 million, and said no thanks, I want to spend more than that.

Cagan found a sure way to ingratiate himself. Before Software.com went public, stock was selling around $18 a share. He offered shares to acquaintances. After the company went public, the stock shot up to more than $150 a share. Cagan estimates that 60 to 70 locals became millionaires when MacFarlane went public.

“There was a period of time, wherever I would go, like to charity events, people would come up to me and slap me on the back,” he said, laughing.

In a way, the old and new economy folks are still trying to figure each other out. “The community does embrace folks from wherever, as long as they become involved in the community,” said Chuck Slosser, executive director of the Santa Barbara Foundation, which provides grants to nonprofits. “If they come up here and they don’t get involved and build huge mansions and tear down old buildings, that’s the troubling thing.”

James Haslem, an attorney who represents new economy companies and also raises money for the historic Lobero Theatre, has had trouble persuading the new millionaires to get involved.

“I had dinner last week with a very wealthy guy in his mid-30s,” Haslem said. “I said, ‘I’d love to take you to the Lobero. He said, ‘You know, I’m not sure that’s something I want to spend a lot of time doing.’ ”

Much Friendlier Business Climate

John MacFarlane fits the now-familiar profile of a dot-com millionaire. A whiz kid who always wanted to be an engineer, he grew up in a household of lawyers. His father was a member of the Colorado Legislature; his mother practiced law.

Bookish and unassuming, he attended college in upstate New York and worked on the side for a defense contractor. Though younger than everyone around him, he helped design modules for radios in F-16 fighter planes.

As a doctoral candidate at UC Santa Barbara, he began conversing by computer with a group of Russian scientists who had lost their funding. Out of that experience came his e-mail idea.

But getting his company off the ground was not easy. There were no incubators then, no outreach system for bright young men and women. Today, the business climate is much more friendly. Now, there’s Cagan and the angels and the Chapala Street tech corridor downtown. Even the staid Santa Barbara Bank & Trust has started investing in the Internet. But in 1993 there was nothing.

“I would have moved,” he said. “But I really wanted to live here.”

His wife, Patty, was a different story. She liked the East and didn’t want to hear about the balmy breezes and the mountains and the way the full moon hangs over Stearns Wharf as if it were tied up there for songwriters and poets.

Things got so bad that they were thinking about breaking up. MacFarlane begged her to come out for one weekend. He rented the top floor of a luxurious bed and breakfast and wined and dined her. Champagne, walks on the beach, the whole dreamy Santa Barbara experience. She was convinced.

“Within three weeks after she moved,” MacFarlane said, “she said I’d better make this work, ‘because I’m not moving.’ ”