MANCHESTER, N.H. — When New Hampshire native Gerard Murphy was searching for his tech start-up's first office space, he considered joining the throngs of other ambitious Web entrepreneurs crowding Cambridge's Kendall Square and filling up Boston's Innovation District.
But instead he opted to do what a growing number of young Granite State techies are doing: stay put and try to build up the state's own Internet economy amid this city's 19th-century textile buildings along the Merrimack River.
"Cambridge is expensive. Boston is expensive. You get a little bit of a discount when you hire employees in Manchester," said Murphy, who cofounded an online photo storage company, Mosaic Storage Systems Inc., last year. "The Internet is no less fast in Manchester than it is in Cambridge."
Murphy had some big incentives to stay, too. Earlier this year, his company won a $30,000 start-up competition that came with a year of free rent at a small business incubator, the abi Innovation Hub , a place about 15 other Internet companies now call home.
His fledgling company, with just six employees, is benefiting from a major push in New Hampshire to boost the state's technology economy, which is often overshadowed by Massachusetts. The state of New Hampshire has teamed up with Borealis Ventures , a Hanover venture capital firm, to create a $30 million Granite Fund to invest in companies in the state. New Hampshire is putting $4.5 million into the fund, which is coming from $13 million the state received last year from the Department of the Treasury to fund small business initiatives.
Another group of local investors has raised $100,000 for a start-up contest that will award cash prizes — first place earns $50,000 in funding — in September. The contestants don't have to be from New Hampshire or even relocate to the state, but locals will be given a slight edge in the competition, said Jamie Coughlin, chief executive officer of the abi Innovation Hub and organizer of the TechOut contest.
The bigger idea, said Coughlin, who is also working on starting his own Web company, is to "attract eyeballs and make the case for the New Hampshire advantage."
New Hampshire has long held up cost as its big advantage. There's no sales tax, and the personal tax burden is among the lowest in the country, according to the Tax Foundation, a Washington, D.C., nonprofit. Commercial real estate is less expensive than in the Boston area, too. Average asking price for office space around Manchester is $11 per square foot. It hovers around $50 per square foot in Kendall Square.
"If I can tell you that you can [start a company] for 30 percent cheaper than you can do it in Cambridge, that's something you've got to think about," said Tom Kuegler, managing partner with Wasabi Ventures, a venture capital firm with an office in Manchester that has invested in four New Hampshire start-ups.
That low cost has helped the state grow a robust technology economy, and over the years attracted some Massachusetts and national companies to locate or expand in New Hampshire.
Massachusetts microcomputer maker Digital Equipment Corp., or DEC, had a big presence in Nashua until it sold to Compaq in 1998. It spawned successful offshoots in New Hampshire, most notably, EqualLogic Inc., a data storage company that Dell Inc. bought for $1.4 billion in 2007.
Softdesk Inc. was another big one. The Henniker, N.H., public company that made computer-aided design software sold to Autodesk Inc. for $72 million in 1996. After the acquisition, Autodesk, a San Rafael, Calif., company known for its 3D design software, set up an office in Manchester.
Dean Kamen brought attention to New Hampshire when he unveiled his Segway in 2001. His research lab, DEKA Research and Development Corp., is located in Manchester's massive 19th-century textile mill buildings, which that many locals describe as skyscrapers lying on their sides.
Today, the state has the ninth highest concentration of technology employment in the country, and in 2010 had 37,200 workers in the industry, according to the TechAmerica Foundation, a Washington, D.C., group that tracks the nation's technology economy. Massachusetts has the country's second highest concentration, the group found, and 247,200 people working in the industry.
Even though New Hampshire can point to past successes, it has been awhile since the technology spotlight has shined down on the state in a big way.
"There's a reason why a lot of companies want to be located here," said Pamela Goldberg, chief executive of the Massachusetts Technology Collaborative, a quasi-public organization that promotes the Commonwealth's tech economy. "We have so many smart young people graduating from our colleges who can walk into these start-ups and start contributing from day one."
What's more, said Goldberg, the region's venture capitalists who fund and mentor these innovative start-ups are concentrated in and around the Boston area. Last year, venture capitalists made 384 investments in Massachusetts companies and 19 in New Hampshire firms, according to PitchBook Data Inc., a Seattle research firm that follows the private equity industry. That amounted to $3.7 billion invested in companies here and just $97 million in venture funding north of the border, the firm said.
Part of New Hampshire's pitch to entrepreneurs is its proximity to Cambridge and Waltham, where many of the Bay State's venture firms are located. Manchester, for example, is just under an hour's drive.
Still, New Hampshire investors and entrepreneurs admit there are major challenges to building a tech cluster, and they have to fight against the lure of Boston or other areas around the country, such as Boulder, Colo., or Portland, Ore., that have similar efforts.
"We have to work harder to recruit," said Matt Cookson, executive director of the New Hampshire High Tech Council. "We have a lot going on up here; we just don't talk about it in a unified way."
There's also a perception issue, said Jesse Devitte, managing director of Borealis Ventures, a New Hampshire venture capital firm, and a former Softdesk executive. In fact, he said, the notion that the Granite State has a venture industry was even a gag for Owen Wilson and Vince Vaughn in the movie "Wedding Crashers." Their characters posed as venture capitalists from the state when they snuck into strangers' weddings.
But that luddite image is beginning to change with the new generation of entrepreneurs such as the abi's Coughlin and people like Jeremy Hitchcock, chief executive officer of the Internet infrastructure company Dynamic Network Services Inc., a 14-year-old Manchester company with 160 employees and such high-profile customers as Twitter, Zappos, and Etsy.
On a recent weekday at their headquarters, young workers in T-shirts and shorts — the unofficial uniform of the Internet workforce anywhere — gathered around computer screens in a sprawling office space with all the accessories that have become cliches of tech offices whether in Silicon Valley or New York City. There were the video games and dart boards. Dyn, which the company is known as, even has its own stage where bands occasionally perform, and it recently opened a farm-to-table restaurant just for employees.
"Dyn is the new era of New Hampshire company," said Devitte of Borealis Ventures, the New Hampshire venture capital firm. "They are cutting a new path."
Many of the state's young entrepreneurs such as Dyn's Hitchcock and Mosaic's Murphy have also become some of its loudest evangelists.
"When talking to customers we wear New Hampshire on our sleeve, and customers kind of like it," said Murphy. He's even celebrating his home state by promoting another New Hampshire industry that is upstaged by success in a neighboring state. "At one point we even sent maple syrup to our customers."
Michael B. Farrell can be reached at email@example.com.