Channel Intelligence: 2014's Best States To Start A Solution Provider Business

Location, location, location.

Before launching Quattra in January, the company's founders thought long and hard about where to base the managed services and solution provider startup.

They wanted to be able to serve the booming Washington, D.C., region and the competitive-but-customer-rich areas farther up the Northeast corridor. At the same time, they wanted to capitalize on the growing number of business opportunities in South Carolina and, especially, North Carolina. The availability of a pool of experienced IT talent to fill out its employee roster also was a factor.

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Quattra's founders are far from alone in mulling the best place to start a solution provider business. So for the second year, CRN Channel Intelligence has undertaken a detailed analysis of the business climate in all 50 states to offer readers guidance about what makes some states better than others for starting or expanding a solution provider business.

[Related: Best States Interactive Map]

The analysis covers a broad range of criteria including the education levels of a state's workforce and the pool of experienced workers; a state's labor and employment costs; taxes (including tax incentives, corporate income taxes and property taxes); regulatory environment; level of innovation (as measured by awarded patents and the share of the private sector employed as scientists and engineers, among others); a state's economic strength and business opportunities (including the number of small and fast-growing businesses in a state); and even lifestyle criteria such as crime rates and personal income tax rates.

CRN Channel Intelligence surveyed solution providers in July of this year to learn what criteria were most important to them. Those results were used to weigh the selected criteria in our state-by-state analysis.

For detailed information on all 50 states, check out the interactive map included in this package. A detailed description of the criteria and methodology of the analysis can be found in the accompanying sidebar to this tablet-exclusive package.

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The Top Five States

Virginia is the best state in which to start a solution provider business, according to this year's analysis. Virginia, with its deep pool of educated IT workers, high scores for business opportunity and innovation and growth, and comparatively low taxes and business-friendly regulatory environment, moved up from No. 2 last year and knocked Utah, last year's best state, from the No. 1 spot.

"Virginia was our choice," said David Watson, CIO of Quattra, the Stafford, Va.-based solution provider that launched in January. He said location is key: The company provides cloud computing and managed services, as well as more traditional on-site IT services, to customers in Virginia, in the fast-growing Washington, D.C., area to the north, and in North and South Carolina to the south.

With its low taxes and business-friendly regulatory environment, "you get a better break in Virginia than [you would] driving two hours north," Watson said. And where solution providers in other parts of the country struggle to fill job openings, Watson isn't worried about hiring the four Linux and two Windows application developers Quattra currently needs. "In the Virginia market you have a good pool of talent," he said. "Northern Virginia has turned into a technology dream."

Virginia can thank its improved scores in the innovation and growth criteria (rising to No. 7 this year from No. 15 in 2013) for its No. 1 ranking. Among the criteria scores, the state ranked No. 1 in the number of information technology jobs as a share of private-sector employment (up from No. 3 last year), an indication that many Virginia companies have significant IT operations. And it remained at No. 2 in the share of the private sector employed as scientists and engineers.

Next: The Top Five States (continued)

The Old Dominion State ranked No. 5 in business opportunities, up from No. 6 last year. Contributing to that was high scores for the number of fast-growing companies in Virginia (No. 3 among the states) that are potential customers for solution providers. Our analysis ranked it No. 5 for its economic climate, No. 5 for high-wage traded services (the share of employment in sectors in which the average wage is above the national median for traded services), and No. 4 in manufacturing value added (per production hour worked as a percentage of the national average).

"This is a good area to start a business. I think this is a great business climate down here," said Aaron Frketich, vice president at 360IT Partners, an MSP and solution provider based in Virginia Beach serving SMBs in the booming Virginia Beach/Hampton/Norfolk region. "We've had consistent 20 percent-plus growth for the past three years," he said. "We're determined to be the No. 1 solution provider in our area."

IT talent is plentiful in the region, either working in the private sector or coming out of the military. "Here, the incentive to hire veterans is great," Frketich said, noting that Virginia offers tax breaks and reimbursement for training expenses for doing so.

Virginia has its downsides, however. This year it ranked No. 34 in overall labor and employment costs. That's not surprising given that a lot of the state's population and business activity is in the Washington, D.C., metropolitan area -- one of the most expensive areas of the country. And the state is No. 19 in overall personal cost of living.

But get away from the D.C. region and costs are lower: Frketich estimates that labor expenses and other costs in the Virginia Beach area are as much as 30 percent less than in northern Virginia.

Colorado also moved up in our rankings this year to No. 2 from No. 3 in 2013. The Centennial State, especially with its fast-growing Front Range area, is an increasingly attractive place to start and grow a business. Its experienced, educated workforce ranked No. 7 among the states and its business climate for innovation and growth was ranked No. 6.

Most tellingly, Colorado's ranking for business opportunities jumped to No. 3 this year from No. 19 in 2013. The state was tops for economic expansion and development, and for access to capital. And it scores in the top 10 among states with fast-growing small and midsize companies that are potential customers for solution providers.

"I think that's a reason the Denver area recovered quicker than the rest of the country from the recession," said David DeCamillis, sales and marketing vice president at Denver-based Platte River Networks, speaking about the large number of startups and small companies in the Front Range region.

Founded in 2002, Platte River provides managed, cloud and telecom services -- including its Intuition network monitoring and managed services platform -- to businesses that average about 75 employees in size (up from 25 when Platte River started).

The solution provider's sales are expected to grow from about $4.7 million in 2013 to about $6 million this year. "We've been seeing massive growth since the recession," DeCamillis said in an interview. The company now has 30 employees and it's continuing to hire, but DeCamillis said finding people with the right technical and communications skills remains a challenge.

Utah, which was ranked the No. 1 state last year to start a solution provider business, dropped to No. 3 in this year's analysis, due largely to lower scores for workforce education and experience, and innovation and growth.

Washington state held steady at No. 4 in this year's analysis while California, last year's No. 7, moved up to No. 5 this year.

Next: The Bottom Five States

The Bottom Five States

At the other end of CRN's ranking is No. 50, Rhode Island, with its high taxes, high labor costs and dismal business opportunities. That marks a significant decline from last year when the Ocean State was an already a low No. 42.

Rhode Island has been slow to recover from the recession and had a 7.7 percent unemployment rate in July -- below only Mississippi and Georgia, according to the U.S. Bureau of Labor Statistics.

The CRN analysis ranked Rhode Island No. 49 among the states for its business opportunities, with low scores for economic climate (including job, income and gross state product growth) and the low number of small and midsize businesses. The state also ranked No. 45 for its high labor costs (including high unemployment insurance taxes), and No. 48 for high corporate income taxes (a 9 percent rate) and a regulatory environment that's unfavorable to businesses.

"The business climate in Rhode Island isn't great. It isn't a pro-business growth state," said Ernie Yenke, president of Lincoln, R.I.-based Lighthouse Computer Services. (CEO Tom Mrva founded the company there 19 years ago.) Six years ago, for example, Lighthouse received a $100,000 grant from the state's economic development council to develop a security technology business. But today, Yenke said, the council doesn't appear to be as active.

On the plus side, Rhode Island does score moderately well (No. 18) for its available pool of educated, experienced workers. And it's No. 19 in both the share of the private sector employed as scientists and engineers, and in the number of information technology jobs as a share of private-sector employment.

And Yenke said Rhode Island offers a perfect location for Lighthouse, which has customers to the south through Connecticut to New York City, and north through the Boston area into northern New England. "Logistically, it's a good place to be. We can get to 85 percent of our customers from Rhode Island in under two hours," he said.

Mississippi dropped to No. 49 this year (from No. 46 in 2013), primarily due to lower scores for taxes and regulations, while Maine declined four spots to No. 48 because of a significant decline in its ranking for business opportunity.

GreenmarkIT is a four-year-old MSP based in Presque Isle in Maine's northern Aroostook County. And CIO Tim Levesque admits that growing the business there is a challenge.

"Up here we still struggle to convince people that cloud and hosted is the way to go," he said in an interview. "Everybody up here is used to break-fix. We're really focused on getting that recurring revenue, but it's a struggle." Despite not having a lot of competition, GreenmarkIT has "pretty much saturated the market" in its region and has begun expanding south toward Bangor for new business opportunities.

The bottom five states were rounded out by No. 47 Arkansas (which held the same spot last year) and No. 46 West Virginia -- last year's No. 50 -- which moved up from the bottom spot by improving its scores for workforce education and experience, business opportunities and personal cost of living.

Arkansas was ranked No. 33 in business opportunity in the CRN analysis. And Warren Balcom, president of Kalmer Solutions, a Jonesboro, Ark.-based managed services provider, admits that his region has been slow to adopt cloud computing and managed services. But he sees that as offering a greenfield market for Kalmer's services.

"We're seeing a pretty steady increase in our revenue. We really feel there is tremendous growth potential here in Arkansas," Balcom said in an interview. Along with serving Arkansas, Kalmer, founded in 2007, has customers in neighboring Missouri, Tennessee and even a few in Texas. "We feel that we're just scratching the surface here with opportunities," said managing partner Nathan LaRue.

Arkansas was ranked No. 1 for its low labor and employment costs, but only No. 47 for the availability of educated, experienced tech workers. "That's been one of our biggest challenges, finding and keeping quality staff," Balcom said. "We could really grow a lot more if we had additional staff."

As for West Virginia, which was ranked No. 50 overall in the 2013 analysis, its move up to No. 46 is largely due to its improved ranking for business opportunity (from No. 48 in 2013 to No. 38 this year).

Next: Finding Balance

Finding Balance

The states that come out on top of the CRN analysis, states such as Virginia and Colorado, may not have the best scores in every criteria. But they offer good business and growth opportunities and an educated workforce, balanced against relatively low costs and relatively limited taxes and regulations.

High-tech hubs such as California and Massachusetts, for example, certainly have some things going for them. California (No. 5 this year, up from No. 7 in 2013) is ranked No. 1 for innovation and growth potential. But it's an expensive place to do business, ranking No. 38 in labor and employment costs and No. 42 in personal cost-of-living criteria. Case in point: A recent report from Beacon Economics said high housing costs in the Golden State had become a drag on the state's economy.

Novacoast, a solution provider based in Santa Barbara, Calif., has averaged double-digit growth over the past seven years as it provides IT services, including security, software development and private cloud services, to customers all around the country, said CEO Paul Anderson. (A New York native, Anderson started the company in 1996 in Santa Barbara after he and his wife moved there.) The bulk of the company's customers are in highly regulated industries such as health care and financial services.

But most of Novacoast's employees are outside California. "California's tough. There's a great talent pool here. But it's very expensive to employ people in this state," Anderson said in an interview. If he has a choice of where to base new employees, he hires them outside the state. Novacoast's software licensing operation, in fact, is based in Provo, Utah. "California seems to getting even more expensive," he said.

Massachusetts (No. 6 this year, up from No. 9 in 2013) is No. 2 in innovation and growth and No. 4 for its educated, experienced workforce. The Bay State, however, is ranked a dismal No. 42 for its taxes and regulatory environment and No. 48 for its labor costs -- behind only Hawaii and New York.

Texas is another state with contrasting scores. This year the Lone Star State ranked No. 7 in CRN's analysis, up from No. 11 in last year's ranking. The booming state was No. 1 in overall business opportunities, based on high scores for the large number of startups and fast-growing companies in the state, easy access to capital, and other economic and business benchmarks.

Texas' overall showing among the states also gets a boost from its No. 8 ranking for innovation and growth. But it can be a challenge finding educated, experienced IT workers in Texas, criteria in which the state ranked only No. 39.

"Texas has been awesome in the last couple of years. And it seems the prospects just keep getting better," said Christopher Alghini, president of Coolhead Tech, an Austin-based cloud-computing-focused solution provider. Launched in 2008, Coolhead offers a range of cloud computing and managed services built around Google Apps and the HubSpot online marketing application.

"Our business community is thriving," said Neal Juern, president of Juern Technology, a San Antonio-based solution provider that provides managed services, including help desk and backup and recovery, and cloud computing services. "There's always more potential clients," he said. There are so many that Juern Technology largely sticks to serving small and midsize companies with between 10 and 50 employees.

Much of the state's growth is being driven by the booming oil business, said Juern, with the thriving real estate business also spurring the economy. Juern even has two customers in the health-care arena for the solution provider's HIPAA services. "That's a brand-new area for us and it appears to have unlimited potential," Juern said in an interview, conducted on his mobile phone while he was in the process of moving his growing company to bigger office space.

Some solution providers, of course, might just as soon not let the word get out that the place they've chosen to set up shop is such a great place to live and work.

Take Coolhead Tech's Alghini, who moved to Austin from San Diego, in part, to escape that city's high housing costs. Austin is a fun city with much of the same cool factor, he said, and he worries that CRN's Best States stories could spoil things by attracting too many people.

"We try not to spread the word around too much," he said in a confidential tone.