Poets&Quants keeps close tabs on the startup scene. In 2019, after years of sharing dominance with Harvard Business School, we saw Stanford Graduate School of Business become the clear frontrunner in the number of new businesses emerging from the ranks of its graduates — not surprising given Stanford’s location in the heart of Silicon Valley, perhaps, but definitely an eyebrow-raiser when you consider the relative sizes of their graduating MBA classes: for HBS, more than 900, and for GSB, fewer than 500.
One thing that is abundantly clear from the years of studying data on startups and entrepreneurship programs at leading business schools is that location is crucial. Small businesses are like trees: They need good soil to survive. When entrepreneurs find conditions conducive to commerce — and when they have a little bit of luck to go with their Grand Idea — great things happen. Uber, after all, started as an idea before it found investors and an eager consumer base and grew to be the world-dominating multinational it is today.
Where is the best ecosystem for keeping alive your Grand Idea? Volusion, an ecommerce platform that boosts small businesses, has published its annual list of the top 50 U.S. cities for launching and nourishing startups, and this year it names Seattle, Washington as the top spot for entrepreneurs. (Seattle is home to a few of the startups named in our annual top-100 ranking, based on venture capital raised, including No. 24 Booster Fuels and No. 41 FlyHomes.) Rounding out the top five on Volusion’s list are No. 2 Austin-Round Rock, Texas; No. 3 San Jose-Sunnyvale-Santa Clara, California; No. 4 Nashville-Davidson-Murfreesboro-Franklin, Tennessee; and No. 5 Denver-Aurora-Lakewood, Colorado.
“While some startups garner massive success over time, others fail to achieve scale,” writes Kevin Fowler, Volusion’s SEO chief. “Choosing a city with a favorable business environment can help your startup attract better talent, have better access to funding, and pay less in taxes and operations costs. For startups, choosing a favorable place to do business can mean the difference between surviving past the startup stage — or not.”
THE TOP 3 METRO AREAS FOR LAUNCHING A STARTUP
Seattle is not just the home of major companies like Amazon, Microsoft, and Starbucks; it’s also one of the top West Coast destinations for entrepreneurs itching to make their mark, and for good reason. As Fowler notes, 1.9% of Seattle firms receive venture capital investment, the highest percentage among all large cities in the U.S. Meanwhile, the local government is highly supportive of startup and small business growth, offering special grants through the Only In Seattle Initiative to “foster innovation in key districts and sectors”; Washington state also levies no income tax, “which can be helpful for entrepreneurs running a bootstrapped startup.”
There’s another big player in the Seattle business ecosystem: the University of Washington’s Foster School of Business. Washington Foster may be best known as a tech hub, sending 60% of its 2018 graduating class into the industry, but the school is also ranked 24th in the U.S. in entrepreneurship by U.S. News & World Report. Overall, Foster is famous for placing more than 99% of its MBAs in jobs three months after graduation. The school’s grads populate the big companies in town, but they are increasingly starting up their own shops.
That’s also the reality at the No. 2 metro area for startups, per Volusion’s 2019 list. Austin has “quickly become a hotbed for new businesses,” Fowler writes, “especially in the tech sector. Austin’s low cost of living and doing business makes it an attractive alternative to bigger cities like New York or San Francisco. The University of Texas also has a student population of more than 50,000, making it ideal for recruiting fresh talent. The university’s Austin Technology Incubator and the Techstars Austin accelerator offer plenty of resources for entrepreneurs ready to embark on new ventures.” Austin is home to RigUp, the No. 6 startup on our 2019 list and a regular on past rankings.
As Fowler notes, you can’t have a startup list and leave out Silicon Valley, which appears at No. 3 on this year’s list. The largest city in the valley, San Jose, has a startup density of 10.1% — 9.7% higher than the national average. The share of firms receiving VC investment, meanwhile, is more than three times above the national average. For young entrepreneurs interested in starting a business, Stanford GSB — legendarily difficult to get into — isn’t the only option, Fowler writes, pointing out that San Jose State University is home to the Silicon Valley Center for Entrepreneurship. “For those who are no longer enrolled in school, the Silicon Valley Global Accelerator offers other resources, mentorship opportunities, and office space for entrepreneurs,” he adds.
‘STARTUPS ARE A CONSISTENT SOURCE OF JOB GROWTH DRIVING THE ECONOMY’
Volusion uses an interesting methodology to create its list of top entrepreneurship cities in the U.S. It analyzes data from the U.S. Census Bureau Annual Survey of Entrepreneurs (ASE), the U.S. Bureau of Economic Analysis Regional Price Parities, and the U.S. Census Bureau 2017 American Community Survey Public Use Microdata Sample and creates a composite score based on startup density (the percentage of all firms that are two years or younger), small business density (the percentage of all firms that have fewer than 50 employees), share of firms receiving VC investment, cost of living, and other factors. Among the key questions it asks: What percentage of business owners report that “lack of work” is not important in starting their own business? This is a way to measure founders’ other motivations, such as wanting to be their own boss, needing a better avenue for creative ideas, having flexible hours, etc. And: What share of residents are recent college grads? This metric indicates the availability of workers that are likely to join a startup company.
“Regardless of the eventual outcome of each individual business, startups as a whole are vital to encouraging innovation, creating new solutions to problems, and driving employment,” Fowler writes. “Interestingly, most entrepreneurs in the U.S. (76.7%) want to start businesses for reasons other than a lack of employment. But as all entrepreneurs know, building a business from scratch is no small feat. Startups face numerous challenges related to funding, operational costs, and access to the talent and resources needed to scale the business. For example, only 0.48% of startups receive VC funding. A few factors that increase the likelihood of success include lower overhead costs, a talented pool of people to hire from, better access to capital, and access to other startups and ideas.
“Nationwide, startups account for 9.2% of all businesses. However, some locations around the country are more conducive to startup success than others.”
Fowler points out that just as with more established businesses, the number of startups ebbs and flows with the state of the economy. The Great Recession, for example, corresponded with a big drop in the number of startups, with the number shrinking between 2006 and 2010 from a peak of 457,223 to a historic low of 326,091. Since then, however, startups have recovered much of their lost ground but haven’t returned to pre-recession levels. In 2018, Fowler notes, there were 416,853 firms less than one year old.
“The good news is that even during recessions, startups are a consistent source of job growth driving the economy. Compared to established firms, startups create more new jobs despite having lower overall employment. In 2018, startups created 1,700,208 new jobs, while established firms only created 518,384. Notably, during the Great Recession, established firms experienced significant job loss, including more than four million in 2010, while startups still had job gains in the same time period. Like the number of new startups, job growth from startups has slowly been rising but hasn’t fully recovered from the recession.”
See the next page for Volusion’s full list of the best 50 U.S. cities for launching a new business.