Outside the Superhubs: Making the Midwest a startup destination

The national startup scene is changing, and has changed radically in the past ten years. As recently as seven years ago, New York could not claim to be at the heart of the national startup scene; today it is regularly cited among the nation’s startup “superhubs.” More and more, cities outside of the established centers for tech and innovation are implementing and encouraging policies and programs that provide resources to startups, which are themselves seen as the key to economic growth and rejuvenation.

The very idea of the startup is spreading like many innovations and fads before it -- from California to New York, into young and educated early-adopter towns and small cities, and eventually all over the United States.

Yes, you heard me right -- all over the United States.

Does that story sound familiar? Because it should. The spread of startups and the culture of entrepreneurship and innovation is following the same path of a successful product or idea. The very idea of startups has been customer validated after testing, first in Silicon Valley then Boston and NYC, and is being launched slowly but surely all over the United States, with two major implications.

First, it means that startup-centric cities and towns are seeing real results with good effects on the community and economic development. (After all, why invest in a product -- in this case startups -- if it doesn’t work?)

Second (which I will expand upon here) it means that geographically speaking, the playing field is going to slowly even out when it comes to attracting startups and tech talent.

At present, it’s true that there are disadvantages for startups outside of the accepted core cities -- and this will probably always be at least somewhat true, thanks to the importance of networks and non-market interactions. Currently, however, the advantage of starting up in an accepted superhub is outsized (though declining). Most VCs are geographically focused (but perhaps not for long), and according to one analyst, it takes about 10% longer to raise seed and Series A funding outside of the established superhubs in California, New York, and Boston. Additional time spent seeking funds puts young companies located elsewhere at a disadvantage, especially since it reflects a greater trend of less access to capital outside the superhubs.

This analysis, however, ignores the premium that startups in these major centers are paying for this kind of access. The tech talent shortage outside of superhubs and and college towns may or may not be overstated -- but the competition for tech talent in major startup centers is much higher with major companies like Google and Microsoft in the mix, leading to higher salaries. As a result of higher wages, cost of living, real estate, and a number of other cost-based factors, a dollar doesn’t do as much work in Boston, New York, or Silicon Valley as it can elsewhere in the United States.

Getting out of the superhubs can also aid innovation by exposing entrepreneurs to different kinds of people and potential customers. Silicon Valley in particular can be a kind of bubble, with a collective mindset and focus on tech startups that can be hard to avoid. Elsewhere, ideas from other industries can shape and influence one another.

All kinds of smaller cities are offering incentives to draw in startups, and building up infrastructure to help small businesses succeed. In St. Louis, one foundation is offering startups $50k to relocate, while other cities like Chicago are taking a different strategy and doing a better job nurturing new ventures and entrepreneurs through the creation and maintenance of networks of angel investors, incubators, accelerators, and shared working spaces.

Only policy, however, can ultimately drive the spread of the startup all over the United States. Kansas City, for example, has been trying its hand at attracting startups for a while now. It won the right to be the starting city for Google Fiber, Google’s fiber optic internet experiment, by cutting red tape and exempting Google from certain coverage requirements. Meanwhile, the Illinois Department of Commerce and Economic Opportunity recently launched the Invest Illinois Venture Fund to help out small businesses in Illinois. Attracting entrepreneurial and tech talent, making sure that these critical individuals stick around and have a voice in the city’s future, and just making places good areas to live with infrastructure and transport will all be policy initiatives with an important role in shaping the ultimate national spread of startups.

The shifting picture of available resources should make new startups think again about their current capabilities and specific needs before relocating. Many entrepreneurs only consider relocating to the superhubs, when perhaps their interests would be best served by a more affordable city with good resources for startups like Kansas City or Chicago. These cities can allow entrepreneurs to foster critical face-to-face connections without breaking the bank on material needs like space.

This post is the second part of a research project about startups and location being conducted by Hot Emu. You can read the first part here. If you want to talk about startups or have any questions, you can reach us at [email protected] or [email protected]