Sunday, February 16th, 2014
A new study from Endeavor Insight called “What Do the Best Entrepreneurs Want In a City?” has been making the rounds. They interviewed 150 founders of fast growing companies in America to determine what those founders valued in a place to start a company.
Their conclusions are probably not news to most. Most people started companies where they already live (i.e., they didn’t move somewhere to start one), the most important thing they wanted in the city was access to talent, and the second thing was access to customers and suppliers. The report highlights that taxes and regulations were not major considerations. Quality of life items were mentioned by many. The “vast majority” of founders were in metro areas of over one million people and they were described as “highly mobile as young adults.” Their very direct conclusion stated up front is: “We believe that the magic formula for attracting and retaining the best entrepreneurs is this: a great place to live plus a talented pool of potential employees, and excellent access to customers and suppliers.”
This got a lot of press because it supports the standard urbanist narrative. And while I think there’s significant value and truth here, it’s important to drill down to understand the limits. Since many others have already touted the headline findings, I’ll take care of the caveats.
First, the reason people gave for picking a city to live was most frequently having “personal connections” or “specific quality of life factors.” The report doesn’t break down who said what, so we don’t know the ratio of these or their overlap. It shouldn’t be any surprise that personal connections such as being born in a place, family, etc. play a dominant role in people’s decisions on where to live. As for quality of life, I’ve yet to visit a place where people don’t boast of it. Think about it, how many people live in a place they think sucks, even if they do have a connection there? Some, surely (say a child moving to a place he doesn’t want to live to care for an aging parent), but I suspect not many. I think it’s natural for people to brag about the quality of life in places where they live, so I wouldn’t read too much into this. Based on what the report actually says, personal history or connections could overwhelmingly account for location decisions, with quality of life mostly an overlapping secondary indicator.
The companies whose founders were interviewed weren’t specified. It was only said that they were on the Inc. 500, had an average of 100 employees and $20 million in revenue, and had revenue growth of 600%. In other words, these are predominantly early to mezzanine stage companies. Unsurprisingly, a big concern of new and smaller companies is finding customers and suppliers, as well as employees. Often these firms are not even profitable, so things like taxes are irrelevant. But no customer means no company. And small, rapidly growing firms can’t afford to carry a lot of deadweight employees. Traditional business climate items generally loom larger as companies mature and already have an established customer, supplier, and employee base.
It may be that these companies tended to stay located where they were founded when they reach maturity, but that doesn’t mean they grew their operations in that place. That’s why Silicon Valley has fewer jobs than it did back in 2000 even though its companies have thrived. Many of them have grown their jobs base in places like Salt Lake City and Austin.
Additionally, the survey says the companies represent dozens of sectors, but doesn’t give a lot of detail. However, “media” and “software” were mentioned. Also, the among those founders citing talent as a key location factor, “technical” talent was the most commonly mentioned.
This implies to me that tech/media startups loom large in this survey. If true, this would also explain the lack of concern around business climate items. These industries are among the most lightly regulated out there. There have even been specific legislative exemptions to keep the internet space clear of regulation and taxes (such as on internet retail). Most communities think tech startups are key to their future, so bend over backwards to cater to them. You don’t need complex permits to start a tech company.
This means the business climate for technology firms and startups can be very different from what is experienced by other businesses. For example, a recent Rhode Island PBS roundtable featured executives from Hasbro and Banneker industries lamenting the state’s attitude towards business while Allan Tear of tech accelerator Betaspring took a much more positive view. They are all probably right. Life’s probably great if you’re Betaspring, but not quite so good if your company’s name includes “Industries” in it. In short, the experience of tech/media startups is relevant mostly only to other such startups.
Blogger Alon Levy once made a provocative observation that one reason India specialized in software and BPO industries was because those were the only ones that are viable in a country without much infrastructure. The China manufacturing strategy would be a non-starter there. You actually don’t need to invest much in real quality of life items like even universal sanitation or paved roads to have a tech cluster, as many cities in India prove. As long as you have an internet connection to other places you can sell your services to, you’re in business. (Did I mention that Indian outsourcing firms had a massive tax holiday on export revenues for an extended period of time?)
So media/tech are the companies naturally less likely to talk about old school type business climate items, especially when younger. But it’s worth pointing out what mature hypergrowth tech companies have tended to do at some point, namely put their European headquarters on the Emerald Isle where they can take advantage of the “Double Irish” and similar such techniques to all but zero out their tax bill.
I mention this because that the end of the report the authors cite a couple case studies to try to demonstrate the irrelevancy of taxes. Yet this study was in part funded by the Omidyar Network, the philanthropy of eBay founder Pierre Omidyar. Where is eBay’s European Headquarters? Dublin, Ireland. Think that’s because the CEO likes to drink Guinness?
I don’t want to suggest that talent is irrelevant or that taxes mean everything. I’ve clearly pounded the table on the opposite. But just because this survey flatters our conceits in such matters doesn’t mean we should take it to the bank. I see it useful information, but limited in scope to only a narrow segment of firms. I just don’t think this study justified the forcefully stated conclusion
Also, regarding the mobility of youth, this was defined from a Kauffman Foundation study that noted 75% of entrepreneurs started their company in a different city from where they received their final university degree. This is unsurprising and irrelevant. Colleges can be understood as “education factories” whose nature is to produce graduates. Much as actual factories export their widgets, colleges export graduates. This is especially true since many great schools are in proverbial “college towns.” I went to school at Indiana University which is in Bloomington. Bloomington is an awesome town, but how many of the 30,000+ students at IU can a town that’s otherwise only about 50,000 people absorb? This is a not very useful statistic of mobility in my view.
Lastly, the notion that regions of one million people or more are economically advantaged seems very right to me. In this regard, their survey foots to everything I’ve seen and written about. These cities have thicker labor markets, more talent, unique infrastructure (e.g., major airports), bigger local markets, more specialized suppliers, and more entrepreneurial ferment. I’ve long said that there’s a “minimum viable scale” of around 1-1.5 million people in a region you need to have to really succeed in the modern economy. Smaller places generally only have thrived to the extent that they’ve got a unique amenity like Bloomington’s Big Ten university. Since I took a critical eye towards this survey’s actual support for its findings, I thought I’d end on one where I think they hit it.