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Sunday, February 16th, 2014

What Entrepreneurs Want

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.

8 Comments
Topics: Economic Development, Talent Attraction, Technology

8 Responses to “What Entrepreneurs Want”

  1. Rod Stevens says:

    I don’t agree that a theme running through a number of posts like this one and the Columbus comments that given economic opportunity every place would be somebody’s cup of tea. My room mate in business school said he spent the money to go back to business school to get a good degree and have the freedom to move someplace other than Flint, Michigan, where he’d previously worked for GM after going to General Motors Institute. He wanted a change of company, a change of scenery and a change of people. America’s always been a restless country. We like the variety of America and what it has to offer. Seinfeld and Outdoor Magazine have both had a great deal of influence in getting the Millennial generation to move.

  2. Pete from Baltimore says:

    A very good article. I agree about the over reliance on tech companies in the report

    Tech companies and media companies[especially the latter] are media savvy by their very nature. An auto company that builds a factory in Alabama, is genenrally going to be honest about its reasons[low cost. no unions,. Perceived good work ethic among local population,ect]. They arent going to gush about the local “Lifestyle” ect

    Whereas Tech and media companies know how to say “The right things”. So i take a lot of their comments as PR BS

  3. Pete from Baltimore says:

    Mr Renn makes some very good points when he mentions that tech and media companies arent as effected by regulations as manufacturing or construction companies are. And i would like to add to that

    Tech and media companies also are generally fairly new.so they are almost always in fairly “nice” parts of a city. Whereas many factories and construction yards are in neighborhoods that have declined into poverty and violence. So its a lot easier to have a sunny view of a city, when you live and work in a “trendy’ area.

    Also, manufactures have been leaving many urban areas. Whereas tech companies have been moving in to select urban areas. So there is an inbuilt bias in any survey of companies that have moved into urban areas.

    UnderArmour clothing headquarters is in Baltimore. Im sure that their pr spokesman could give out many good reasons why the company is in Baltimore.and some reasons would be sincere.But its worth noting that its located in an old Proctor and Gamble factory. Which closed down about 15 years ago. I remember working on the construction site for a new Proctor and Gamble factory back then.Just ten miles outside of Baltimore.

    So by all means, lets ask UnderArmour why they want to be in Baltimore.But we should also ask Proctor and Gamble why they left. And we should also realise that the Proctor and Gamble factory workers in south Baltimore werent the type of people to be hired at a clothing design company headquarters. So its great that UnderArmour has its headquarters in Baltimore[i know a few people that work there]. but its sad for those that lost their jobs when the P&G factory closed down

    I would add, that originally, the factory was renovated for dot -com companies.But that changed when the ones headquarted there, closed down in the tech bust int he early 2000s. So tech companies dont offer any more employment stabilty than auto plants

  4. Anonymous says:

    Though this is what current startup founders cite as desirable and ideal, unfortunately for future startup founders this is in an ideal illusory world where this data does not reflect or consider the hardcore trend emerging in American education of its falling share of global college graduates that threatens America’s future economic competitiveness. From Barro & Lee Report (2012) and U.S. Census data, the U.S. will have a -6% decline in college graduates between 2000 and 2020, while China will have a +4.4% increase and India will have a +1.2% increase.

    U.S.: 23.8% – 2000 world share… 17.8% – 2020 world share

    China: 9.0% – 2000 world share… 13.4% – 2020 world share

    India: 6.5% – 2000 world share… 7.7% – 2020 world share

    So the high-tech educated talent/creative pool required for America’s Knowledge Economy Revolution and high-tech startups will be shrinking and progressing at a steadily increasing disadvantage on the emerging world tech scene until it loses its status as the world leader. The trend and data projects that China’s college graduate output will surpass American college graduates in the decade following 2020.

    The Center for American Progress reported in “The Competition that Really Matters”:

    “From 2000 to 2010, the U.S. share of college graduates fell to 21% of the world’s total from 24%, while China’s share climbed to 11% from 9%. India’s rose more than half a percentage point to 7%. Based on current demographic and college enrollment trends, we can project where each country will be by 2020: the U.S. share of the world’s college graduates will fall below 18% while China’s and India’s will rise to more than 13% and nearly 8% respectively.”

    America’s pivotal and primary problem is the destruction of its Middle Class income sector by the radical Left policies of this current government that is creating an “education gap” by rising levels of income inequality and poverty, resulting in education cuts, and now only half of American students receive early childhood education which studies show is integral to produce tertiary educated graduates. All this while China and India are increasing educational attainment among their lower- and middle-classes, creating stronger national standards, improving teacher quality, and making investments into early childhood education and other programs.

    SOURCE: CENTER FOR AMERICAN PROGRESS – The Competition that Really Matters
    Comparing U.S., Chinese, and Indian Investments in the Next-Generation Workforce

    By Donna Cooper, Adam Hersh & Ann O’Leary

    http://www.americanprogress.org/issues/economy/report/2012/08/21/11983/the-competition-that-really-matters/

  5. Rod Stevens says:

    Anonymous:

    One of the key factors here is the quality of those grads. In this country the Wesleyan English major may or may not be employable in rapidly growing industries, depending on his or her interest level in the work, the willingness of the employer to train a smart person, and the availability of training programs. Beyond this, there are big differences in the quality of American and Chinese or Indian higher ed institutions. Somewhere I read that many of the engineering graduates in India would not make the grade here.

    This doesn’t mean I am a wholehearted support of American higher ed and of having everyone go to college or of saying that everyone that gets a degree is well qualified to work. In fact, I believe that we may be spending way too much on colleges when, in fact, we need better technical programs that will help those who do not want to go to the traditional college get the training they need to work. We also need more apprenticeship and supplementary training programs like Northern Europe has. It’s an interesting time when so many young graduates can be coming out of college deeply indebted and with majors that tech firms do not value, while there are, at the same time, so many of these grads who are self-taught in tech and working. Really makes you wonder about the traditional colleges and what they see as their mission.

  6. @Rod Stevens – I do see what Aaron is saying where there’s some “self-confirmation bias” going on. While Americans might be willing to be mobile in general, this survey is speaking specifically to a group of entrepreneurs. That means that this is a group that has invested money and time in their businesses that go far beyond simply switching jobs. It’s going to be pretty rare for an entrepreneur (particularly in the tech industry) to be setting up a business in a location where he/she doesn’t like the quality of life. The issue, of course, is that “quality of life” is very personal and highly variable between people. A tech guru that’s an urbanist is going to care more about walkable neighborhoods and public transportation. However, to use an extreme example on the other end, Phil Robertson is also an entrepreneur (note that I don’t endorse his views on anything at all) and he’d have a very different view of what’s “quality of life”. There is quite a wide swath of people where “quality of life” means lots of land in a rural or remote location without many distractions (or where access to fishing is more important than access to top seafood restaurants). As I like to say, “Different strokes for different folks”.

    The access to (a) a pool of potential employees and (b) customers are more objective measures that can be quantified.

  7. Rod Stevens says:

    “Frank the Tank”: I’m not sure the site criteria of the entrepreneur are a lot different than the young employee, for the simple fact that most people open the business where they are already settled. It doesn’t seem like most people would move at the same time they are starting a business. For one thing, it’s a lot of stress to move. For another, that would mean uprooting all the business, financial and social connections that are so useful in starting a business. Yes, I can see moving a business later, after you are up to speed and you’ve identified some local impediment to growth, such as the need to be near a key supplier or the inability to find enough qualified job applicants, but even then, I would think that is coming when the company is reaching the 30 person+ threshold.

    What’s this all mean? That the factors that determine an employer’s ability to draw bright young talent are also going to affect the rate of business formation. In Washington County, west of Portland, Intel came to the region in the mid 1980s, but the number of small start-up businesses did not rise dramatically for about 15 years. It took that long for young employees to become established in their career, to rise up to mid-management positions, to gain the necessary capital and insight to go independent, and to build the networks around them of interested co-workers who would follow them to a new company. They couldn’t really do that for a number of years, since those tech companies they were working for were pioneers in the wilderness. Now there’s an “ecosystem” of smaller companies around the big ones. I haven’t heard of many of those companies moving away, except when they sell out to a Bay Area VC who wants to restock the management from the Bay Area.

  8. Ziggy says:

    “America’s pivotal and primary problem is the destruction of its Middle Class income sector by the radical Left policies of this current government that is creating an “education gap” by rising levels of income inequality and poverty, resulting in education cuts, and now only half of American students receive early childhood education which studies show is integral to produce tertiary educated graduates.”

    I couldn’t let the Anonymous troll’s comment below go unchallenged. The current destruction of America’s middle class is in fact a thoroughly bi-partisan effort these days, but its seeds were sown in the infamous 1971 “Powell Memo,” a decidedly elitist inspiration:

    http://reclaimdemocracy.org/powell_memo_lewis/

    Anonymous is a disinformation troll whose goal is to cloud responsibility for the demise of America’s middle class and foment hate for old school Democratic Party standards that elevated the quality of life in America’s 30 year, post WW II Golden Age.

    The old left/right, liberal/conservative, blue/red dynamic no longer applies. These days it’s all Purple Party – welfare for the wealthy, capitalism for everyone else, and the elites controlling both parties are totally on board with this agenda.

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