Category: Startup Ecosystems

The Top 200 U.S. Startup Cities for 2020

Post author By Ed Egan
Post date March 15, 2021
No Comments on The Top 200 U.S. Startup Cities for 2020

The 200 top U.S. startup cities for venture capital (VC) investment for 2020 provide few surprises. The top four startup cities are the same for the third year in a row, and San Francisco holds on to its top spot for its 14th year. However, there are some changes to explore from the industry’s ongoing evolution and the COVID-19 crisis.

Rank	Location	$mil.	Deals	Funded	+/-
1	San Francisco, CA	12,482	216	1,328	0
2	New York, NY	7,056	195	1,178	0
3	Boston, MA	3,651	41	304	0
4	Cambridge, MA	4,565	40	227	0
5	Seattle, WA	1,850	41	230	2
6	San Diego, CA	3,230	38	196	2
7	Palo Alto, CA	1,352	31	259	-2
8	Mountain View, CA	4,645	21	143	4
9	Los Angeles, CA	1,279	29	248	-3
10	Austin, TX	799	27	229	-1
11	Chicago, IL	818	26	189	1
12	San Jose, CA	945	23	127	-1
13	Irvine, CA	3,077	14	59	19
14	South San Francisco, CA	1,781	14	72	4
15	Philadelphia, PA	757	13	131	-5
16	Redwood City, CA	1,609	11	111	1
17	Santa Clara, CA	760	14	90	2
18	Denver, CO	709	16	82	7
19	Menlo Park, CA	624	16	95	-5
19	San Mateo, CA	875	11	103	-5
21	Atlanta, GA	551	17	102	-5
22	Houston, TX	656	13	71	2
23	Santa Monica, CA	452	12	94	-3
24	Berkeley, CA	616	12	54	12
25	Boulder, CO	414	13	73	-2
25	Oakland, CA	429	13	71	-4
27	Columbus, OH	573	9	50	23
27	Sunnyvale, CA	372	9	85	-5
29	Waltham, MA	496	7	41	27
30	Salt Lake City, UT	470	8	35	7
30	Washington, DC	281	10	53	4
32	Bellevue, WA	657	3	45	-5
33	Burlingame, CA	593	5	31	-4
34	Dallas, TX	268	9	43	-6
35	Portland, OR	181	8	53	-9
36	Baltimore, MD	172	6	50	42
37	Fremont, CA	404	4	23	1
38	Emeryville, CA	414	4	21	15
38	Pittsburgh, PA	237	2	135	-7
40	Culver City, CA	682	2	25	-10
41	Somerville, MA	280	4	25	0
42	Durham, NC	167	5	39	-4
43	Campbell, CA	239	5	24	0
44	San Carlos, CA	258	7	20	0
44	Wilmington, DE	141	9	28	14
46	Arlington, VA	113	9	27	20
47	Los Altos, CA	158	3	35	-7
48	Florence-Graham, CA	57	13	48	33
49	Jersey City, NJ	304	4	14	21
50	Nashville-Davidson, TN	128	3	41	-2
51	Miami, FL	120	5	24	18
52	Ann Arbor, MI	109	3	41	-20
52	Tampa, FL	328	2	20	28
54	Indianapolis city, IN	80	6	32	-20
55	Raleigh, NC	73	7	33	-4
56	Milpitas, CA	159	5	14	48
57	Carlsbad, CA	114	3	24	-16
58	New Haven, CT	196	2	18	13
59	Lincoln, NE	177	2	18	35
60	King of Prussia, PA	130	3	16	40
61	Sandy Springs, GA	363	2	12	-1
62	Sacramento, CA	104	3	16	51
63	Walnut, CA	145	2	17	8
64	Charlotte, NC	596	1	21	-20
64	Goleta, CA	282	2	11	58
66	Tysons Corner, VA	77	2	26	-17
67	Newton, MA	96	2	16	84
68	El Segundo, CA	102	2	15	-3
69	Newport Beach, CA	452	1	13	34
69	Phoenix, AZ	58	2	18	-23
71	Rockville, MD	128	2	11	142
72	Cupertino, CA	64	2	17	40
73	St. Louis, MO	37	2	35	-12
74	Hawthorne, CA	2,336	2	5	53
75	Burlington, MA	32	4	21	-21
76	Minneapolis, MN	25	5	23	-17
77	Scottsdale, AZ	103	1	16	21
78	Kirkland, WA	52	2	11	100
79	North Fair Oaks, CA	306	2	5	147
80	Framingham, MA	107	1	15	12
81	Cary, NC	1,793	1	6	358
82	Carmel, IN	32	3	12	29
83	Plano, TX	145	1	10	-16
84	Cleveland, OH	19	3	23	46
85	Eden Prairie, MN	269	1	7	192
86	West Hollywood, CA	29	2	13	-31
87	Pasadena, CA	22	2	18	-31
88	St. Petersburg, FL	57	2	6	263
89	South Plainfield, NJ	160	3	4	539
90	Gaithersburg, MD	138	1	7	-19
91	Newark, CA	97	1	8	95
91	Pleasanton, CA	17	3	16	-28
93	Orlando, FL	31	2	9	121
93	Rochester, NY	50	1	12	-17
95	Wellesley, MA	126	1	7	-24
96	Hillsborough, CA	234	2	4	532
97	University, FL	189	2	4	278
98	Madison, WI	14	2	30	-13
99	Santa Barbara, CA	69	1	8	7
100	Boca Raton, FL	65	1	8	57
101	St. Paul, MN	52	1	9	156
102	Mercer Island, WA	151	2	4	47
103	Mill Valley, CA	19	3	10	28
104	Woburn, MA	32	1	14	-57
105	Albuquerque, NM	11	3	20	-1
106	Alameda, CA	21	2	9	-17
107	Aliso Viejo, CA	30	1	12	1
108	New Orleans, LA	32	1	11	-24
109	Addison, TX	22	2	8	284
110	Marina del Rey, CA	24	3	6	92
111	Dover, DE	23	3	6	429
112	Boise City, ID	20	2	8	3
113	Skokie, IL	16	3	8	103
114	Lake Forest, CA	52	1	6	355
115	Albany, NY	11	4	10	3
116	Richmond, VA	24	1	11	47
117	Nashua, NH	71	1	5	322
118	Beverly Hills, CA	14	2	10	-39
119	Bend, OR	35	1	7	129
120	Providence, RI	18	1	13	-4
121	Irving, TX	26	1	8	307
122	Lewes, DE	20	3	5	169
123	Charleston, SC	51	1	5	15
124	Chapel Hill, NC	23	2	5	416
125	Solana Beach, CA	46	1	5	175
126	Long Beach, CA	23	2	5	414
127	Centennial, CO	23	2	5	204
128	Birmingham, AL	25	1	7	95
129	Reston, VA	7	2	18	-12
130	Fort Collins, CO	42	1	5	165
131	Santa Fe, NM	14	2	7	-17
132	Calabasas, CA	27	1	6	44
133	Coral Gables, FL	36	1	5	137
134	Alpharetta, GA	9	2	10	266
134	Santa Clarita, CA	65	1	4	256
136	Stanford, CA	11	2	7	20
137	Omaha, NE	4	4	23	-41
138	Provo, UT	300	0	14	-86
139	Greenwood Village, CO	12	4	5	489
140	Eagleview, PA	55	1	4	109
140	Hayward, CA	234	0	16	-65
142	Northbrook, IL	24	2	4	253
143	Lexington, MA	220	0	14	-81
144	Burlington, VT	12	1	10	6
145	Gainesville, FL	42	1	4	232
145	Morrisville, NC	19	1	6	62
147	Charlottesville, VA	11	1	11	22
147	Westport, CT	19	1	6	240
149	Missoula, MT	23	1	5	154
150	West Palm Beach, FL	23	1	5	106
151	San Antonio, TX	8	1	13	-63
152	Hoboken, NJ	12	2	5	337
153	Draper, UT	15	3	4	591
154	Foster City, CA	293	0	8	-86
155	Winter Park, FL	63	1	3	473
156	Bedford, MA	15	1	6	-54
157	Redmond, WA	272	0	8	-26
158	Fayetteville, AR	6	2	7	135
158	Union City, CA	17	2	4	382
160	Basking Ridge, NJ	57	1	3	245
160	Creve Coeur, MO	182	0	9	-35
162	San Bruno, CA	250	0	8	-1
163	Daly City, CA	5	2	8	4
163	Tucson, AZ	7	1	11	53
165	Industry, CA	52	1	3	463
166	San Ramon, CA	77	0	13	49
167	Fulton, MD	10	1	8	-33
168	Huntington Beach, CA	45	1	3	321
169	Farmington, CT	4	2	9	249
170	Memphis, TN	2	2	25	68
171	Cottonwood Heights, UT	11	1	6	-72
171	San Juan Capistrano, CA	5	1	14	197
173	Watertown Town, MA	137	0	8	-91
174	Glendale, CA	7	1	9	226
175	Portland, ME	9	1	7	-34
176	Santa Cruz, CA	625	0	5	263
177	Arlington, MA	7	2	5	58
178	Paradise, NV	6	3	5	450
179	Lehi, UT	6	1	9	-102
179	Mesa, AZ	20	1	4	128
179	Portsmouth, NH	20	1	4	361
182	Chandler, AZ	5	2	6	307
183	Newark, DE	6	1	9	-31
183	Trumbull, CT	18	1	4	357
185	San Luis Obispo, CA	10	2	4	443
186	Hoover, AL	30	1	3	222
187	Fort Worth, TX	17	1	4	95
188	Kansas City, MO	2	2	11	17
189	Vista, CA	26	1	3	77
190	White Plains, NY	11	3	3	1034
191	San Leandro, CA	186	0	5	147
192	Reno, NV	5	1	8	208
193	Corte Madera, CA	24	1	3	435
194	Saratoga, CA	79	0	6	-100
195	North Bethesda, MD	59	1	2	549
195	Orem, UT	4	2	5	266
197	Silver Spring, MD	4	2	5	-58
198	Poway, CA	55	1	2	546
199	Bethlehem, PA	2	2	9	51
200	Manhattan Beach, CA	5	1	6	93

Trends for Startup Cities

Breaking Records

Twenty-twenty was a record year in terms of dollars invested, though a small number of very high-value deals enlarged the aggregate amount. A trend of billion-dollar rounds that began with Lyft in 2017 has continued into 2020. (Yes, Facebook had a billion-dollar round in 2011, but there weren’t any others for six years.) Some billion-dollar rounds are, at least notionally, seed or early-stage investments, like those into JUUL Labs, Quibi, and Rivian Automotive. Most are later stage rounds supporting firms like Uber, WeWork, and Epic Games as they try to find their exits.

There were four billion-dollar rounds in 2020. These included investments in Rivian, Waymo, SpaceX, and Epic, who had already taken a billion-dollar round in 2018. Epic Games is the main force behind Cary’s, and North Carolina’s, drive up the rankings.

COVID-19 Bump

Even without the billion-dollar rounds, U.S. venture investment levels are now above the dot-com boom’s heights in both nominal and real terms: Both 2018 and 2019 beat 2000 in nominal investment amounts. Twenty-twenty was the first to boast a higher amount than 2000’s U.S. venture capital investment adjusting for inflation.

There were reasons to think that the COVID-19 pandemic might cause a retrenchment in investment. In particular, the U.S. stock markets collapsed from February 12th to November 16th, 2020. Concern over returns to capital might have led L.P.s to reconsider new investments in alternative assets. There was also speculation that some L.P.s might renege on existing commitments to venture funds. Instead, the market for venture capital seems to have had a COVID-19 bump.

Concentration Among Startup Cities

America has had a long-term trend towards greater concentration of venture capital dollars, deals, and startups within the top 10 startup cities. Over the last decade, the share of venture capital dollars invested in the top ten startup cities rocketed up. It went from about 30% in 2010 to almost 60% in 2018. Other measures of venture activity followed a similar trend. But this seems to have changed in 2020.

Greater concentration could be problematic if some cities are at or past their efficient capacity. For example, Palo Alto has the highest startup density in the U.S. and seems over-crowded with startups. (New York, though, looks like it still has plenty of room for more.) Then greater equality in venture capital across startup cities would enhance growth. So, it’s somewhat enheartening to see the top 10 startup cities’ share back below 50%. Presumably, lockdowns, travel restrictions, and everyone getting used to teleconferencing reduced the benefits to locating in the Bay Area or Route 128 ecosystems.

Is Houston a Startup City?

Houston, Texas, ranked 22nd among U.S. startup cities in 2020. That’s the Space City’s highest ranking since 2002. In 2016, it was ranked 54th, so Houston’s startup ecosystem has had an astronomical recent rise. Moreover, the city’s 2020 ranking components are now fairly evenly balanced: Houston ranked 19th for new deal flow, 24th for dollars invested, and 25th for active startups. (That new deal flow is driving Houston’s ranking suggests good things to come; follow-on rounds should assure more money and active startups in subsequent years.)

Why am I still reluctant to describe Houston as a startup city? Because Houston is the 4th largest metro area by population, the 7th largest by GDP, and boasts that it is home to 4,600 energy-related firms. It contributes just under half a trillion dollars to the U.S. economy each year.

In 2020, H-town added 13 new startups to its venture ecosystem, bringing its total headcount of actively-financed firms to 71. These firms collectively received a little over $650m. So, until someone works out how high-growth-high-tech and oil-and-gas go together, Houston will remain just the Energy Capital of the World. (Also, the space sector moved to California several decades back.)

A Historic Fall

I have written extensively about Houston’s fall in the rankings and the policy initiatives that exacerbated it, as well as the attempts to reform Houston’s startup economy that followed.

The short story is that Houston realized it had a problem with creating and retaining new high-growth, high-tech firms in the late 1990s. The city’s “solution,” announced in 1998 and launched in 1999, was the Houston Technology Center. The HTC then lead Houston to the largest and fastest ranking decline of any former top 20 startup city.

Fortunately, starting around 2011 and picking up pace in 2014, some new initiatives took hold in Houston. These were a mix of private firms and non-profits that were (mostly) unaffiliated with the HTC. Then, in 2016 a group of VCs and serial entrepreneurs with ties to the city started Station Houston, the city’s first startup hub.

Policy Takes Time

It takes a couple of years for a new initiative to take effect: On average, a startup is just under a year and a half old when it receives its first seed round, and over two and a half if its first round is a Series A. So the effects of policy in 2018 are just now starting to be felt. Twenty-eighteen was a big year for bad startup policy in Houston:

The City of Houston Task Force on Technology and Innovation was dissolved.
The HTC was repurposed and rebranded as Houston Exponential, and then took over control of the city’s startup policy process.
Rice University announced that it was (unilaterally) creating an innovation district around one of its properties in Midtown. (I estimated the long-term economic cost as more than $600m.) It later named it the Ion.
Station Houston’s board voted in a high-principal as their new CEO, turned Station into a non-profit, and announced Station was moving into the Ion and outsourcing its operations.

Market Forces

Of course, many other things were going on in Houston’s startup ecosystem in or around 2018, and some of them were positive. So, on balance, it looks like Houston’s prognosis is fair-to-good, despite its abysmal policy history.

First, deal flow surged to record highs in 2018. Houston was getting around six new deals each year from 2010 to 2016. In 2017, Houston got nine first-time venture investments, and in 2018 it got 17, before falling back to 13 new deals each year in 2019 and 2020. The two drivers of this boom were Station’s efforts before its takeover and Houston’s biotech scene, which finally found some legs: Liongard and Arundo Analytics were both Station residents that secured a first-round of VC in 2018 (and went on to raise almost $50m combined), and life science startups Vivante Health, Wellnicity, and Trilliant Surgical all got their first rounds that year. (Data Gumbo, a client of The Cannon, also got its first round in 2018.)

Second, many for-profits, non-profits, academics, and policymakers across the state were working hard to build high-growth, high-tech expertise and capabilities in Houston in 2018. This effort has translated into a wealth of new initiatives, programs, and ecosystem support organizations in 2020. Credit is particularly due to Lori Vetters, who led efforts to reach out to non-Houston accelerators despite being shunned by many Houston startup scene members for her lack of high-growth, high-tech pedigree. (Lori replaced Walter Ulrich and tried to reform the HTC.) Both the Texas Foundation for Innovative Communities in Austin and my team at the McNair Center for Entrepreneurship and Innovation also deserve honorable mentions.

Building Better Biotech

The Texas Medical Center Innovation Institute (TMC-II) got off to a rough start with its various initiatives, which included the TMCx, JLabs@TMC, and the AT&T Foundry. For instance, publicly-traded firms generally don’t attend startup accelerator programs, but Bellicum Pharmaceuticals was an early client of JLabs@TMC. Bellicum was the HTC’s sole IPO and listed on the NASDAQ. (It’s worth noting that JLabs@TMC has removed Bellicum from their publicly-available client lists. And that the TMC-II still appears to report Bellicum’s IPO proceeds in their “raised to date” stat.)

Nevertheless, the TMC-II’s program quality increased materially in late 2016 and reached a decent standard a few years later. Furthermore, John Reale, the former CEO of Station Houston, founded Integr8d Capital and shifted his focus to life science startups in 2018. He later became the entrepreneur-in-residence at the TMC-II as well. J.R. was crucial to Houston’s first market-driven reformation effort and is likely an essential factor in its second one too.

The Green Mountain State

I also keep tabs on things going on in Vermont’s startup scene. Vermont is home to a tiny but growing startup ecosystem. In the 1990’s Vermont got around one new deal a year, and by the 2010s, Vermont averaged two and a half new deals a year. The U.S. doubled its deal flow over the same period, so, proportionately, Vermont is outpacing U.S. national growth. But in absolute terms, Vermont doesn’t have much. Since its first deal almost forty years ago, Vermont has received 125 rounds of VC., totaling just over $400m, into 56 companies. A top 30 city can comfortably achieve those numbers in a few months.

Agglomeration Powers Startup Cities

Historically, Vermont’s startups were mostly spread out down the I-89 east from Burlington. Vermont’s startup success stories include Dealer.com and Seventh Generation in Burlington, SunCommon in Waterbury, Keurig Green Mountain, which was up the road in Stowe, and Northern Power Systems in Barre. The jewel in the Green Mountain crown, though, is Casella Waste Systems in Rutland. (Casella has a surprising number of patents.)

Most of Vermont’s venture capital has gone into companies in Burlington though, which has increasingly dominated the state’s tech scene. This trend towards fewer startups outside of the Queen City is both good and bad. In the long-term, denser agglomeration is a powerful force for startups. But in the short-term, having fewer non-Burlington startups means having fewer startups. Until Burlington ups its game, or non-Burlington startups return, the state looks set to stay in the ebb part of its gentle ebb-and-flow in the bottom end of the U.S. startup state rankings.

Up and Down

Burlington is the only place in Vermont to make the top 200 startup cities list in recent history, and it has done so every year from 2014 to 2020, except 2016. Rutland, Vermont, made the top 200 list in 1994. Twenty-twenty is Burlington’s second-best year ever. (It has lagged well behind Burlington, Massachusetts since the 1980s, but has bested Burlington, North Carolina, handily every year since 1998.) But, with a rank of 144th and just one new deal and two follow-on rounds, it’s hard to describe the People’s Republic of Burlington as a real startup city.

Among the 50 states, the District of Columbia, and Puerto Rico, Vermont has consistently ranked in the mid to late-thirties. In 2020, there were no new deals and no follow-on rounds outside Burlington, and Vermont takes 40th place in the U.S. startup state ranking.

Startup Cities Ranking Methodology

The startup cities ranking uses an open methodology that anyone can use and recreate, and data on the top 200 startup cities from 1985 to 2020 is freely available.

This article’s results are based on data from Thomson Reuter’s VentureXpert, who survey venture capitalists. The rankings consider only data on “growth venture capital. ” Growth venture capital is seed, early, or later-stage investment into privately-held, (predominantly) high-tech high-growth startups. (The main alternative is transactional venture capital, which includes investments into publicly-traded firms and large non-tech incumbents).

The reported rankings are a rank-of-ranks over three measures that capture related but different aspects of a city’s startup ecosystem:

The amount of venture capital dollars invested.
The number of new deals (i.e., startups receiving VC for the first time).
The number of actively-funded startups (i.e., startups receiving stages of VC and working towards an exit).

Tags Cary, Covid-19, Houston, Top 200 Startup Cities, Venture Capital, Vermont

McNair Center Startup Ecosystems

Ranking Startup Activity in Cities

Post author By Diana Carranza
Post date February 20, 2018
No Comments on Ranking Startup Activity in Cities

Are startup hubs exclusive to a handful of U.S. cities? Or is high-technology entrepreneurship spreading throughout the country? To answer these questions, the McNair Center recently published The Top 100 U.S. Startup Cities in 2016, ranking startup activity by tracking venture capital deals in U.S. cities. The report found that roughly 70% of startup activity is concentrated in 50 American cities. While the top seven U.S. cities for entrepreneurship are San Francisco, New York City, Boston, Cambridge, Palo Alto, Austin and Seattle, startup clusters are also forming in many American cities.

There are several rankings of startup activity. While these rankings use different methodologies, the results point toward the same trends in startup activity. This blog post compares the McNair Center’s methodology and that of rankings published by the Kauffman Foundation, City Lab /Martin Prosperity Institute and Startup Genome. We also identify the consistent themes across the rankings.

Kauffman Foundation: Startup Activity by Rate of New Entrepreneurs

The Kauffman Foundation ranks U.S. metropolitan areas by new business creation activity and the number of people engaging in business startup activity, using the following three metrics: the rate of new entrepreneurs, the opportunity share of new entrepreneurs and startup density.

The rate of new entrepreneurs measures the percentage of the adult population of an area that became entrepreneurs each month. Opportunity share of new entrepreneurs provides the percent of new entrepreneurs who were employed before starting their business; this metric tracks entrepreneurs who started their own businesses because they saw a market opportunity. Startup density is the number of startup firms per 1,000 companies. Startup firms are defined here as as small businesses that are less than one year old and employee one person in addition to the owner. This web-based ranking is dynamic, and the data can be downloaded. Users have several options such as measuring startup activity by larger or smaller states and by growth entrepreneurship. While the overall rank is a weighted average, users can also change the ranking for each individual measure.

City Lab / Martin Prosperity Institute: Measuring Global Venture Capital

A 2016 ranking prepared by City Lab with the help of the Martin Prosperity Institute provides the geography of venture capital investment in high-tech startups for more than 200 U.S. metro areas for 2016. This analysis ranks metro areas in terms of the total dollar amount of VC investment, as well as their share of national venture investment. The ranking provides individual rankings for venture capital investment, deal share and venture investment per capita. According to their findings, “No matter how you slice it, venture capital-backed high technology remains spiky, and if anything, it may be getting spikier.”

The Martin Prosperity Institute’s 2015 ranking, The Rise of the Global Startup City, finds that the U.S. accounts for nearly 70% of total venture capital worldwide, followed by Asia (14.4%) and Europe (13.5 %). Both the 2016 and 2015 rankings rely on venture capital investment in absolute numbers and percentage as their key measure for startup activity.

Startup Genome: Global Focus with Eight Success Factors

Startup Genome has identified eight factors that drive the growth of high-technology firms: funding, market reach, global connectedness, technical talent, startup experience, resource attraction, corporate involvement, founder ambition and strategy. Startup Genome’s ranking assesses 55 startup ecosystems across 28 countries and ranks the top 20 for 2017. Analyzing roughly 100 metrics that measure the eight external and internal factors, Startup Genome measures startup performance by growth over the first years of operation.

The top five regions in the 2017 ranking are Silicon Valley, New York City, London, Beijing and Boston. Startup Genome finds that greater global connectedness leads to higher ecosystem performance. Startups’ ability to reach out outside their own ecosystems highly correlates with attracting global customers.

McNair Center for Entrepreneurship and Innovation: Measuring U.S. Venture Capital

Our research paper analyzes startup activity based on three venture capital metrics: the dollars invested, which measures the total amount of growth-oriented venture capital invested into startup firms in a city; the number of new deals, which looks at the number of startups that received their first-ever round of venture capital financing; and the number of startups backed by venture capital, which gauges the overall scale of a city’s ecosystem.

We ranked cities on each of these three measures for 2016 and then assigned them an overall rank by equally weighting the component metric rankings. Our methodology is similar to the global ranking produced by City Lab/Martin Prosperity Institute, but we create a composite ranking of U.S. cities based on the weighted average of each measure, while City Lab/Martin Prosperity Institute publishes individual rankings for each metric.

Common Trends

The top 20 cities for each ranking is compiled in Figure 1. Across all the rankings, startup activity is highly concentrated in a handful of U.S. cities. The global assessment done by Startup Genome shows that the U.S. leads the world in high-technology entrepreneurship.

Other trends include:

• San Francisco ranks number one for McNair and City Lab/Martin Prosperity
• New York City takes the second spot for McNair, City Lab/Martin Prosperity and Startup Genome
• Boston-Cambridge, San Francisco Bay Area/Silicon Valley, Austin, Seattle, Chicago and Los Angeles are consistently the U.S. cities with the highest rankings across the four studies
• California cities are spread all over the rankings, confirming the spillover effect in the San Francisco Bay Area
• San Francisco and Silicon Valley are at the top of all of the rankings except for the Kauffman Foundation. The Kauffman Foundation ranking measures entrepreneurship by new business creations, which combines small businesses and startups. For example, the Houston metropolitan area has the 9th spot on the Kauffman Foundation ranking, yet it is not shown as part of the top 20 in any other of the rankings. This result reflects a high rate of small business creation in Houston, not its startup ecosystem.

Figure 1. Top 20 Cities across 4 Rankings

Conclusion: Why Is Venture Capital Our Preferred Measure?

Venture capital provides comparable and systematic information on investment that can be directly linked to specific geographical locations. The amount of venture capital invested in an area shows the supply of financial capital available in the ecosystem.

Venture capitalists invest in high-tech, high-growth startups, not small businesses. This difference is key to assessing the innovation taking place in any given area. High levels of venture capital indicate that there is a healthy demand for this kind of financial capital. This increased competition creates the virtuous cycle that feeds a top ecosystem.

Tags entrepreneurship ecosystem, High tech high growth, spillover effect, startup cities rankings, startup hubs, Venture Capital

McNair Center Startup Ecosystems

Manufacturing Incubators

In the past few decades, there has been a decline in manufacturing jobs in the United States. Companies have been able to produce goods abroad at a cheaper price due to lower labor costs in developing countries.

Incubators are crucial to the revitalization of U.S. manufacturing. The Fulton-Carroll Center Incubator in Chicago is one of the largest and first manufacturing incubators in the nation. It was established in 1980 with $2.6 million in grants from the federal government. In 2015, the city of Seattle awarded the Industry Space Seattle, a manufacturing incubator started by Johnny Bianchi in 2015, a grant of $100,000.

Importance

Traditional startup incubators provide office space, network access and business advice for tech companies developing things like software and apps. Startups usually pay a monthly/annual membership fee, or pay monthly rent at a rate determined by the incubator. The rent is usually slightly more expensive than what companies need to pay to get a similar office in the same area. However, extra value comes from access to the incubator’s resources. Costs are shared among multiple startup companies, as well as by the incubator sponsor. Sponsors can be nonprofit or for-profit entities.

Incubators are perhaps even more important to the manufacturing industry than to the tech industry. Manufacturing firms require more expensive machines and tools, in addition to basic resources. Incubators that provide those technologies are especially important for manufacturing startups that aren’t ready to invest in their own infrastructure yet.

Providing Equipment

Chicago’s mHub, opened in March 2017, is an innovation center for physical product development and manufacturing. mHub is equipped with ten labs, including a 3D-printing lab, fabrication labs, electronics labs, plastic molding, textiles, welding and grinding, wood shop and wet lab. Overall, they provide a total of more than $2.5 million of prototyping and manufacturing equipment.

Industry Space Seattle gives its tenants the use of 10 overhead crane systems, which can cost up to $80,000 each, along with a $30,000 compressed-air system, a $20,000 forklift and an industrial paint booth.

MHub in Chicago

Other Resources

In addition to the machinery and tools, incubators provide manufacturing startups with general business resources. The Industry Space Seattle partners with Impact Washington. Impact Washington is a nonprofit that provides consulting services and business mentoring to fledgling manufacturers.

The Advance Business & Manufacturing Center Incubator, a program provided by the Greater Green Bay Chamber in Wisconsin since 1987, partners with local universities, who connect college students to startups when extra manpower is needed. When multiple firms work in close proximity, they share knowledge and inspire each other with ideas. The business networking at incubators can also foster collaboration and expansion.

Structures of Manufacturing Incubators

The sizes of manufacturing incubators can range from less than 100,000 square-foot to the size of a city block. On the smaller side, the Industry Space Seattle provides up the ten industrial working spaces, while mHub can serve hundreds of startups at one time.

Although these incubators provide machinery for manufacturing, not all of their client companies are in the manufacturing industry. Startups service companies, ranging from non-profits to law firms to consulting firms, can rent out only the office space at a cheaper price.

Incubator Sponsors

The up-front investment in a manufacturing incubator is expensive. Although most are sponsored by the government, there are individuals who started an incubator because they believe that incubators offer talented minds chances to succeed. Bianchi bought and renewed a building into Industry Space Seattle because “there’s a whole bunch of people operating out of garages trying to legitimize their business [and] it’s financially infeasible to grow them.” Elissa Bloom started a fashion incubator because “there’s so much talent in the city, but they’re not getting the know-how to run and launch a business.”

Trends and Barriers

The long-term trend in U.S. manufacturing is of more automation to increase productivity with fewer workers. This trend favors larger manufacturers who can afford the capital investment needed to remain competitive. In recent years though, technologies like 3D printing, CNC laser cutters and other CAD/CAM equipment, have reduced the price and time needed for prototyping and development. There are therefore now lower barriers to entry to new product development in manufacturing, providing firms have access to the necessary technologies.

Conclusion

Manufacturing incubators take advantage of economies of scope and scale by providing capital equipment to manufacturing startups. This works because a typical piece of equipment will be mostly idle even at a fairly large single firm. Manufacturing incubators have also borrowed some best practices from startup incubators. In particular, they often provide broader business services and access to networks.

However, manufacturing incubators are a recent phenomenon. They are still on their first evolutionary cycle and their funding is largely not tied to their performance. Startup ecosystem participants, by comparison, have now faced almost a decade of competitive pressures. Competitive pressures select business models and niches that are aligned with market needs. Manufacturing incubators will likely become more successful when they partner with industry incumbents. A first step towards this is to sponsored by local for-profit firms.

Tags Economic Growth, Entrepreneurs, Incubators, Manufacturing, Public Policy, Startups

McNair Center Startup Ecosystems

Silicon Valley: A Powerhouse for Innovation

Post author By Taylor Jacobe
Post date November 30, 2017
No Comments on Silicon Valley: A Powerhouse for Innovation

Silicon Valley’s economy is a powerhouse. Representing 14% of U.S. Gross Domestic Product, if California were a country, it would have the sixth biggest economy in the world. Although it has remained successful for decades, California was not always the leader that it is today. What about California led it to become a high-tech phenomena?

The Growth of Silicon Valley

Semiconductor Expertise

Although Silicon Valley is well-known among the American public today, this area was not always known for its tech development. In the first half of the twentieth century, San Francisco began to become a hub for the radio and telegraph industries. The first steps towards becoming modern-day “Silicon Valley” occurred in the 1940s, with the founding of Hewlett-Packard and Bell Labs. Engineers at HP made oscilloscopes, radar and artillery technology to aid the US in World War II. The first ever transistor was also invented at Bell Labs during this time period. The transistor later went on to become the computer processor, and its inventor created Shockley Semiconductor Labs, the first company to create transistors out of silicon.

In the ‘50-60s, employees with knowledge of semiconductors at Shockley Semiconductor Labs left and started their own enterprises. From there, the area became a hub for technology, known for expertise in semiconductors.

University Collaboration

Another milestone, occurring simultaneously with the region’s growth in semiconductor production, was the creation of the Stanford Research Park (SRP) in the early 1950s. Stanford University’s Dean of Engineering developed SRP as a hub for entrepreneurs and researchers to collaborate. Soon after SRP’s creation, the city of Palo Alto annexed SRP’s lands to generate tax revenue; this created a mutually beneficial relationship between Palo Alto’s residents and the researchers at SRP.

In 1951, Stanford Research Park’s first company, Varian Associates, broke ground. Varian went on to develop the microwave tube, which served as underlying technology for satellites technology and particle accelerators. Since then, SRP has been the home to many technological breakthroughs, from developing components of the international space station to being the home to Facebook as it was in its earlier stages of growth.

University presence in the area gave Silicon Valley the advantage of having a steady stream of innovators. Lawrence Livermore Labs‘ establishment at the University of California at Berkeley in 1952 also brought a wave of innovators to the area. Their development of breakthrough defense technology began many years of innovations. Their work in collaboration with Los Alamos National Laboratory later enabled the launch of the Human Genome Initiative in the 1980s.

Over the following decades, more companies located themselves in the area. The 1970s brought Apple, Atari, and Oracle. The location of these large companies in the area brought talent and prestige.

Two decades later, after the area was well-established as the leader for the computer industry, companies like eBay, Yahoo, and Google all joined the ranks of Silicon Valley’s residents.

High Tech High Growth Enterprises and Changes Over Time

Graphic 1: Bay Area Startup Firms, 1980-2016

Graphic 1 shows changes in the amount of high tech high growth enterprises since 1986 in the Bay Area. We can draw a few insights from this information. First, the Bay Area’s concentration of these types of enterprises has clearly grown. The cities of San Francisco and San Mateo also became significantly more crowded than 30 years ago. However, concentration is not the only thing that has increased. Enterprises span the entire bay perimeter, whereas they used to mostly exist in small clusters.

A small cluster of enterprises has been growing to the East of the Bay Area, in Pleasanton. This could be a sign of even further sprawl in future years as the more popular areas become overcrowded.

Home to Venture Capitalism

Silicon Valley also houses the street that features some of the most prominent VC firms in the world: Sand Hill Road. Sand Hill Road, a 5.6-mile strip in Menlo Park, is famous for its high concentration of VC firms. The biggest names in tech – like Microsoft, Amazon, Facebook, and Twitter – all received funding from Sand Hill firms.

Although the success has been relatively steady, many sources are hypothesizing that Sand Hill Road’s reign may not last much longer. Tech Crunch attributes Sand Hill Road’s potential demise to VC firms’ desire to be closer to entrepreneurs along with the understanding that location isn’t as important as it used to be due to increased technology and on-site visits to founders. Sand Hill also has some of the highest space rental prices in the United States, which doesn’t incentivize firms to stay. Nonetheless, even as firms leave Sand Hill Road, they tend to stay in the Silicon Valley area. This means that Silicon Valley’s reputation as a VC leader is not truly in danger.

Broadening Success to California

With the success of Silicon Valley in Northern California and the long-standing success of Southern California as a center for pop culture and media, it is no surprise that the state experiences economic prosperity.

The Milken Institute cites the diversity of high-tech firms as what allows Silicon Valley and the rest of California to thrive. This diversity serves as a protection in the event that a specific tech industry crashes. Through sharing of resources and ideas, new firms are frequently popping up as well.

Nonetheless, California’s success is not unstoppable. According to the Milken Institute, California’s human capital capacity has been decreasing. Its rank in the Human Capital Investment Composite has dropped from second in 2002 to seventeenth in 2014. With this, California must recruit human capital from other states and countries in order to satisfy demand. If this human capital pipeline ever stutters, it could create issues for California’s continued growth. California is also only mid-tier when it comes to per capita academic R&D investment; this may not bode well for maintaining innovative competitiveness in the future.

Tags California, california berkeley, High tech high growth, Sand Hill Road, Silicon Valley, stanford, Stanford Research Park

Government and Policy McNair Center Small Business Startup Ecosystems

Capitalizing on Competencies: Augusta, GA’s Innovation Path

Post author By Taylor Jacobe
Post date November 30, 2017
No Comments on Capitalizing on Competencies: Augusta, GA’s Innovation Path

Downtown Augusta, Ga., skyline as seen from Riverwalk. 12/12/96 Steven Schretzmann photo METRO

Cities around the country constantly aim to increase their innovative competitiveness. The city of Augusta, Georgia, continues to emphasize this goal to boost the local economy. After thorough research, the McNair Center generated suggestions to help Augusta’s leaders drive this growth.

The Ideal Situation for Growth

Although there are more than 28 million firms in the U.S., economic growth comes disproportionately from only a tiny fraction. More than half of growth in the American economy comes from these “High-Growth, High-Tech” (HGHT) enterprises. HGHT firms grow from nothing to IPO in a very short period, about 5-6 years.

HGHT firms desire areas with abundant funding. This includes venture capital (VC) funding, angel investors and crowd funding, government grants and contracts, and research and development (R&D) opportunities.

To support HGHT firms, certain systems and mechanisms must also be in place. Factors like accelerators, incubators and collaboration hubs all attract firms by creating innovation communities.

Evaluation of Current Situation

Augusta does not have a strong entrepreneurship record. With only one VC deal in the last few decades, it seems clear that entrepreneurs are not flocking to Augusta. The city’s lack of resident corporations with big R&D expenditure also indicates that innovation culture isn’t strong.

In terms of mentorship and support, there are no accelerators in Augusta, and only one incubator. The lone incubator, The Clubhou.se, was founded in 2012. They have 80 members, and boast that they “have helped 60 entrepreneurs grow 32 companies that create 90 jobs and a $7,000,000 annual economic impact in our community.” The Clubhou.se is yet to have a venture-backed success.

New or higher performing accelerators and incubators are necessary to attract large amounts of innovative firms. Right now, some of Augusta’s strongest innovation advocates are spearheading another entrepreneurship resource, the Augusta Innovation Zone. The Innovation Zone hopes to act as a physical hub for Augusta’s entrepreneurs.

Government grants and contracts, however, have a relatively strong presence in Augusta. With over 1,000 contracts and 200 grants from agencies like the Department of Defense and Department of Health and Human Services in the last ten years, Augusta has a clear ability to attract government work and win government grants.

Local Competition

Atlanta, the closest large city to Augusta, is currently ranked 26th for HGHT entrepreneurship among U.S. cities. Boasting $117 million VC invested, 6 new deals and 100 active startups in 2016, Atlanta is performing well. However, this is not performance that labels it as a leader in innovation. Atlanta’s ranking for startup density has dropped nine places relative to its rank in 2015. Although Atlanta is not a top performer, Augusta can expect a difficult relationship with Atlanta. Entrepreneurs tend to prefer strong entrepreneurship ecosystems, and Atlanta will be stronger than Augusta for the foreseeable future.

The Path Forward

The upcoming relocation of U.S. Cyber Command to Augusta, and the existing partnerships with local Fort Gordon, offer strong opportunities for growth in Augusta.

Perhaps the clearest path forward will be for Augusta to build off its current competency in receiving government contracts and grants. It could put together resources to make it easier for startups to apply for grants and provide government contract work. This strategy should attract new startups.

Working with the government often requires security clearances. In Augusta, this may create issues for startups who cannot obtain clearances. But there are many established firms whose employees already have clearances – Booz Allen for example has a large presence in Augusta. If these firms had incentives to partner with startups to jointly win grants and contracts, then an accelerator or an incubator could act as a hubs to bring everyone together. Some famous ecosystem institutions elsewhere, like 1776 in Washington, D.C., owe much of their success to their roles as middlemen, running competitions, brokering joint contracts and enabling startup research.

Cooperation is Key

For this all to work, everyone – Augusta University, US Cyber Command, local government, established firms, ecosystem organizations and the startups themselves – all need to be in close proximity. The startups will also need help to allow them to focus on exclusively on fast-paced development.

Augusta’ Broad Street is their hub of business and tourism.

McNair Center Director Ed Egan sees potential in the future developments of Augusta. A new $60 million building named the Hull McKnight Georgia Cyber Innovation and Training Center (GCITC), built in partnership with the State of Georgia, Augusta University, and others, is currently under construction. It is located on the waterfront, just blocks away from the Broad Street strip. Egan posits that this is the best location for Augusta to try to create a startup scene.

Egan explains, “The GCITC could house much more than just cyber-related innovation. It could be the home to The Clubhou.se and The Innovation Zone, host drop-in offices for incumbents like Booz Allen, and be a place for U.S. Cyber Command and government agencies like the National Security Agency to host competitions and workshops.” Augusta has its own unique challenges, but, with the right approach and leveraging the GCITC, it could build its own unique ecosystem.

Tags Atlanta, Augusta, Augusta Innovation Zone, Broad Street, Clubhou.se, Cyber Innovation and Training Center, Deke Copenhaver, Department of Defense, Ed Egan, Fort Gordon, GCITC, Georgia, Hull McKnight, McNair Center, U.S. Cyber Command

McNair Center Startup Ecosystems

Houston’s Next Step: The Role of Funds of Funds in Venture Capital

Post author By Taylor Jacobe
Post date November 13, 2017
No Comments on Houston’s Next Step: The Role of Funds of Funds in Venture Capital

Recently, Houston Exponential announced plans to create a venture capital Fund of Funds (VC FOF) to support the local entrepreneurship ecosystem. This strategy has been used by other cities and regions, such as Michigan and Cincinnati, to spur local startup growth. Private firms also offer VC Fund of Funds. What does this type of fund look like, and how has it played out in other locations?

The Basics

FOFs are funds that invest in multiple smaller funds. The increased diversification that they offer investors makes them attractive. However, there is a risk of overlap with FOFs; the many funds that make up the FOF may invest in the same entities. FOFs also may carry additional fees over a traditional fund because the the investor also has to pay the fees for the funds that constitute the larger FOF.

A VC FOF specifically invests in multiple venture capital funds. These venture capital funds then invest in local startups, entrepreneurs, and small businesses investment. FOFs diversify investors’ portfolios by ensuring investment in a wide variety of companies. Many venture capital funds make up VC FOFs, so their success depends on what investments the constituent VC funds make. In the private sector, the advertised appeal of VC FOFs is diversification, early liquidity, and enhanced fund returns.

FOFs can also exist through firms that typically invest in mature companies and buy all of each company’s equity, known as “Buyout FOFs.” The Chicago Booth Review claims that VC FOFs offer more diversification than Buyout FOFs, with an average of 7 more individual funds in each VC FOF. The research also indicates that VC FOFs are “more likely, through fund selection and/or access, to overcome their additional layer of fees” than buyout FOFs. This suggests that VC FOFs may bring investors higher value than buyout FOFs.

Impact on Cities

The trend towards creating VC FOFs to boost local innovation began about a decade ago. In 2008, Michigan created the Renaissance Venture Capital Fund. The premise behind the fund was simple: “Venture capital is important for economic growth and [Michigan is] underserved in the amount of venture capital available to fund exciting new ideas and technologies.” By investing specifically in VC funds that are active in Michigan, the Renaissance VC Fund provides the necessary capital for Michigan startups to grow and thrive.

Currently, the fund claims to receive a 21:1 return on every dollar they invest. With this success, they have grown; the fund has offices in both Ann Arbor and Detroit. Figure 1 shows the spike in investment and deals following the introduction of the Renaissance Fund. However, investment and deals seemed to have tapered off in recent years. Nonetheless, the new plateau does seem to be slightly higher than the average values before the fund was introduced.

Figure 1: Michigan saw large increases in investment in 2010 and 2011. Deals then peaked in 2013. Michigan introduced the Renaissance Fund in 2008.

In 2012, Cincinnati created a fund modeled on Michigan’s Renaissance Fund. Cincinnati-based corporations, like Kroger and Proctor & Gamble, created the Cintrifuse Early Stage Capital Fund I, LLC, which exclusively makes seed and early-stage investments in local startups.

According to Cintrifuse, the fund has resulted in a net increase of $24 million in value to the city. Figure 2 shows the spike in deals in both 2012 and 2014. Investment also peaked in 2014, relatively soon after the fund’s introduction. Nonetheless, the introduction of this program seemed to have no noticeable impact on Cincinnati’s overall GDP in 2012 and afterwards. The number of deals and amount invested have also declined substantially since 2014.

Figure 2: Cincinnati’s VC deals spiked in 2012 and 2014. The city created Centrifuse in 2012.

What Will This Mean for Houston?

VC Fund of Funds seem to carry benefits for both investors and local VC/startup culture. However, no plan to boost growth is a guaranteed success. Michigan and Cincinnati have demonstrated that it is difficult to maintain momentum with these funds. These cities’ experiences teach us that the fund needs to place a sustained emphasis on providing capital to the local region. McNair Center research indicates there are about 50 VC firms in Houston. This means that there are firms for which the FOF can provide capital. These VC firms can then disburse funds to local businesses.

On the other side of the equation, Houston will need local entrepreneurs and startups in which VC can invest. According to McNair Center research, there are approximately 20 startups active within the 610 loop. However, looking outside the loop to the greater Houston area, there is an abundance of startups. Nonetheless, the industries in which these startups focus may not be as desirable for investors as others. Houston’s startups do not tend to focus on one specific industry, although medicine and energy are popular. Since tech is one of the most desirable fields for investment right now, Houston’s tech startup scene may need to develop further if a VC FOF is to succeed.

Both sides of this equation need to be present in order for VC FOF to successfully boost the city’s innovation scene. If this is the case, there is hope that a VC FOF could provide a welcome boost to Houston’s ecosystem.

Tags Ann Arbor, CentriFuse, Cincinnati, Detroit, Ecosystem, Entrepreneurship, fund of funds, Houston, Houston Exponential, Investment, michigan, renaissance fund, Venture Capital

Accelerators McNair Center Startup Ecosystems

Social Capital Wins over Financial and Human Capital

Post author By Diana Carranza
Post date July 24, 2017
No Comments on Social Capital Wins over Financial and Human Capital

Entrepreneurship can spur economic growth and job creation. As a result, state and local governments are seeking ways to establish entrepreneurial ecosystems. One way to strengthen an ecosystem is to increase its social capital. Social capital is the networks of relationships among people who work in a particular field.

Lack of social capital is among the top reasons that nine out of ten startups fail. Money and skills are not enough for success in entrepreneurship. Aspiring entrepreneurs also need social capital, which along with financial and human capital, is essential to grow a business.

Human, Financial and Social Capital

It is useful to differentiate between human, financial and social capital. Human capital comprises the knowledge and skill sets that enable people to successfully create new enterprises (Davidsson and Honig 2003; Snell and Dean 1992). Financial capital is the funding needed to get a business off the ground, sustain growth and develop operations.

Human capital is further classified into general and specific capital. General capital is associated with education, which provides the knowledge and the skills to solve problems. Specific human capital refers to the know-how for entrepreneurial activities, which has few applications outside of this context (Becker 1975; Gimeno et al. 1997). An example of specific human capital is the previous startup experience demonstrated by serial entrepreneurs.

Financial capital is key for early-stage startups to fund their ventures. Personal funding, debt, equity, crowdfunding and grants are among the funding sources available for entrepreneurs.

In entrepreneurship, social capital refers to all the interpersonal and interorganizational relationships through which entrepreneurs have access to the resources needed to discover and exploit business opportunities and succeed (Davidsson and Honig 2003; Wiklund and Shepherd 2008).

Social capital is, in simple terms, equivalent to individual and community networks. Networks can have strong or weak ties. Strong ties occur between people or firms with a family, working or professional history. Through these ties, people tend to develop high levels of trust, and therefore, are willing to share more detailed information and are more apt to collaborate. Weak ties occur between people or firms working within different contexts or economic clusters where contact is sporadic. These ties provide access to new information and new contacts outside of existing networks.

Figure 1 illustrates the relationship between the three kinds of capital.

Source: Patricia H. Thornton

Why Is Social Capital the Key to Entrepreneurship?

The obstacles entrepreneurs encountered due to a lack of knowledge or skill and a lack of funding can be solved through social capital. Networks connect entrepreneurs to the right people who will provide information, collaboration and partnerships as well as access to financial resources.

Entrepreneurs with higher social capital have greater chances of getting funding for their ventures.

Fried and Hisrich (1994) noted that since investors receive multiple funding requests, social connections play a significant role in determining the allocation of capital. The findings show investors tend to finance the entrepreneurs and ventures they have heard about as part of their network.

Based on a study of 202 venture capitalists in the priming phase, Shane and Cable (2002) observed that direct and indirect links between entrepreneurs and investors have a positive impact on the selection of projects financed. Shane and Stuart (2002) also noted that social capital of company founders represents an important endowment for early-stage organizations.

Social capital can also increase the human capital of a venture since the network can further advance innovation by merging ideas from different individuals. Investment in social relationships leads to the creation of socially embedded resources that can be mobilized by individuals (Lin 1999). Assuming that the social resources of entrepreneurs are more important than the possession of personal resources, social capital assists in achieving financial and human capital objectives that would be otherwise difficult to obtain (Lin 1999).

Social Capital in Nascent versus Mature Ecosystems

The genesis of startup communities is fueled by entrepreneurs’ individual attributes, their human capital. A high-impact startup can find traditional financing, such as personal funds, loans or investment by friends and family, yet social capital may remain as a challenge. Startups founded in regions with poor infrastructure lack the agglomeration needed to transition their ideas into successful companies.

In the absence of a cohesive startup network, incubators and accelerators can serve as a substitute for entrepreneurs from regions with less social capital. Local stakeholders who sponsor and support these programs have an interest in strengthening entrepreneurship in their communities.

The presence of accelerators or incubators can bring the community together as a destination for entrepreneurship and bolster local social capital. A study by the University of South Wales notes accelerators’ direct impact on entrepreneurial skills for the start-ups supported by accelerators and their positive indirect impact on the broader ecosystem. Acs (2001) recognized that entrepreneurship can be more challenging in underdeveloped areas, given their remoteness, which limits their access to skilled labor, technology, capital and networks. The alliances built by accelerators and incubators are the strongest assets in ensuring sustainability and building an ecosystem.

Cities with mature ecosystems reflect strong social capital, which plays a major role in fostering entrepreneurship. Kwon et al. (2013) sees a community’s social context as a public good. In high-social capital communities, entrepreneurs are able to take advantage of high levels of community trust and well-being, as well as more robust social networks. Individuals who feel support from cohesive communities will experiment with innovative ideas.

Conclusion

Social capital theory explains the value of networks as an integral part of a successful entrepreneurial ecosystem. Entrepreneurs need to increase social capital to increase funding and improve the human capital in their ventures.

As ecosystem actors come together to strengthen startup culture, communities should foster social capital through strong and weak ties. The Harvard Kennedy School’s Social Capital Building Toolkit is a valuable tool for understanding and creating social networks.

Tags Access to Capital, Capital, Early Stage, Economic Growth, Entrepreneurial Ecosystem, Entrepreneurs, Entrepreneurship, Financial Capital, Human Capital, Serial Entrepreneur, Social Capital, Startup

McNair Center Startup Ecosystems

Entrepreneurship for All: Washington D.C.

Post author By Diana Carranza
Post date June 29, 2017
No Comments on Entrepreneurship for All: Washington D.C.

Washington D.C.

Washington, D.C. is known for its politicians and bureaucrats, but it’s also where the top-20 U.S. government contractors are based. In recent decades, high-tech, high-growth entrepreneurship has been on the rise in the U.S. capital. Startup ventures, coupled with a diverse economy, largely fueled by the federal government, have led D.C. to emerge as a strong entrepreneurial ecosystem.

History of Entrepreneurship

The diversified needs of the federal government have led to a varied ecosystem. Feldman 2001 concludes that two unique conditions impacted the development of D.C.’s entrepreneurial culture: underemployed skilled labor caused by federal job cuts and the commercial exploitation of intellectual property rights from publicly funded research.

Changes in federal employment policy through the Civil Service Reform Act of 1978 led the federal government to outsource goods and services in an effort to reduce civil service jobs.

The Federal Technology Transfer Act of 1986 created the Cooperative Research and Development Agreements (CRADAs) as a mechanism whereby nonfederal entities can collaborate with federal laboratories on research and development projects. CRADAs aim to promote technological competitiveness and technology transfer to marketable products.

Biotech found a partner in the federal government through CRADAs. Proximity to federal labs has created an important biotechnology cluster attracting Merck and Pfizer among others, as well as startups MedImmune and Human Genome Sciences, later acquired by GlaxoSmithKline.

Other notable startups that emerged under the public-private sector collaboration include Stinger Ghaffarian Technologies, Inc. (SGT), who provides scientific and IT service solutions to a wide array of federal government agencies nationwide including NASA and the U.S. Department of Transportation.

Government outsourcing opportunities benefitted the Information and Communications Technology (ICT) industry. The earliest ITC entrepreneurs were government contractors, who began working on ARPANET, the predecessor of the internet.

When the federal government removed the commercial restriction on the use of internet in 1989, former contractors became tech startups with ample opportunities to grow their ventures.

Resources in D.C.

AOL is a prominent ICT company launched in the D.C. metropolitan area during the 1990s dot-com boom. AOL is also credited for shaping the region’s entrepreneurial ecosystem. Prior to its relocation to Manhattan, AOL funded Fishbowl Labs, a business incubator located at its Dulles campus. Fishbowl Labs provides resources to startups at no cost and a mentorship program through its employee network.

The company also invested in firms such as the D.C.-based tech hub incubator 1776. The incubator is modeled after 1871 in Chicago and the General Assembly incubator in New York. Notable companies currently working with 1776 include Babyscripts, Cowlar and MUrgency. 1776 organizes networking events for the government innovator community to promote the interconnectivity of startups and D.C.’s main consumer, the federal government.

Washington D.C. boasts four top universities in the immediate area with entrepreneurship programs: The Sustainable Entrepreneurship and Innovation Initiative at American University, Startup Hoyas at Georgetown University, Mason Innovation Lab at George Mason University and The Office of Entrepreneurship and Innovation at George Washington University.

Current D.C. Startups

Washington D.C.’s economy is stable and diverse. As of February 2017, the area had an unemployment rate of 2.5% and the gross product of the area was $471 billion in 2014, making it the sixth-largest U.S. metropolitan economy.

D.C.’s ecosystem has historically been linked to government agencies, but more recently, the startup community has had greater diversity. Notable startups out of D.C. include LivingSocial, iStrategyLabs and CoFoundersLab. Advertising company iStrategyLabs has created devices and advertising campaigns for 21 Fortune 500 companies. CoFoundersLab connects entrepreneurs via an online network.

The success of LivingSocial has invigorated the D.C. ecosystem with a new generation of startups. Borrowing Magnolia, a wedding dress rental business, Galley, a freshly prepared food delivery service, and online custom framing business, Framebridge, are among the ventures founded by LivingSocial alumni.

Venture Capital in Washington, D.C.

The D.C. startup scene is home to a number of influential venture capital firms that help invigorate the ecosystem. Venture Capital investment in D.C. has reached around $350 million in investment for years 2014 and 2016, with investment lower than $200 million in 2015.

According to a report from the Martin Prosperity Institute detailing worldwide VC investment in high-tech startups, D.C. is ranked eighth in the world with a total cumulative venture capital investment of $835 million until year 2012 (the most recent year these detailed data are available).

Data indicating the number of first-round deals in D.C. illustrate a stable ecosystem with an average of 36 first-round deals per year in the last five years.

One of the largest venture capital firms in the world, New Enterprise Associates (NEA), calls both D.C. and Silicon Valley home. In 2015, NEA’s fourteenth investment fund closed with $3.1 billion in investor capital, making it the largest venture capital fund ever raised. NEA invests in technology and health care companies around the world, but continues to support companies in D.C. such as online movie player SnagFilms and software producer Cvent.

A diverse portfolio of venture capital firms are settled in the ecosystem to guarantee funding sustainability. Fortify Ventures, an early stage technology investment fund, nurtures investors and entrepreneurs. Fortify has received $100,000 in funding from the D.C. mayor’s office. D.C. startup, Social Tables, recently raised $13 million in Series B funding from Fortify Ventures and other investors.

Other notable venture capital firms in the D.C. area include Groundwork VC, a fund for minority founders, New Atlantic Ventures, a firm that invests in early stage startups and NextGen Venture Partners, which transitioned from an angel network into a venture capital firm this year.

D.C. venture capital investment is strong, but compared to areas such as San Francisco, which posted over six billion dollars in venture capital investment, San Jose (approximately $4 billion) and Boston (approximately $3 billion), VC investment in D.C. still has room to grow.

Startup-Friendly Government Policy

Local government policy incentivizes companies to move to or remain in D.C. The District waives corporate income taxes for the first five years and provides new-hire wage reimbursements for startups. However, D.C.’s regulatory environment still implies high costs for obtaining business licenses and permits.

Washington’s venture capital firms, angel networks and private investors cannot compete with the extensive network and resources in established ecosystems like Silicon Valley or the Research Triangle in North Carolina. According to Dow Jones VentureSource, about 50% of all venture capital invested in the United States goes to companies in Silicon Valley.

Despite Silicon Valley’s dominance, D.C.’s location, culture and resources position it as a strong ecosystem. D.C. will continue to take advantage of the resources and opportunities presented by the federal government.

Accelerators McNair Center

MassChallenge: Connecting Startups and Big Business

Post author By Diana Carranza
Post date June 23, 2017
No Comments on MassChallenge: Connecting Startups and Big Business

MassChallenge was located at One Marina Park Drive until 2014.

Corporations and startups are moving toward early stage interactions. MassChallenge, a highly successful nonprofit accelerator, has been connecting corporations and startups since its 2010 launch in Boston. MC has several US and international locations, which accelerated 372 startups in 2016.

MC delivers positive results and has been listed among the Best Startup Accelerators by the Seed Accelerator Rankings Project, led by Baker Institute Rice faculty scholar Yael Hochberg. There are over 1,000 MC alumni, who have collectively raised more than $1.8B in outside funding, generated $700M in revenue and created over 60,000 jobs. According to a 2016 MIT study, MC startups are 2.5 times more likely than non-MC startups to hire at least 15 employees and three times more likely to raise $500,000 in funding.

With seven years of history, notable MC alumni includes Ginkgo Bioworks, which designs custom microbes to produce chemicals, ingredients and industrial enzymes. As a startup, Gingko Bioworks raised $154M in funding and signed a deal for 700 million base pairs of designed DNA — the largest such agreement ever made — with Twist Bioscience. Other remarkable graduates of the program include Ksplice, Turo, Sproxil and LiquiGlide.

An Attractive Alternative for Startups

MC is similar to other startup institutions such as Techstars and Y-Combinator. However, the nonprofit differentiates itself by not taking equity. Entrants to the accelerator must be early stage startups, defined as companies with no more than $500K of investment and $1M in annual revenue. As part of the four-month program, selected startups receive mentoring, co-working space, access to a network of corporate partners, tailored workshops and the chance to win a portion of $2M in zero-equity funding. Additional prizes are provided by partners such as The Center for the Advancement of Science in Space (CASIS) and Microsoft’s New England Research and Development Center.

For entrepreneurs in regions with mature ecosystems like Silicon Valley and Boston, MC is one option among an array of accelerators and informal networks. This density of resources is called agglomeration, a geographic concentration of interconnected entities increases interactions and the productivity. The MIT study suggests MC acts as a complement to the prior advantages of startups in established ecosystems by providing key resources and access to social capital and also found evidence that startups founded in regions with higher access to early stage investors had on average higher quality ideas, but that their chances of success were not higher conditional on the quality of their idea.

For startups in nascent ecosystems the resources provided by MC can become the only option to pitch their ideas to investors and advance their company at no cost other than the time invested on the program. Of equal value is the endorsement received as a MC graduate inferring the quality of the startup venture.

A Model Built on Strategic Partnerships

As a nonprofit, MC depends on the support of a network of public, private and philanthropic partners, with the vast majority of their funding coming from corporations. Governments and philanthropic foundations fund MC with the goal to foster regional economic growth. Founders John Harthorne and Akhil Nigam, former consultants at Bain & Company, garnered early support from the Commonwealth of Massachusetts, successful entrepreneurs and large corporations such as Blackstone, Microsoft and the nonprofit Kauffman Foundation.

MC could have faced financial challenges by providing accelerator programs at no cost and with no equity commitment. However, MC was able to become a bridge between large companies’ need for innovation and startups’ need for capital. Large companies have the scale of resources, customer information and market experience, but may lag in innovation. Startups, on the other hand, lack the resources but innovate with sometimes disruptive and successful ventures, frequently taking incumbents by surprise (Airbnb, Uber).

MC serves as a channel between startups and established companies to meet the need for fast-paced innovation. Companies like Bühler and PTC partner with MC to source high-potential startups for the development of advanced technology. Companies can also source tailored programs or tracks for specific needs.

A study done jointly by MC and innovation firm Imaginatik looked at how startups and corporations interact in new collaborative ways. The research team surveyed 112 corporations and 233 startups from various industries. 82 percent of the corporations considered startup interactions important, and 23% stated that these interactions are “mission critical.” Startups have a high interest in working with corporations with 99% stating it is important for them to interact with potential corporate customers, marketing channels and strategic partners.

Expansion

MassChallenge was located at One Marina Park Drive until 2014.

MC communicates its impact and vision to donors by demonstrating the cost-effectiveness of alliances between startups and corporations. A solid accelerator program, global vision, robust network and a sustainable funding strategy have set up MC for success. As stated in the MC Impact Report 2016, the accelerator is committed to running 12 locations annually by 2020, including at least one on each populated continent.

Before establishing an MC accelerator, the metropolitan area is evaluated for the quality of its research universities, urban setting, level of entrepreneurship opportunity and investment capability. As government and private stakeholders partner, a sense of shared ownership becomes crucial to consolidating efforts. This engagement guarantees that the resulting ecosystems are seen as a shared legacy.

The next MC sites are yet to be announced. Currently in five locations with global impact, MC’s 2020 vision is on a path to become a tangible reality.

The author and editor would like to thank Tay Jacobe for assistance with researching and drafting this post.

McNair Center Startup Ecosystems

Mile-High Entrepreneurship

Post author By Diana Carranza
Post date June 14, 2017
No Comments on Mile-High Entrepreneurship

Boulder has long been considered Colorado’s startup hub, but Denver is emerging as a strong contender. Mentoring and venture capital support have helped Denver’s ecosystem expand rapidly so that it is well on its way to becoming self-sustaining.

Denver has garnered a reputation as one of the best places for high-tech, high-growth ventures.The total number of tech startups located in downtown Denver has increased by 13% in the last two years; 4% above the national average in new startup growth. Denver has collected accolades that ranging from the Best Place for Business and Careers by Forbes to the third Best Place in the Country to Launch a Startup according to Washington D.C.-based accelerator, 1776.

History

Colorado has a history of high-growth entrepreneurship ranging from telecommunications (Dish Cable) to restaurant chains (Chipotle and Quiznos). The state’s venture capital-backed startup activity began in the 1980’s when national venture funds such as Access Ventures, Vista Ventures, Sequel Ventures and Heritage Group invested in local Denver startups. By 2000, Denver was supporting a startup ecosystem, but successful companies left the state or were sold to out-of-state purchasers. VC funding collapsed after the tech bubble burst.

In 2006 Jared Polis, Brad Feld, David Cohen and David Brown established Boulder-based Techstars, which brought the nascent startup ecosystems of Fort Collins, Denver, Boulder and Colorado Springs together. Accepting only 1% of applicants, Techstars is extremely competitive. Graduates of this three-month program average approximately $1.8 million in outside financing. In exchange for 7-10% equity, Techstars provides $18,000 in seed funding, a $100,000 convertible debt and mentorship opportunities. Denver alumni include UsingMiles, FullContact, Revolar and MeetMindful.

Techstars is not the only catalyst for the entrepreneurial community in the region. Former Denver mayor and current Colorado Governor John Hickenlooper, himself an entrepreneur before entering politics, implemented policies that made supporting startups a central focus for economic recovery and growth.

Colorado’s Entrepreneur Friendly Policies

Colorado policymakers has made entrepreneurship a central focus. The state legislature has lowered tax rates and lifted regulatory burdens for the business community. Colorado taxes business at a flat rate of 4.63%, one of the lowest business income tax levels in the country.

Governor Hickenlooper has championed programs such as the Colorado Innovation Network (COIN), which works to connect the 29 Colorado research facilities with entrepreneurs. In 2014, the Colorado Impact Fund was launched, a public-private fund that estimates making 10-15 investments through 2020.

Home-Grown Resources

Since 2010, downtown Denver has added an average of almost 16,000 residents per year, resulting in a population increase of over 13% in the past five years. This remarkable growth has been accompanied with an increase in the number of homegrown startups. As a result, there is a significant number of resources available for Denver entrepreneurs.

Established in 2012, Denver Startup Week draws entrepreneurs from across the country. In 2016, Denver Startup Week attracted 12,500 people from across the country with 300 events, making it the biggest free entrepreneurial event in North America. Entrepreneurs participate in an elevator pitch competition and interact with VC fund representatives.

The Commons on Champa is a high-tech co-working space that brands itself as “Denver’s public campus for entrepreneurship.” Entrepreneurs have access to networking events, panels, workshop and onsite mentors.

The Rockies Venture Club (RVC) helps to bridge the gap between Denver entrepreneurs and investors. RVC is a Denver angel group that provides educational programs. In addition, RVC hosts events where entrepreneurs and investors can meet and make deals.

The University of Denver’s entrepreneurship initiative, Project X-ITE, brings a number of resources to students. Ranked as one of the top 30 entrepreneurial universities in the United States by Forbes, Project X-ITE is a cross-disciplinary initiative focused on the intersection of innovation, technology and entrepreneurship.

The second quarter of 2018 will mark the opening of Catalyst HTI, which will serve a dual role as incubator and accelerator. Catalyst HTI will bring together entrepreneurs in technology and health care to create state-of-the art incubator and accelerator in downtown Denver. Companies such as CirrusMD and Revolar have already committed to joining the community.

Entrepreneurship for Women

In 2013, Denver was named one of the best places for women to start a business as by Nerdwallet. There are several female-focused resources in the city. Denver’s female entrepreneurs have found support from startup accelerator program MergeLane, which specifically invests in female-led companies. Recently, the Commons on Champa also launched Women on the Rise, an initiative aimed to support and celebrate the success of female entrepreneurs.

Other notable resources include The Coterie, Denver’s first women co-working community, and Women Who Startup, which hosts monthly meetings. SheSays, an international trade organization based in the UK, launched in SheSaysDenver in 2014 and counts over 1,000 women as members. SheSaysDenver provides free mentoring and events to women working in technology and business.

Venture Capital

Overall, Denver VC investment is reflective of nationwide trends, with investment decreasing after the Great Recession, and recovering around 2010. Denver firms such as the Foundry Group, Grotech Ventures and Access Ventures are anchoring investment in the ecosystem.
Local VC received a significant increase in 2015 after Welltok raised a massive $45 million round of investment. VC investment has stabilized around $500 million in investments each year since 2014. However, the 2016 Colorado Startup Report notes that the total funding raised in 2016 was distributed across more than 129 different technology companies, indicating a greater distribution of capital. The Downtown Denver Startup Report indicates that in 2015 alone, more than 165 tech startups were founded in Denver in 2015.

Data indicating the number of first round deals in Denver illustrate a stable ecosystem with an average of around 50 first-round deals per year.

Looking to the Future

Denver entrepreneurs have noted that there is a significantly lower amount of early stage fundraising in the ecosystem. However, this is a reflection of a nationwide trend of cautious investing in early-stage investment.

Denver does have early stage VC investors, but in many cases, does rely on angel investors to supply funding. The University of Colorado’s Silicon Flatiron recommends the continued support of Colorado and Denver super-angel funds, also known as Micro-VCs, which are about $2-$10 million in size and specialize in early stage investing.

In the coming years, it is likely that Denver’s ecosystem will reach critical mass and consolidate as an attractive option for local and out-of-state entrepreneurs. With a strong and growing infrastructure for entrepreneurship, Denver’s startup growth and success is likely to continue.

Tags Accelerators, Co-Working, Denver, Economic Growth, Entrepreneurial Ecosystem, Entrepreneurs, Entrepreneurship, Government, Innovation, John Hickenlooper, Mentoring, Policy, Startup, Technology, Techstars, VC, Venture Capital, Women