High tech high growth Archives

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.

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.