Don't start up in the suburbs: Why cities matter for startup success

June 28, 2014


When people talk about tech startups, they almost always mention Silicon Valley and California. Boston and New York also come up in conversation.


Technology, however, seems like it should make cities obsolete. Every day it seems like some new app has trivialized yet another aspect of physical proximity. At this point, remote working tools are not even new technologies -- so why does new business continue to concentrate not just in cities, but in the same cities?


It’s true that these areas are startup “superhubs” as this infographic indicates. It’s also true that most startup activity is focused in and around cities that are attracting budding entrepreneurs and established startups with incentives targeted to small businesses.


But it’s not only market incentives that are bringing startups to cities -- cities alone are home to vast numbers of the most vital resource: people.


Leading Harvard economist Ed Glaeser says that proximity fosters creativity, ideas, and the growth of human capital by encouraging nonmarket interactions, or instances when people influence one another without exchanging money. Basically, cities make us better people and workers just because our ideas and skills spill over even when we aren’t technically working. The professional and personal connections that cities help us build are crucial for startups especially, which often rely on leveraging networks like these to test products and get a foot in the door with investors.


Even tech startups rely on face-to-face networks and proximity. Although Silicon Valley is a hub of technology innovation that could theoretically allow workers to work remotely and spread out, instead these entrepreneurs and innovators are centrally located -- even when it means absurdly high housing costs. The phenomenon of “hacker hostels,” where brilliant young scientists and programmers hoping to break into the Silicon Valley tech industry can apply to live in high-density barracks-like spaces, is also an example of people valuing physical closeness and the resulting environment of like-minded smart and motivated individuals. 1871 in Chicago and other co-working spaces are a yet another testament to the value of in-person communication and collaboration, this time outside of the Bay Area.


It’s not news that cities are good for startups; so why should the theory matter? Better understanding the way that cities alter and elevate the business landscape can help startups make good choices.


Not just any city will do, for example. Only cities with highly educated populations benefit from these effects, which is one of the reasons that California cities, New York, and Boston reappear on lists of top startup cities -- they are also home to many universities. It also explains why Boulder, Colorado (home of UC Boulder) has the highest number of startups per capita in the United States, and why Blacksburg, Virginia (home to Virginia Tech) considers itself a great place for startups.


The product itself also matters for taking advantage of local talent and inspiring investment. Certain products will have an easier time finding interested investors by location. Getting funding for a startup is a lot like getting a job. Want to work in finance? Go to New York. Interested in oil or energy? Houston may be your best bet, unless you are into solar power -- and then you might want to try Phoenix. Revolutionizing entertainment? LA might be the place to go. These cities will likely have other businesses working on similar products or ideas, which does translate to more competition, but also more targeted resources, better connections, more funding opportunities, and more chances to really test your own product or idea against the best current solutions out there.


If you are thinking about setting up shop hours out of the way, think twice. Reconsider the less tangible benefits of an urban workplace. Even in the digital age, it’s all about location, location, location.


But what about startups in the rest of the country? Stay tuned for the second part in the series, about resources that smaller towns and cities have to offer new businesses. This post is the first part of a research project about startups and location being conducted by Hot Emu.


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