Renewed Optimism As the Start-Up Geography Divide Narrows

Renewed Optimism As the Start-Up Geography Divide Narrows
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Over the past several years, even as the national fervor over startups has continued unabated, there has been a string of negative findings about the state of American entrepreneurship. The Economic Innovation Group, among others, chronicled a long-term decline in business creation as well as ever-increasing concentration in where businesses are being created. Only five metro areas, they found, accounted for half of the nation’s increase in new businesses between 2010 and 2014. Other researchers have found similar declines across several indicators of economic dynamism—fewer and fewer Americans, for example, work for new and young firms.

Happily, a recent report by Michael Mandel at the Progressive Policy Institute (PPI) highlighted a potential reversal of these trends. (Full disclosure: I have a PPI affiliation.)

Using government data, Mandel charts a “revival of economic dynamism” since 2015 that is fairly widespread: by last year, the “growth gap” between tech hubs in Silicon Valley, New York, Boston, Austin had disappeared.

Cleverly, Mandel also used online job postings to devise a Metro Startup Economy Index to compare startup activity across the country. While the tech hubs dominate this index, Mandel finds encouraging signs of startup activity in what he calls the “Next in Tech” metros. These include Atlanta, Phoenix, and New Orleans. Indeed, in early May, thousands of people descended on New Orleans for Collision, which bills itself as “America’s fastest growing tech conference.”

These are certainly heartening findings, and they align with several other efforts to highlight startup activity in places not normally known as startup hubs. The most notable of these is the Rise of the Rest campaign and bus tours by AOL founder Steve Case.

It is not yet clear, however, whether the benefits of startup activity match the enthusiasm—or when they might. As Mandel points out, areas with higher levels of startup activity enjoy faster job growth. But, many of the economic rewards from startups may actually be flowing in a different pattern—one that is more in line with what Richard Florida calls “winner-take-all urbanism” in his new book.

In the most recent Global Startup Ecosystem Report from Startup Genome, we found that global concentration of startup ecosystem value remains hugely skewed. Across the 55 areas that we analyzed, 11 regions (20 percent) account for 78 percent of total ecosystem value. (We define ecosystem value as the sum of a lagging indicator, exit value, and leading indicator, startup valuation.)

Concentration varies by region. Among the 15 U.S. ecosystems we analyzed, Silicon Valley accounted for 56 percent of total ecosystem value. By contrast, Atlanta accounted for only 1.8 percent of ecosystem value in America; Phoenix, 0.4 percent. Ecosystem value is more evenly distributed in Europe (see chart).

 

Why does ecosystem value matter? Many tech startups (including those that are large private companies but still referred to as startups) are creating jobs in other parts of the country, as Mandel and others point out. Doesn’t this dispersed job creation matter just as much, or more, than monetary values that can change rapidly? As the founders of many former “unicorn” companies would attest, startup valuation (part of our ecosystem value measure) can be a fickle number.

Yet the skew in ecosystem value demonstrates that the lion’s share of rewards still flow to startups’ owners and investors. More precisely, acquisition remains a far more likely outcome for startups today than organic growth and public offering. In any given year, according to data from Pitchbook and the National Venture Capital Association, around three-quarters of venture-backed exits are acquisitions.

In the event of acquisition, who will capture more economic value, the executives and investors or the call center workers located in another city? Acquisition, moreover, often means that the founders of a startup will move to one of the existing tech hubs, especially Silicon Valley.

Ideally, of course, if a large tech company in Silicon Valley acquires a startup in Phoenix or New Orleans, some of the resulting wealth will get “recycled” through that region’s startup ecosystem. The founders (if they don’t move with the acquisition) might start another company, or become angel investors in other startups. Any local investors who had backed the acquired startup may also enjoy a windfall.

The record, unfortunately, is uneven. In some places, the ideal scenario does in fact play out. My former colleague Yasuyuki Motoyama found that, after Montana tech company RightNow Technologies was acquired by Oracle in 2012, former employees used the cash to start more than a dozen new companies in the region. Elsewhere, however, startup acquisitions have led to an exodus of talent and little recycling of money. This is what has happened in Atlanta, according to research done by Dan Breznitz at the University of Toronto, and may help explain why Atlanta’s startup ecosystem hasn’t yet taken off economically.

If we want to ensure that the continuing mania for startups leads to benefits for everyone, not just the usual suspects, cities and regions need to take more proactive steps. Early-stage startup activity is exciting: what mayor or civic booster doesn’t love the enthusiasm of pitch competitions and the buzz of co-working spaces? Cities all over the United States have generally done a good job of instigating these initial steps in the development of startup ecosystems.

Now, most places face a new task: they must figure out how to move past the “rah-rah” phase and into the harder work of helping foster startups that will grow and endure.

Dane Stangler is Head of Policy at Startup Genome, Director of Policy Innovation at the Progressive Policy Institute, and senior advisor at the Global Entrepreneurship Network.  

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