The Winners and Losers of America’s Startup Economy | Tech Industry

As Silicon Valley and the San Francisco Bay Area in general have become increasingly expensive for both companies and talented people, some commentators have argued that high-tech startups are spreading to smaller cities and metropolitan areas, many of which are in the industrial heartland. The emergence of startup hubs outside of cities that are already well known for entrepreneurship even has a catch-phrase—the “rise of the rest.” In the latest of several high-profile bus trips led by AOL founder Steve Case (and now author J.D. Vance), a group of venture capitalists, entrepreneurs, and investors set out in May to find the next generation of startups in places like Detroit, Pittsburgh, Cincinnati, and Nashville.

But to what degree is the rise of the rest actually occurring? Is America seeing a significant shift in its geography of startups toward newer hubs?

New research by my colleague and collaborator Ian Hathaway of the Center for American Entrepreneurship, a Washington think tank, takes a detailed look at whether the geography of tech startups and startup hubs in America is changing. To find out, Hathaway used data from PitchBook (a venture-capital and private-equity database) to examine the geographic distribution of early-stage VC investments or “first financings”—the type most associated with high-growth entrepreneurial startup companies.

America’s startups remain highly concentrated in a small number of hubs. In 2016–17, the five leading hubs—San Francisco, San Jose or Silicon Valley, New York, Los Angeles, and Boston—accounted for over half of all first financings. Meanwhile, the top 10—those five, plus Seattle, Chicago, San Diego, Austin, and Washington, D.C.—accounted for nearly 70 percent. And the concentration of first financings among these leading hubs has risen since 2009. However, within this leading group, L.A., Chicago, and San Diego accounted for the biggest relative gains over time.

Metropolitan Areas Where First Financings Are Concentrating

There is some evidence of the rise of the rest outside this group of leading hubs. The lion’s share of them are not Rust Belt cities like Detroit or Cleveland, but rather college towns such as Boulder (home to the University of Colorado), Lexington (University of Kentucky), Durham-Chapel Hill (Duke and the University of North Carolina), Gainesville (University of Florida), Madison (University of Wisconsin–Madison), Raleigh (North Carolina State), and Ann Arbor (University of Michigan).

In the Midwest, Columbus (home to Ohio State University) also makes the list, as well as Indianapolis, another post-industrial economy, and Pittsburgh (home to Carnegie Mellon and the University of Pittsburgh). Other rising hubs include Denver, Charlotte, and Houston in the Sunbelt, but also Philadelphia (home to the University of Pennsylvania and Drexel) and Baltimore (Johns Hopkins) on the East Coast’s Acela corridor.  

Metropolitan Areas Where First Financings Are (Relatively) Rising

In fact, a number of Rust Belt and older industrial cities—Detroit, Cleveland, Cincinnati, Milwaukee, Allentown, Albany, Grand Rapids, and Buffalo—have seen declines in first financings, as have more industrial and resource-dependent Sunbelt cities like Tulsa, Oklahoma City, and Memphis.

Metropolitan Areas Where First Financings Are Reversing

So what are we to make of the rise of the rest?

Hathaway’s data suggests something of a mixed bag. Startup financing is still massively concentrated, but some smaller places, mainly college towns and cities like Pittsburgh, are seeing some growth. A decade and a half ago, I called Pittsburgh my “base case,” suggesting that it was the one city in the Rust Belt region with the university and place-based assets that could potentially navigate the transition to the tech-based knowledge economy. Hathaway’s data bear this out.

Pittsburgh appears to be the one older industrial center that is maybe growing into a startup hub, along with the post-industrial cities of Columbus and Indianapolis and, of course, college towns. Hathaway stresses that it takes a long time for new startup hubs to develop, and city leaders and policy-makers need to be realistic about the scope, pace, and inevitability of the rise of the rest.

The most the disturbing finding in the report is the substantial overall decline in startup financings in recent years. After growing by more than 20 percent per year from 2009 to 2014, first-round financings declined to negative 10 percent per year from 2014 to 2017. This contraction has been “geographically widespread,” according to the report. While nearly half all metros saw an increase in first financings from 2009 to 2014, this share dropped to just 16 percent from 2014 to 2017. During the latter period, more than 40 percent of metros saw a decline in first financings, compared to just 12 percent in the earlier years.

This is in line with a growing body of research, some of it by Hathaway, that points to a decline in startups and entrepreneurship in the United States. What we see here mainly captures the situation before moves by President Trump and his administration to restrict immigration and attack science—moves that many see as damaging the national climate for technology and talent. As I noted in my post earlier this week, it may be that the real rise of the rest is occurring outside the United States.