I was talking with a few people at the last High Tech Happy Hour and the last Capital Entrepreneurs meeting about what makes a city startup friendly. We came up with a short list, but I’ve been thinking about it ever since. What makes a city startup friendly and how can cities that are not startup friendly make changes to become more startup friendly?
Startup friendly cities need to have a high density of smart people. Potential founders of startups need other smart people who could be potential partners, contractors or employees. Most cities that have a high density of smart people happen to be cities with large universities that attract a huge supply of smart people each year. It helps that these cities have universities because it’s even better to have young smart people, rather than simply smart people. Young people can afford to take bigger risks and are more willing to work longer hours for little or no pay than older people who may already have families, mortgages or other obligations.
Another helpful characteristic is low cost of living. If founders can live cheaply and find cheap office space, it makes it much easier for a startup to get off the ground. Additionally, having a low cost of living allows startups to stretch their investment dollars much further. Employees, rent and just about everything else is cheaper. I talked to one Madison-based founder who has successfully sold one company and is on his second startup who believes that Madison’s low cost of living is one of the most important reasons why his company succeeded and his competitors did not.
Access to affordable office space in a business incubator is another key characteristic of startup friendly cities. Business incubators are an important asset for startups, especially if they are affordable. Unfortunately, many incubators I’ve seen end up charging close to market rates. Incubators are an important step for startups because they are usually the first move from working out of the founder’s bedroom. They also provide camaraderie, connections and bring startups out of isolation because the rest of the people in your office are also running startups. It’s much better for a startup to move into an affordable business incubator with other startups, rather than move into an affordable office space next to a lawyer, construction contracting company and a non-profit.
It is extremely important for startups to interact in a community of other startups. Having other entrepreneurs around, especially entrepreneurs who have been successful in the past, is important because founders can ask for advice when they have problems. A mentor program like MERLIN Mentors is very important because it matches up experienced people who have been successful before with inexperienced startup founders. These mentor programs not only build a community of startups, but they provide specific feedback to startups and help them overcome challenges that they might not if they were left on their own.
Another important aspect of an entrepreneur community is free networking events like the High Tech Happy Hour and Capital Entrepreneurs. Events like the High Tech Happy Hour bring smart people together who are not necessarily focused on entrepreneurship and startups, but are fertile ground for finding employees. Local, free entrepreneurship groups like Capital Entrepreneurs offer founders of startups a place to meet others who are doing what they are doing. It also creates a community and gives founders of startups some semblance of co-workers. Starting a startup can be lonely if you do not get out and interact with others who are facing the same challenges and dilemmas that you are.
These free networking events provide a way for experienced entrepreneurs to mingle with people who are just getting started. Experienced entrepreneurs set an example and show everyone in the city that starting a company is viable. They can also provide advice, but simply having experienced, successful entrepreneurs in your city makes your city startup friendly. Cities like Boston, San Francisco and Seattle have these networks. Others like Madison and Boulder are just getting started, but are on the right track.
These experienced entrepreneurs can introduce inexperienced founders to professional service providers like lawyers and accountants who are willing to help entrepreneurs. It also helps if your city cultivates a network of experienced, flexible professional service providers. These service providers should be willing to take equity, give discounts or defer payments into the future for startups that they think are going to be successful. It is extremely helpful if startups can still get top notch professional services, without breaking the bank during the company’s research stage.
These professional service providers can help startups gain access to capital that they need to fund their business. Ideally, a startup friendly city will have VCs, angels and other rich people who are interested in investing in startups, but not all cities must have all three. A strong network of professional service providers who work with entrepreneurs can make introductions to rich people who are willing to invest. Some startup friendly cities can be heavy on angel and rich individuals, but light on VCs. Another way cities can help entrepreneurs is by advocating for small business loans and other alternative ways of funding.
Startup friendly cities generally have support programs in place for entrepreneurs. They tend to have low taxes. It is much easier to start a startup in a city that does not have 10% sales tax, like the city of Chicago. The state of Wisconsin provides a 25% tax credit to angel investors who invest in certified Wisconsin startups. Wisconsin also offers low interest loans that are forgiven if the startup fails. Both of these programs help entrepreneurs succeed. Other states have implemented programs that fund early stage startups.
Finally, many people who start statups generally like living in cities. They like walking to work and living in tolerant environments. They like to be able to meet in coffee shops, go to interesting restaurants and enjoy life with their peers. It’s best to have good weather. Low crime and good schools are also helpful. Overall, creating a city with high quality of life keeps the three most important ingredients, experienced entrepreneurs, rich people and smart, young people, in one place.
Cities can begin to implement policies that help foster entrepreneurship. Cities can start by creating a business incubator for startups that offers offices (with windows) at 50% discounts. They can start to create mentor programs like MERLIN and create entrepreneur networking groups like Capital Entrepreneurs. Service providers can start offering discounts or equity for service deals. Once one service provider has success offering this deal, it quickly becomes the industry standard. I’m not advocating that government do all of this. People who want to see their cities become more friendly to startups have to do some of the work themselves.
Government does have a place. It can offer incentives for startups to move to their cities. It can lower taxes or offer government programs that provide easier access to capital. It could create a new business incubator and it could help create a community of entrepreneurs by publicizing entrepreneur success stories or the local startup community. Government could help make cities more startup friendly simply by being more friendly to startups themselves.
Characteristics of Startup Friendly Cities
Figure out if your city is startup friendly. Rate your city on a scale of 0-2 for each characteristic and score total the score at the end. 0 means that your city does not do it at all, 2 means your city does is very well.
- Access to capital
- High concentration of smart people
- Low cost of living
- High concentration of rich people
- Network of experienced entrepreneurs
- Mentor programs
- Low cost startup incubator
- Low taxes
- Governemnt support
- Flexible professional service providors
- Free networking events
- High quality of life
- Tolerant, vibrant, walkable cities
- Large universities
- Culture of entrepreneurship
- Educated workforce
- Good weather
- High concentration of science and technology workers
- Direct national flights
- Entrepreneurship advocacy groups
I would say Madison, WI gets a score of 23/40. Milwaukee gets a 13/40. San Francisco gets 36/40.
How startup friendly is your city? Do you agree with my list? Do you have any characteristics to add?