Cover Story

The best cities in America for starting and growing a business

In this Internet, wireless, telecommuting world, shouldn't you be able to start a company anywhere? Don't entrepreneurs found companies to take control of their lives -- which means being free to live and work anywhere they choose? In the end, does location really matter to a growing business? You bet it does. With a start-up or a growth company, success depends on the CEO's ability to marshal resources -- and a lot of key resources are available only if you're in the right place. Universities, a skilled workforce, good access to airports, inexpensive real estate, a local culture and infrastructure that support new businesses -- those all help form fertile ground for young companies. Are you a manufacturer? You have to be near reliable supplies and have access to good shipping systems. Starting a high-tech company? You'll need an area with high-speed Internet access and a stable electrical grid. How do you find the right place for your business? Start with our rankings of the best American cities, large and small, in which to start and grow a business.

Intense, compact, wiry, Peter Metcalf is a natural-born climber. He's one of those guys that look the part: a real mountain rock jock, right at home on the faces of cliffs so sheer, they would have most of us gibbering with vertigo. When he was just 17, Metcalf set a record as the youngest person ever to ascend the Kain Face of Mount Robson, the highest mountain in the Canadian Rockies. He's 44 now, and climbing is still his life. It's also his business. Metcalf is the CEO of Black Diamond Equipment Ltd., which makes gear for hard-core rock climbers and back-country skiers.

Metcalf started Black Diamond in 1989, leading a group that bought the assets of a bankrupt equipment company that he had worked for since 1982. That company was in Ventura, Calif., a beachside city halfway between Los Angeles and Santa Barbara -- not too close to any mountains. If Metcalf wanted to run out on his lunch hour and test some new climbing equipment, the closest he could get to the genuine article was the support structure of a highway overpass. Second choice was a 10-foot seawall at the beach. Real mountains were four hours away through killer traffic.

"If we were a company designing innovative surfboards, maybe being on the beach in Ventura would have made a lot of sense," says Metcalf. But he couldn't have cared less about surfboards. So eight years ago Metcalf moved his life and his company to Salt Lake City (the #2 large metro area for starting and growing a company -- see page below). Now Black Diamond's headquarters is nestled under a vista of Utah's Wasatch Mountains. Whenever Metcalf feels like checking out some new gear or taking a visiting manufacturer's rep for a climb, he can drive 20 minutes from the office to Little Cottonwood Canyon. Even closer is Mill Creek Canyon, where he sometimes spends his lunch hour on cross-country skis. Once in a while, he starts his day with the "Dawn Patrol," a bunch of his employees who like to "get up at 2 a.m., drink massive amounts of espresso, and ski one of the peaks near Black Diamond." There's plenty of time to get in a few runs and still be at work by 9, bleary-eyed and elated.

You can do those things in Utah. You can't do them in Ventura. The move was good for Metcalf and good for the business. Being located near the mountains puts Metcalf's company in touch with its customer base, facilitates product design and testing, and goes a long way toward aiding recruitment and retention. In Utah it's a lot easier to find employees who are passionate, knowledgeable climbers and skiers -- not the people you'd find living by the beach.

The mountains are crucial to Black Diamond's identity. You could even get a little spiritual about it and say that being close to the rocks has been good for the company's soul, not to mention its numbers. From 48 employees and $7 million in revenues in 1991, Black Diamond has grown to 250 employees and $30 million in revenues, says Metcalf. So when it comes to the question, Does location matter? for Metcalf and Black Diamond the answer is definitely yes.

But does location matter for every growing business? In this Internet-everywhere, global-community world, where you can do all kinds of business from anywhere on the planet, does location matter at all?

The answer is, it depends. Some companies really can operate anywhere the founder hangs his or her hat. But location is often more important than you might think, according to consultant David Birch, founder of Cognetics Inc., in Cambridge, Mass., and creator of the report from which our city rankings are drawn. Birch has been tracking fast-growth businesses for 17 years. He says that even if location doesn't matter when you first start a business, it probably will later. "Up to a point, you can choose to be anywhere you want to be, anywhere you'd like to live," he says. "But if you grow and develop a client base all over the country or the world, you start to pay a very heavy price for that choice. A start-up will never become a Fortune 500 company unless it can reach its customers and ship products efficiently. So there comes a time, from a business point of view, at which location cuts in and makes a big difference."

How much of a difference? To explore that question, we took a hard look at six companies in five of the top-ranked metro areas for starting and growing a business, as well as two companies in areas that are -- according to Birch -- not as fertile ground for growth businesses: New York (#47 among the large metro areas) and Detroit (#34).

The truth is, successful businesses are founded in all kinds of locations, including communities that seem to provide little support for entrepreneurs. It's often a real advantage to be located in an environment that encourages growth. Yet the choice of place for a new business is often casual and usually starts out as a personal decision. "If you're an entrepreneur and you can live anywhere you want to live, you don't pick a place that's horrible," says Todd Ballenger of $5-million Capital Savings, based in Durham, N.C. (Raleigh-Durham is #4 among the large metro areas.)

But there may eventually come a time when business considerations overtake personal ones. It may be when growth slows; when the company can't quite get to the next level; when the business, or part of it, needs to be somewhere else.

Take, for example, a computer reseller, the kind of business that does everything over the phone and the Internet. Could be anywhere, right? Well, yes and no. When CEO Eric Crown founded computer reseller Insight Enterprises (now a $1-billion public company), in 1986, he started out in Tempe, near Phoenix (the #1 large metro area). Why Tempe? Because he lived there, because he'd gone to college at Arizona State University, because he liked it. And because he didn't think location mattered much. "Our business is telesales," he notes. "We could exist anywhere."

So he says. Yet he and his brother, Tim, who is the company's president, have moved big chunks of the company to distant cities. Distribution went to Indianapolis (the #5 large metro area), a huge shipping hub from which Insight can truck shipments to 60% of the United States in less than a day. And some of Insight's telesales operations have been moved to Montreal in order to reach customers in eastern time zones.

Eric Crown lucked out with his choice to put Insight's headquarters in his hometown of Phoenix. It's turned out to be an excellent environment for his company, being flush with business resources, including cheap real estate and a deep pool of sales talent. But as the company grew, it made sense to establish some operations in locations thousands of miles from company headquarters. Crown wouldn't accept the inconvenience of running remote operations if location didn't matter to his company or its future.

In Search of Brains
At Insight Enterprises' headquarters, in Tempe, the telesales force works the phones in giant rooms called "stadiums," although they're more like high school gyms. Salespeople's cubicles are banked up against the walls like bleachers. The air hums with the sound of pitches being made to the tens of thousands of companies that buy computers from Insight. There's even a basketball hoop, so that the salespeople can let off steam or celebrate. There are no windows, just posters urging on the troops, pushing them to reach the company's newest sales goals. These are rooms totally engineered to incubate the hard-driving offense that generates huge numbers of sales.

Insight used to have a different approach to sales. It spent $1 million a month on advertising to consumers. The company's telemarketers simply took orders over the phone. In 1994, Insight weaned itself away from the consumer market, refocusing on business-to-business selling and switching to an outbound-sales model. The switch worked, but it has given the company a ravenous appetite for high-caliber sales talent -- smart, gregarious, articulate people who can master Insight's line of more than 100,000 products. The company has had as many as 200 new sales hires stuffed into its three-week-training pipeline at a time.

Finding great salespeople is never easy, says Eric Crown. But the Phoenix metropolitan area is the best place that he knows to look in. It doesn't hurt that the city has become a telemarketing capital of sorts, creating an experienced labor pool to draw on. Just as important, the city seems to attract the people Crown is looking for. Each year 61,000 new residents move into Greater Phoenix, filling the desert with spanking-new houses and broad freeways. These modern-day pioneers often exhibit the kind of go-getter attitude that Crown wants in his salespeople. "It's a very qualified, competent, and open-to-learning labor pool," says Rick Weddle, president of the Greater Phoenix Economic Council.

"I have looked at other cities when I have considered opening new call centers, and I cannot find a better place" in terms of talent, says Crown. And the numbers back him up. Labor costs, on average, are lower in Phoenix than in California. (See "Relative Wages," below.) Yet Phoenix's population is larger than other areas with relatively low labor costs, such as Raleigh-Durham and Salt Lake City. (See "Size Matters," below.)

One problem, though, is Phoenix's time zone. When you sell to the East Coast from Phoenix, your people have to come to work at 5 in the morning to start making calls. It's tough to generate a lot of enthusiasm at the crack of dawn. To ease the strain, Crown opened the Montreal call center. "Montreal had a large labor pool with high unemployment," says Crown. "I can pay wages lower than in the United States" -- about 20% lower, he claims -- "and get a more educated workforce."

In these days of tight labor markets, ease of recruiting has become a significant factor in choosing a business location. It was the number one reason CEO Alan Dabbiere chose Atlanta (the #3 large metro area) as the new home for his $75-million software company, Manhattan Associates.

Dabbiere had founded the company in Manhattan Beach, Calif., in 1991. By 1995 he wanted to be on the East Coast, closer to his customers, the retailers and retail suppliers that bought Manhattan Associates' distribution software. "We were at a point in the life cycle where we knew we would have fairly rapid growth," he says.

At first, Dabbiere settled on the New South boomtown of Charlotte, N.C. (#14 among the large metro areas). He went so far as to pick out office space there. But as the time to move got closer, Charlotte began to seem a little small. "After my third trip, I was starting to go back to the same restaurants for dinner. I knew something was wrong," Dabbiere says. "Talking to recruiters and job candidates at the time, we saw that most people felt that Atlanta would be a much stronger city for recruiting."

It wasn't just the restaurants. Atlanta was more of a high-tech hub than Charlotte was and had a larger labor pool of engineers and developers. (According to the latest figures from the American Electronics Association, Atlanta has 112,797 high-tech jobs, Charlotte 27,462.) And though Manhattan Associates might face more competition in hiring in Atlanta, the concentration of high-tech jobs also proved a draw for recruits from out of town, says Dabbiere. Atlanta's bigger pond provided some assurance that they could build their careers in the city without having to move if they changed jobs.

Good Living, Good People
Twelve years ago Peter Altman was living in Plano, Tex., just outside Dallas (#9 among the large metro areas) -- but only, he's quick to add, because that's where he landed his first job out of college. The area, with its brand-new subdivisions and glass office complexes sprouting from old farmland, bored him stiff. "I didn't like Dallas -- it was flat, concrete, and didn't have much character," Altman says.

And it wasn't where he spent his free time. Weekends, he'd motor some 200 miles south to see friends and take in live music on Sixth Street in Austin (the #2 small metro area). Now that was a town. Perched among rolling limestone hills, home of the sprawling University of Texas, Austin managed to be cutting-edge cool and relatively easygoing at the same time. "It stuck with me that Austin would be a neat city to work in," he says.

Altman's next gig, a stint as a product manager for Black & Decker's lighting group, brought him to Connecticut. That's when he decided to go into business for himself, making specialty lighting products. And while he was at it, he'd ditch the cold New England weather. Altman launched a short-lived illuminated-slipper business in San Diego (#17 among the large metro areas). Nice and warm, San Diego. A fun town. Still, his wife, who had grown up in El Paso, wanted to move back to Texas.

So Austin was the birthplace of Altman's next venture: Lumatec, a flashlight company. Things really clicked for him in Austin. "I met the right people and made the right connections," he says. Selling book lights, credit-card-sized flashlights, and other novelty lights, Lumatec grew to $7 million in sales last year. And Austin has turned out to be just as sweet a place to live as Altman remembered: traffic is light and housing is cheap, at least by Southern California standards. (On the American Chambers of Commerce Research Association Cost of Living Index for the first quarter of this year, Austin's composite score is 98.4, and San Diego's is 125.6. The average score is 100. According to a 1996 study by the Texas Transportation Institute at Texas A&M, San Diego ranks 9th in the nation in roadway congestion, Austin 32nd.)

All that was nice for Altman, but did the new location really make any difference as far as the business was concerned? Well, odds are that if Altman liked Austin, so would potential employees. Good living draws good workers, says entrepreneurship professor Alex De Noble of San Diego State University, who has researched relocation patterns for high-tech businesses. As a result "you see companies gravitating to areas that offer an ambience that would attract skilled, educated workforces," De Noble says.

Take David Ball. A graphic designer who had worked with Altman in San Diego, he packed up and joined Lumatec four years ago -- largely because he was so attracted to Austin. "It's a big city with a small-town feel," he says. "The music scene makes for a great nightlife. I like the lush green trees and the river running through the middle of the city."

More practically, there's that lower cost of living. Ball also had heard that Austin had good schools -- no small consideration when, like him, you have four kids.

Altman is depending on the appeal of the city to help take Lumatec to a higher level. "It was easy to get to $6 million or $7 million. We're trying to break through to $15 million," he says. For that Altman needs topflight management talent with experience with retailers -- talent that's not so easy to find in his immediate neighborhood. "I've got to bring them to Austin," he says. "There are relatively few retail operations in the Southwest."

Altman has already recruited a head of promotions -- Joseph Holland, who was working for a company called Axius, a maker of auto shades and other products in Los Angeles (#32 among the large metro areas). The first thing the new guy did was to purchase a house in Austin that was three times the size of his old one in L.A. "We were able to buy a 3,000-square-foot house for not exactly the same price as our old one but close enough to it to be pretty impressive," Holland says.

Black Diamond's Metcalf has similar stories to tell. Before the company's move from Ventura to Utah's Wasatch Mountains, he says, his climber recruits used to ask for more money (one asked for a $10,000 premium) for having to live in Ventura; now, he says, they're just as likely to take a pay cut to live in Utah.

Joe Skrivan did. Now in charge of product design and development at Black Diamond, Skrivan left his post as director of engineering of boys' toys at Hasbro to join Metcalf's company earlier this year. Skrivan took a pay cut serious enough to "change our lifestyle a little, but not a lot," he says.

Seems like a pretty big sacrifice, but Skrivan knew what he was doing. Because he is a climber and a skier, the work he does at Black Diamond intersects neatly with his passions. When he was at Hasbro, Skrivan lived in Cincinnati, five hours away from any good climbing or skiing. Location was a huge factor in his decision to change jobs and move. "My family and I had been here a number of times, and we really liked the area a lot," he says. "We felt that one day we were going to move here anyway. And I don't know of any other company around Salt Lake City where I would want to work."

Besides, Skrivan says he and his family really enjoy being 10 minutes away from a good climbing site. "It's no longer a huge thing to go out and have fun," he says.

Rah, Rah for College Towns
Because they have sizable college communities, cities like Tempe or Austin tend to have a lot of young, educated people willing to try something new -- perfect recruits for a start-up. "A lot of people that don't know what they want to do when they grow up, like me, stay in their college town to figure it out," says Capital Savings' Ballenger, who recruited the first hires for his mortgage company among the postcollege crowd in Chapel Hill, N.C.

College towns have other benefits, as Ballenger learned when he was launching Capital Savings as a general financial-services company in 1991. (He recently sold it to in a stock-swapping deal.) He didn't know much then about starting or running a business, but one of his old business professors at the University of North Carolina at Chapel Hill sent him to the Small Business and Technology Development Center, a state program affiliated with UNC that fosters entrepreneurship. "They gave me tons of information," Ballenger recalls gratefully.

As he struggled to get his business off the ground, he found that living in a college town, surrounded by students who didn't have any money, was easy on the wallet. There were plenty of inexpensive eateries, like Pepper's Pizza, one of Ballenger's favorite old hangouts. A slice and a beer made for a cheap lunch or dinner -- just $2.50. "If you're an entrepreneur and you're trying to live on $1,000 a month, you act like a college student," he says.

While the college community helped Ballenger get started, it was the booming local economy that kept his company growing. Capital Savings took off in 1993, after Ballenger decided to expand into mortgage brokering. Fueled by low interest rates and a superheated housing market in the Chapel Hill­Durham-Raleigh area, the company's revenues doubled every year for the next five years, landing Capital Savings on the 1998 Inc. 500.

Yet even at this late stage, Ballenger says, he still turns to his alma mater for advice and support. "We had a near-death experience last year," he says, "and the first person I called was a professor" -- Rollie Tillman Jr., director of the Center for Entrepreneurship at UNC's Kenan-Flagler Business School.

CEOs of growth companies often call on Tillman for advice. There's a long-standing relationship between the university and local entrepreneurs that's worked well for businesses and the community as a whole. That collaborative environment helped create North Carolina's high-tech sector, known as the Research Triangle. "There's just great synergy between entrepreneurs and the university, and that's really transformed the region," says Tillman.

Colleges also tend to be excellent providers of employee training or retraining services. At its Salt Lake City headquarters, Black Diamond manufactures most of its products on-site, including some that require high-precision metal work. But qualified machinists and tool-and-die workers were scarce when the company first moved to the area. CEO Metcalf filled the gap by figuring out which of his current employees were most mechanically inclined and sending them to machinist training at Salt Lake Community College.

Some companies dip into the university pool so often, they find it worthwhile to form special relationships with particular colleges. Since moving to Atlanta, Manhattan Associates has gone out of its way to establish ties with Georgia Institute of Technology. The work done at the school's Logistics Institute, a think tank focusing on supply chains, dovetails neatly with the company's own specialty: software for warehouses and distribution. After the company's initial public offering, Dabbiere spent $1.5 million to endow a chair at the university. Manhattan Associates also sponsors faculty research, paying for sabbaticals for professors to run in-house research projects. All the interaction also helps attract Georgia Tech alums to Manhattan Associates: 23% of the company's employees are Tech graduates.

Even the students themselves can come in handy. M.B.A. students from UNC have worked at Capital Savings for credit, developing the company's human-resources program and preparing a valuation for possible venture-capital investment. "You can get them for free when they're in college, but the instant they graduate, they cost you a small fortune," Ballenger jokes.

The Insider
In 1991, when Casey Hoffman founded Child Support Enforcement (CSE) -- now called -- in Austin, he figured he had a sure thing. Hoffman had the perfect background for running a business that collected unpaid child support on a contingency-fee basis. He had just spent five years as head of the Texas attorney general's child-support-enforcement program. Under Hoffman collections rose from $18 million to $200 million; but only 15% of the parents who turned to the overwhelmed agency ever collected a check. He wanted to bridge that gap using his knowledge of the system and his contacts in state government.

It didn't work out at first. When a new attorney general took office, Hoffman found himself with fewer supporters in the state capital. It was especially discouraging because to Hoffman, CSE was not just a business but a cause. Drawing on media contacts from his years in government, he got himself some publicity and attracted enough clients to keep CSE going. But there were still a lot of nights when, meeting some of his old state-agency colleagues for a few beers at one of Austin's open-air bars, the embattled CEO would wonder aloud why this terrific idea of his wasn't catching fire. "We built a field of dreams and no one showed up," Hoffman says. "The best description I can give you is, I jumped off a building with no wings."

Then Hoffman found out why so many CEOs love Austin: it's flush with capital looking for investment. As the home of such success stories as Dell Computer and Texas Instruments, Austin has been the building site for more than a few fortunes. Homebred venture capitalists often like to invest in local start-ups -- it's the old giveback principle -- as Hoffman found out after he hooked up with Austin Ventures. (According to Venture Economics/National Venture Capital Association figures, this year venture capitalists have funded more companies in the Austin area than in any other metro area in Texas and more than in the entire states of Virginia or Georgia.)

The venture-capital firm is the largest of a crop of investment firms that have helped fuel the growth of tech companies and other businesses in town. According to principal Ross Cockrell, Austin Ventures was intrigued by the sheer size of "the problem-slash-market-opportunity" in unpaid child support: a number the firm believed was $57 billion.

In 1997, when Hoffman received a $5.5-million investment from Austin Ventures, the company really started to fly. CSE began advertising nationally with commercials on the Lifetime cable-television channel. The Austin Ventures imprimatur also helped Hoffman recruit high-level managers like chief technology officer Steve Padgett, former chief information officer of Tivoli Systems. And Padgett began overseeing the transformation of CSE into, now a $7-million company. The move to the Web allowed the company to reach a national clientele more efficiently.

Austin Ventures also has a pipeline to the most energetic movers and shakers in the state capital. Recently, partner Ken DeAngelis introduced Hoffman to adman Roy Spence of Austin's GSD&M, an agency that serves big-name companies such as Southwest Airlines. Pitching his company's social mission, Hoffman persuaded GSD&M to waive most of its usual fee in exchange for equity. "It was extremely validating for us," he says. Not only is Hoffman's company located in a community with lots of local capital, but he has benefited from an entrepreneurial spirit that is carefully nurtured by local VCs, public officials, and fellow CEOs.

People Who Need People Who Start Businesses
For Hoffman, Austin Ventures has given him something more than just money and advice. It's the sense that someone is on his side, cheering for him.

That support (or the lack of it) can make all the difference in the world when it comes to building a company. After eight years Peter Metcalf is still galled by the blasé reaction Ventura officials had when Black Diamond announced that it was leaving town. "The local newspaper quoted the mayor as saying, 'So what?' " he recalls.

Compare that with the reception that his company got in Utah, where the governor showed up at the press conference heralding Black Diamond's move. "We're all human," says Metcalf. "It's nice to know you're appreciated."

Hospitality toward entrepreneurs can take many forms. Sometimes all you need is a support infrastructure in place: venture capitalists like Austin Ventures, for example. "You'll also find in a lot of cases that the accountants and lawyers who cater to entrepreneurs are willing to work for a reduced fee or equity in lieu of a fee," says Babson College professor Andrew "Zach" Zacharakis.

Alternatively, a city may simply offer plenty of room for a growing company, simply because it doesn't have a lot of entrenched businesses that suck up resources. "Even when we were starting up, this town was growing, and it still is," says Eric Crown of Tempe's Insight. "When I called up FedEx, the agent was over here in a minute and ready to do business, because the town wasn't full of Fortune 100 companies. This town is not cliquey, and it's easy to enter the fold."

Then there are the rare communities like Silicon Valley, where entrepreneurship reaches the kind of critical mass that feeds, incubates, and grows its own companies at an accelerated rate. "It's not quite networking. It's sort of collaboration, idea generation," says entrepreneurship professor Hal Heaton, a Stanford Ph.D. now teaching at Brigham Young University.

To a greater or lesser extent, the same phenomenon occurs in a number of other communities with the right atmosphere and people. In North Carolina's Research Triangle, Capital Savings' Ballenger says, he's gotten some terrific ideas and established lasting business relationships during casual conversations with friends of friends over dinner.

"You meet a guy who owns a computer-service company, he does IT, and he gives you an idea about a technology for videoconferencing," says Ballenger. His loan officers were soon holding videoconferenced meetings with home buyers. (Recently, the officers switched to Web-based conferencing.) "You get around these people, and that starts sparking new things," Ballenger says. "That's one of the dynamics that make this a neat place."

Getting Out of Town
When Alan Dabbiere was deciding between Charlotte and Atlanta for his company's new home, he paid particular attention to the airport. He had eaten too many airline meals to take potluck on travel facilities. "I was personally on a red-eye every single week for three years," he says.

Even though moving Manhattan Associates from California to the East Coast would bring Dabbiere closer to his customers and cut down on the overnight flights, he and the company's software engineers would still have to visit customers' warehouses all over the eastern half of the United States, not to mention in Europe and on the West Coast. Charlotte was a major U.S. Airways hub, a big point in its favor. But when Dabbiere started looking more closely at flight schedules, he noticed that quite a few of the flights out were timed late to allow for earlier connections to arrive from other places. That meant that it was hard to get a 7 a.m. flight to Chicago (#33 among the large metro areas), for example. On the other hand, he says, "Atlanta has enough of a local population that it could sustain very early and very late destination flying" -- a big part of the reason he eventually picked the larger city.

In North Carolina, Raleigh-Durham International Airport has attracted low-priced Midway Airlines, AirTran Airways, and Southwest Airlines. Todd Ballenger boasts that he can fly anywhere in the continental United States for $325 or less. With those inexpensive flights, Ballenger could keep in close touch with Capital Savings' strategic partners in other states. "That was a huge thing," he says. "It allowed us to expand our business into Ohio and other places."

Gimme Shelter
Some entrepreneurs go to a lot of trouble to find a location with great real estate at a great price. That was one of the benefits of Black Diamond's big move from Ventura. The company now operates out of a funky, rambling Swiss-village-style headquarters, which CEO Metcalf acquired almost by accident. Originally, he had planned to move the company to offices on the outskirts of Park City, around 15 miles from Salt Lake City, in the heart of ski country. But when a developer's financing for a new facility there fell through, just five months before Black Diamond's Ventura lease was up, Metcalf went to his backup: Salt Lake City. After he'd spent a day "traipsing around looking at crap," Metcalf says, his broker mentioned a listing for an abandoned shopping center in foreclosure.

The cuckoo-clock architecture bordered on kitsch, but Metcalf liked what he saw. "This place is eclectic. It personifies Black Diamond," he thought.

Thanks to Utah's then-depressed economy, he bought the whole place for "barely seven figures," he says, what he calls "the price of a cheap house on the beach in Ventura." Now the half-timbered buildings shelter not only Black Diamond's corporate offices but a manufacturing plant and a warehouse that total approximately 60,000 square feet. There's also a retail store that sells Black Diamond products; a restaurant; and a climbing gym where Black Diamond employees go when they feel the need for altitude. It's a "poor man's Microsoft campus," Metcalf says. "People love to visit; people love to work here."

Lumatec's Altman also bought a building in foreclosure, a former chicken-processing plant in a borderline neighborhood. "I looked at it, and we were actually pretty scared," says Altman. "It was in disarray, and nobody wanted it."

But because the building was in an economic-redevelopment zone, the city of Austin helped fund the $410,000 mortgage and also gave Altman $150,000 for renovations -- as long as he pledged to hire workers from the area. Fully revamped into a smart, airy, modern facility with concrete walls in bright teal and purple, the building now houses both Lumatec's executive offices and a small manufacturing plant. Ironically, real estate just like Altman's has become red-hot in Austin right now as Internet entrepreneurs spurn modern office parks for cool old industrial buildings.

Phoenix, with its shining boom-time crop of office towers, gives the impression of having been unwrapped and assembled from a kit just this morning. It just doesn't have a lot of old buildings. But back when Eric Crown was starting Insight, the city's traditionally boom-and-bust economy was in a slump, which meant that finding office space to accommodate a rapidly growing company was no problem. Crown recalls that his first landlord gave him a year's free rent on a three-year lease. Even after the economy recovered, land was still plentiful and cheap: Insight's 103,000-square-foot corporate headquarters, with its four large stadiums, cost just $10 million to build. Not exactly lunch money, but a lot less expensive than it would have been in, say, midtown Manhattan.

Customers, Customers, Customers
If these cities are so great, why don't all entrepreneurs put their businesses in Austin or Atlanta? Why are there so many businesses rooted in what Birch considers harsher environments, like New York City and Detroit?

For Todd Abrams, who founded Empire Graphics in New York City eight years ago and has made it to the Inc. 500 twice since, the answer is simple. That's where his customers are. Despite higher rent, labor costs, and taxes -- all of which are about 10% more, he says, than he would pay in the suburbs -- being in the city gives him a clear-cut advantage over his competitors in New Jersey and on Long Island, Abrams figures. Turnaround times are lower, and customers in the city can check proofs more easily. "We really felt that clients need to touch and feel jobs," he says.

Not that it's easy to run a manufacturing facility in Manhattan. When Abrams needs to install a new press -- which can run to 100 tons and almost 70 feet in length -- he has to hire a crane, block off the street, and bring the machine into his fourth-floor space through a window. It's a $20,000-to-$30,000 job. But for a sales-driven company like Empire, there's nothing quite like the density of potential customers that you find in Manhattan, where, Abrams says, a good salesperson can make up to eight sales calls a day. "To me the Metrocard is a windfall to salespeople," he says, referring to the unlimited-ride pass to New York's subways. "I figure I save $300 a month. You pay one price and you make all the sales calls you want." (Abrams recently sold Empire but continues to run it.)

Ned Homfeld has started four businesses in Detroit, another city not known as a garden spot. The newest was Spirit Airlines, which began in 1981 as a charter service to Atlantic City and evolved into a full-fledged airline serving vacation spots like Myrtle Beach and Fort Lauderdale. The Detroit airport is dominated by Northwest Airlines. It wasn't until this past fall that Spirit got its own gates. Yet Homfeld says that being in Northwest's "fortress hub" was actually an advantage for him. "Northwest is a relatively high priced carrier, and as a small carrier, we could compete with them effectively on a cost basis," he says. "There is so much traffic in Detroit that we could get a piece of it without ruffling too many feathers."

Even so, Homfeld has just opened offices in Fort Lauderdale and is opening a new reservation center there as well. He hopes the south Florida climate will help when it comes to attracting executive recruits. Plus, since Spirit has designs on the Latin American market, the company needs Spanish-speaking reservation clerks. But Detroit will remain as the company's hub, and its existing maintenance facilities and reservation center will stay there -- along with a sizable portion of its customer base.

And there's nothing like living among your customers to help keep you in touch with their changing desires. Being located in what is practically Climb Central has helped Black Diamond get smarter. When employees take new products onto the slopes or up the rocks, other climbers and skiers are there to provide instant feedback. "It's like having hundreds of business meetings," says product designer Andrew McLean.

The lessons sometimes come hard. In the past eight years, six Black Diamond people have lost their lives in avalanches. That would never have happened in Ventura, Metcalf says. To combat such tragedies, Black Diamond developed a specialty product called the AvaLung, which prevents avalanche victims from suffocating.

"The one thing most people say now about Black Diamond is, 'You guys are an absolutely integral part of the sport,' " Metcalf says. "That's because we're here."

Emily Barker is a senior staff writer at Inc.


50 Best Big Metro Areas
1. Phoenix, AZ
2. Salt Lake City-Provo, UT
3. Atlanta, GA
4. Raleigh-Durham, NC
5. Indianapolis, IN
6. Washington, DC-MD-VA
7. Memphis, TN-AR-MS
8. Orlando, FL
9. Dallas-Fort Worth, TX
10. Nashville, TN
11. Denver-Boulder, CO
12. Louisville, KY-IN
13. Minneapolis-St. Paul, MN-WI
14. Charlotte, NC-SC
15. Grand Rapids-Muskegon, MI
16. Birmingham-Tuscaloosa, AL
17. San Diego, CA
18. Houston-Galveston, TX
19. Columbus, OH
20. San Antonio, TX
21. Cincinnati, OH-KY-IN
22. Richmond, VA
23. Kansas City, MO-KS
24. Portland, OR-Vancouver, WA
25. Miami-Fort Lauderdale, FL
26. Milwaukee-Racine-Sheboygan, WI
27. Baltimore, MD
28. Tampa-St. Petersburg, FL
29. Norfolk-Portsmouth-Virginia Beach, VA
30. St. Louis, MO-IL
31. San Francisco­Oakland­San Jose, CA
32. Los Angeles, CA
33. Chicago, IL-IN
34. Detroit, MI
35. Dayton-Springfield, OH
36. Boston, MA
37. New Orleans, LA
38. Greensboro-Winston-Salem, NC
39. Cleveland-Akron, OH
40. Seattle, WA
41. Sacramento, CA
42. Oklahoma City, OK
43. Philadelphia, PA-NJ
44. Pittsburgh, PA
45. Bridgeport-Stamford-Norwalk, CT
46. Buffalo, NY
47. New York, NY-NJ
48. Rochester, NY
49. Hartford, CT
50. Albany-Schenectady-Troy-Glens Falls, NY
Source: Cognetics Inc.

50 Best Small Metro Areas
1. Las Vegas, NV
2. Austin, TX
3. Fargo-Moorhead, ND-MN
4. Savannah, GA
5. Sioux Falls, SD
6. Jacksonville, FL
7. Reno, NV
8. Wilmington-Jacksonville, NC
9. Montgomery, AL
10. Tucson, AZ
11. Lexington, KY
12. Green Bay­Appleton, WI
13. Columbia, SC
14. Huntsville, AL
15. Lafayette, LA
16. Manchester-Nashua, NH
17. Jackson, MS
18. Madison, WI
19. Boise, ID
20. Omaha, NE-IA
21. Fort Wayne, IN
22. Pensacola, FL
23. Greenville-Spartanburg-Anderson, SC
24. West Palm Beach, FL
25. Baton Rouge, LA
26. Macon, GA
27. Lynchburg, VA
28. Hickory, NC
29. Topeka-Lawrence, KS
30. Charleston, SC
31. Knoxville, TN
32. Evansville, IN-KY
33. Portsmouth-Dover-Rochester, NH
34. South Bend-Benton Harbor, IN-MI
35. Fort Collins-Loveland-Greeley, CO
36. Gainesville-Ocala, FL
37. Springfield, MO
38. Panama City-Fort Walton Beach, FL
39. Mobile, AL
40. Toledo, OH
41. Brownsville-McAllen, TX
42. Lincoln, NE
43. Columbus, GA-AL
44. El Paso, TX
45. Fort Myers, FL
46. Des Moines, IA
47. Tallahassee, FL
48. Anchorage, AK
49. Colorado Springs-Pueblo, CO
50. Little Rock-Pine Bluff, AR
Source: Cognetics Inc.

In its "Entrepreneurial Hot Spots" listing of the best cities in which to start and grow companies, Cognetics Inc. ranks places according to two measures:
1. Significant starts -- local businesses, started in the past 10 years, that employ at least five people today, as a percentage of all companies, and
2. Young growers -- the percentage of local businesses that were 10 years old or less 4 years ago and that had a growth index of at least 3 over the past 4 years.

The growth index is a measure of percentage and absolute growth. If job growth were to be measured in percentage terms alone, small companies would dominate the list. (Those going from one to three employees would report 200% growth.) If absolute growth alone were used, only large companies would qualify. (Those going from 5,100 to 5,200 employees would top the list with 100-employee gains.) To avoid either of those extremes and to capture growth that is significant in both percentage and absolute terms, Cognetics developed its growth index. Technically, it is a company's percentage employment growth (expressed as a decimal) times its absolute employment growth.

A city's rank in this report is based on a weighted average of its significant-start index and its young-grower index. Both indices are scaled versions of the percentage of significant starts and percentage of young companies that grow. Those indices are completed by ranking all places in the study by their significant-start and young-grower percentages, respectively, assigning 100 to the top-ranked place and 0 to the bottom-ranked place on each list, and calculating the relative position of all places in between.

To end up with a high overall index, a place must have a large number of significant start-ups and be able to support the growth of a high proportion of them.

The average 1997 earnings per hour for all workers in
PHOENIX $14.02
SAN DIEGO $15.71

Source: U.S. Bureau of Labor Statistics.

How Phoenix's population compares with other cities
RALEIGH-DURHAM 1.0 million
SALT LAKE CITY 1.2 million
CHARLOTTE 1.3 million
PHOENIX 2.7 million

Source: U.S. Department of Commerce, Bureau of the Census, 1998.


COMPANY: Spinecare
CEO/FOUNDER: Drew Bizzoco
TYPE OF BUSINESS: Provides multidisciplinary health-care services
REVENUES: $4.5 million
"This is where I was born and raised. Brooklyn is my home, and home is where the heart is," says Bizzoco. "It would have been stupid to go somewhere else, because I wouldn't have had all this business right off the bat. We love Brooklyn -- it's got the best pizza and Italian ices in the world."
"Definitely. We're on a busy avenue, and we have a lot of walk-by traffic. Most of our patients are local, so everything is accessible. We stay here because the business is better than if we'd gone anywhere else."

PLACE OF BUSINESS: Youngsville, N.C.
COMPANY: P&R Environmental
CEO/FOUNDER: Gary M. Pratt
TYPE OF BUSINESS: Recycles plastic bottles from curbside programs
REVENUES: $8.6 million
"I was living in Raleigh, so I surveyed the surrounding counties for a location, and this one seemed to be the best," says Pratt. "If you look at the material we pull in and the markets we serve, Youngsville was right smack in the middle of it all. It's also located on good highways. Luckily, I didn't have to move."
"Yes, in terms of logistics and being accessible to markets that bring us materials as well as the locations where we send materials. Also, we're in Franklin County, next to the one Raleigh is in. The area around Raleigh has more of a city mentality. Here in Franklin County, we're a big fish in a small pond."

COMPANY: Peepers
CEO/FOUNDER: Dan Thralow
TYPE OF BUSINESS: Retails sunglasses, night-vision equipment, and telescopes
REVENUES: $1.5 million
"Originally, it was because Duluth is a tourist destination," Thralow says with conviction. "It's between the tourist areas of Thunder Bay, Ontario, and Minneapolis, so a lot of people pass through here. Also, I personally love the city. The people here -- including my employees -- are more honest, loyal, and reliable than most. I think it has to do with the Midwest upbringing and the weather. It takes a particular type of person to handle so many months of subzero temps. If you can do that, you tend to look at things in the long term. That makes for a good employee."
"For us, not like it used to, no. When we were strictly retail it was huge. Now we're on the Internet, and location really doesn't make a difference. But the fact that I can live here -- it's the gateway to the North Woods, has clean water, clean air, low crime -- and still run the company is terrific.

COMPANY: Windows on Washington
CEO/FOUNDER: Thomas Klein
TYPE OF BUSINESS: Provides catering services
REVENUES: $1.7 million
EMPLOYEES: 200 part-time, 12 full-time
"I placed my business in the city of St. Louis to take advantage of its neat architecture and good financial incentives," Klein says. "Unlike other cities, St. Louis proper has more reasonable rent than the suburbs. So I have an old turn-of-the-century building with multitoned marble, 18-foot Corinthian columns, and detailed millwork right in St. Louis."
"St. Louis provided everything that I would have wanted. It has historical significance, coupled with good economics and all of the amenities of a big city."

PLACE OF BUSINESS: Kingsland, Fla.
COMPANY: East Coast Concrete
TYPE OF BUSINESS: Makes concrete
REVENUES: $15 million
"My partner's lived in Kingsland all his life. He knew the people, he knew the community, and they knew him," Blunier says. "People buy from people -- that's why it works for us. We've learned that knowing the contractor makes a big difference in our success. We're opening up three more locations, and each is determined by what contacts we have in the area."
"Yes. In the concrete business, you're dealing with a very perishable item -- you've got only two hours to get it to the job site. So you've got to be close enough to metropolitan areas to deliver your product."

COMPANY: Crystal Group
CEO/FOUNDER: Craig Jensen
TYPE OF BUSINESS: Manufactures industrial rack-mount computers
REVENUES: $21 million
WHY HIAWATHA? "It started with our relationship with a company that MCI later purchased, which does its software development nearby in Cedar Rapids and has a large presence there," Jensen says. "It's a high-tech center, and there's also a lot of smaller companies. In fact, it's our belief that per capita there are more Inc. 500 companies in Hiawatha than anywhere else. The city is very accommodating and provides a terrific infrastructure. The snow removal is great. Plus, we can drive to Chicago in three hours, and we have good airline service into Eastern Iowa Airport."
DOES LOCATION MATTER? "I don't think so. You should put your business where you want it. Location has very little to do with whether or not it will be successful. Business is about product, product, product, and filling a need. If you treat your customers well, they'll trek to the top of the mountain to get it."

-- Jennifer McFarland


David Birch is president and founder of economic-research firm Cognetics Inc., in Cambridge, Mass. A former faculty member at the Harvard Business School and at MIT, Birch is renowned for the landmark research that first identified the critical role that innovation plays in job creation, particularly among small companies. The author of Job Creation in America and the Corporate Demographics series of information reports on U.S. companies, Birch is also a 1996 recipient of the Swedish government's NUTEK Prize for Entrepreneurship and Small-Business Research. Our Best Cities rankings are drawn from the forthcoming 1999 edition of his report "Entrepreneurial Hot Spots: The Best Places in America to Start and Grow a Company." Inc. spoke with him recently.

INC. : How did you create your system for ranking these entrepreneurial hot spots?

BIRCH: My measures are based on two indices: significant starts and young-company growth. I take an average of those and say that to win at this game, a city has to have both. If a city has a lot of start-ups that grow well, it will do very well in the ranking. I wanted per capita measures, so that I wasn't penalizing Boston because it was small or San Francisco because it was big. I didn't want it to be a beauty contest. I didn't want to crunch factors or use aggregate numbers such as what the employment rate or the unemployment rate is in a city over time. I would rather focus on entrepreneurship, not on the whole economy. I want to see how well or poorly these cities are replenishing their existing base of business with new and growing companies.

I wanted to get past the public relations to find out that maybe San Francisco, for example, isn't nearly as great as you'd think it is. And maybe Salt Lake City and Austin will become the San Francisco of 40 years from now because they are spawning great new companies now, and San Francisco isn't. The ranking is really a 40-to-50-year look ahead to where the entrepreneurial energy of the future is being incubated, as opposed to which cities are doing the best right now. So I measure the number of start-ups and growth and whether there are significant start-ups rather than just one-person starts.

A good city is like a cake. You've got to have all the ingredients, the flour and the water and the yeast and the sugar and cream working together. Austin has all the ingredients. Atlanta has all the ingredients: It's a nice place to live. It's got a great airport and great universities.

You can't have one cylinder firing like crazy and have the other four or five cylinders be duds. If you have a hub airport as Philadelphia does, but everything else is lousy, then it isn't good enough. Philadelphia is interesting because it has great universities and has a very good airport, but the city is very old, the public education system is terrible, and everybody is leaving. So it is missing a big hunk of the thing called a talent pool.

INC. : It seems that a lot of entrepreneurs choose location for personal reasons, at least when they start their companies. So the question remains, Does the choice of location really matter, especially to a start-up?

BIRCH: I think you can pick a place just because you want to live there when your company is very small. But if you want to grow, you have to start figuring out what the business logic behind your choice of location is. Wal-Mart may be run from Bentonville, Ark., where Sam Walton lived, but 90% of its employees are in distant locations. The distribution centers are all over the country.

If you are determined to sacrifice practicality for personal considerations when it comes to choosing a location, then you will probably be forsaking your chances for a certain level of growth. Each kind of business has a different calculus -- a different rationale -- but there is some logic to choice of place that applies at some point to every growing company. For almost any business, either labor pool, raw materials, or customer location makes a difference. If you are in the oak-flooring business, for example, you had damn well better be near oak trees. Now, you can buck that if you are very small, but eventually it has an important effect on your continued success. So does location matter? Yes, it matters.

INC. : How does a CEO know when his or her company has reached the point where a new location must be found?

BIRCH: It is probably when growth slows down, when the company has saturated some market and has to get into a bigger market. I have traced the history of the Inc. 500 very carefully and found that very few sustain their growth. At some point growth companies hit a wall. And in many cases that wall is a geographical-preference wall. And then the question is, What do they do? Do they go outside of the world in which they live, or do they stay at that size, fall off the list, and lead a comfortable, income-producing life? That, it seems to me, is the choice to be made. I think any growing company has to make that choice sooner or later.