Hot Zones

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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.

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