If you want to keep a close eye on the most promising startup hubs in 2017, it wouldn't hurt to look south.

That's because the Sun Belt--the region of the U.S. that includes the Southeast and Southwest (though some demographers include the Pacific Northwest as well) and generally stretches from Southern California to South Carolina--is poised to continue its strong economic growth thanks to a growing population. A place like Florida--where the housing and tourism industries are starting to show signs of recovery after the 2008 recession--could prove to be a fertile breeding ground for startups this year. The state had the highest net domestic migration rate from 2015 to 2016, according to William H. Frey of the Brookings Institution.

Ross DeVol, chief research officer for economic think tank Milken Institute, says he's seen positive signs of economic growth in Sun Belt cities that correlate with increases in migration to those cities. Each year, the Milken Institute publishes a ranking of the "best-performing cities" in the U.S. based on wage growth, job growth, and high-tech GDP growth over a four-year period, as well as the number of high-tech industries in that city.

"I expect that we'll see more Florida metros in our top 25 when we update it for this coming year," DeVol says. He points to Orlando, which was No. 9 on Milken Institute's 2016 list, as a city to watch. Orlando also experienced the biggest positive increase in rank on the Kauffman Foundation's annual index of startup activity among metropolitan areas. The city's economy has become less concentrated on tourism in recent years, as its GDP growth rate from high-tech industries is now relatively in line with the rest of the nation's, according to DeVol.

However, Orlando still has plenty of room to grow. According to a 2016 report from Brookings, "advanced industries," which generate STEM jobs in engineering and manufacturing, only accounted for 6.4 percent of all jobs in the region, well below the 15.3 percent share in tech-focused San Francisco. Orlando doesn't have as strong of a partnership between its universities and private companies as other U.S. cities have. Such a partnership can be a big contributor to a healthy R&D ecosystem.

"I don't want to say it's a missing ingredient, but it's a component that hasn't been utilized to it's full potential," DeVol says.

Cities in the Sun Belt region that have traditionally had small but active startup communities will also probably continue to enjoy popularity this year. Austin, for example, which led the U.S. in the rate of new-business creation in 2016, according to Kauffman, will likely continue to be popular among entrepreneurs this year thanks to its favorable regulatory climate. And Nashville, which might seem like a less obvious hub for new companies, has seen positive signs too: The economy has experienced strong gains in wage growth and job growth over the past five years, driven by resurgence in equipment manufacturing for the auto industry, according to DeVol. And it's still a much cheaper place to do business than the Bay Area.

Where the venture capital is

Of course, for companies that need to attract venture capital, the places to be are still New York, Silicon Valley, Los Angeles, and Boston. But there are signs of positive venture capital growth in other areas. In the fourth quarter of 2016, for example, venture capital invested in Midwest-based companies rose 4 percent from the third quarter. Two Ohio-based companies were able to secure investments north of $40 million: Everything But the House, a Cincinnati-based online estate and consignment startup, and Cleveland-based MacroPoint, a freight-tracking startup.

While that's still far short of what some Silicon Valley startups are receiving, investors in second- and third-tier cities across the U.S. are taking more steps to raise funds in their hometowns. Anna Mason, director of investments for Revolution's (a VC firm co-founded by Steve Case) Rise of the Rest tour, a combination pitch contest and touring conference that's meant to celebrate American entrepreneurship, points to cities like Detroit and Omaha as ones that exemplify the kind of regional funding trends you may see in 2017. Both are home to regional microfunds--funds that raise between $10 million and $50 million and are focused on investing in local and regional companies.

"I actually think this is going to be a theme across all rising cities," says Mason.

The Washington, D.C.-Metroplex area also saw positive interest from investors in 2016, as the amount of venture capital received by area companies increased 25 percent from 2015. That was thanks in large part to a $1.2 billion investment in satellite startup OneWeb by Japan's SoftBank. But there are other reasons to be excited about the D.C. area in the coming years.

"The growth in the area appears to be resurgent, as a significant portion of the top deals in that area were early stage, indicating a nice pipeline of companies that may go on to further financings," says Marcelo Ballve, a research director with CB Insights.

The making of a startup hub

Ultimately, there's no magic formula cities can follow to create a hot, local startup scene. According to Jason Wiens, policy director for the Kauffman Foundation, cities are best off when they create a development plan for entrepreneurship that emphasizes the community's existing assets--for example, trying to strengthen the relationship between entrepreneurs and a strong technical university in the city, or building an incubator that's focused on recruiting startups from one of the city's leading industry sectors. Provo, Utah, might not have looked like a promising place for startups 20 years ago, but creating strong relationships between Provo-based Brigham Young University and the companies in the area was one of the initiatives that helped change the picture. BYU first started offering entrepreneurship classes in the late 1980s. Now, according to the university, BYU students have launched 422 companies and raised $719 million in funding in the past five years. Provo had the highest high-tech GDP growth rate of any city in the nation in 2015, is home to half a dozen "unicorn" companies, and was No. 2 this year on the Milken Institute's list of best-performing cities.

"The fact of the matter is that unless you are a place that has strong rates of entrepreneurship, you simply can't be among the top-performing metros in the country," DeVol says. "Those small to medium-size businesses are the bulk of where the jobs are being created."

Published on: Jan 13, 2017