Everyone wants to know about the best cities to start companies. But what about the towns that fare less well?

When we crunched the data on this year's Inc. 5000, we found a number of cities where you'd expect to find a lot of small, thriving businesses. While there were the usual suspects--SF, NYC etc.--we also pinpointed a number of the cities that showed surprisingly less entrepreneurial activity, at least as far as our pool of fast-growth companies is concerned.

Among those, Hartford, Connecticut, and Memphis, Tennessee both had just 12 companies each, while Sacramento, California had 16, and San Antonio, Texas had just 21 of our businesses. As a group, they hosted the fewest fast-growth companies in Inc.'s 2014 list.

To find out more about why that might be, I turned to the Initiative for a Competitive Inner City, the brainchild of Harvard University and management guru Michael Porter, whose work on urban clusters informs much of the ICIC's efforts. ICIC studies the fastest-growing inner city businesses nationally and produces an annual list of the top 100.

It turns out what makes a good city for starting and sustaining a business depends on just the right mixture of interconnected elements, somewhat like baking a cake. You need all the right ingredients, in just the right amounts, to get something really good.

"We think of cities that are good for business growth as having three primary drivers," says Kim Zeuli, senior vice president and director of research for ICIC.

Those drivers include:

  • Access to capital, whether that's microfinance, traditional financing, such as from banks, or more sophisticated financing such as venture capital and private equity.
  • Education and training, although not necessarily of the university and MBA kind. We're talking crash courses on the practical realities of running a business and coaching.
  • Networking and contracting opportunities. Cities with lots of networked businesses and chances to work for larger companies or as government suppliers, tend to support more businesses, Zeuli says.

A Meeting of the Minds

The main hallmark? A thriving business environment often has clusters of businesses, Zeuli says, that are devoted to a particular industry or industries, and which typically grow at a pace far exceeding the rest of the local or national economy.

More specifically, the fastest-growing clusters typically depend on businesses that conduct trade outside of the immediate locale. Think of the super-successful aerospace manufacturer that sells nationally or internationally, or the online retailer that has a huge following throughout the U.S., and maybe overseas. There's a secondary effect, as well, because the cluster also supports the restaurants that feed the employees of the fast-growing tech startups, or the dry cleaner that cleans the suits and dresses of their workers.

It's not always the case, however, that metropolitan areas with developed clusters had a preponderance of Inc. 500 companies. In some cases, the opposite was true.

The recently bankrupt Detroit has at least two successful clusters, most notably in the automobile industry--GM alone has reeled in $22 billion of profit since its 2009 bankruptcy, but also in food. Surprisingly, traditional and urban agriculture supports 36,000 jobs and creates $3.6 billion in revenue annually in Detroit, according to a recent study. Yet the Inc. 500 list has only 80 fast-growth companies in the Detroit area. 

Similarly San Antonio, which had a fraction of Dallas' 168 businesses and Austin's 94 businesses from our list, specializes in aerospace and defense, communications equipment and services, financial services, hospitality and tourism. Cumulatively, those businesses notched 12 percent employment growth between 2003 and 2011, which is many times the national average of about 1.3 percent for the same time period, according to ICIC.

Why Tech Reigns Supreme

Silicon Valley's success on our list and in general is partly the result of so many technology companies clustered together. Still, as ICIC notes, clusters alone do not a startup mecca make. The Valley's tech community has in its backyard some of the biggest venture capital firms in the world. Networking and educational opportunities also abound there, with access to some of the nation's best universities--Stanford, Berkeley--and tech accelerators. (The San Francisco metro area had 163 companies on the Inc. 5000 this year.)

In the end, even our stats, which cover a spectrum of companies and locales, are colored by the tech world. So it can be difficult to gauge the success of different cities, as the firms within the tech ecosystem, in particular, are driving much of the nation's economic growth. And it's in those areas that most businesses are still located.

"There are certain traded clusters that are linked to emerging, if strong sectors, like 'knowledge economy' businesses," Zeuli says. "That is where you find a lot of support and fast-growing small businesses, compared to the financial sector, or manufacturing."

So, how do you succeed when you don't live in San Francisco and you don't own a tech firm? Figure out where your ideal cluster is and locate resources necessary for you to thrive. When in doubt, start your own. 

Published on: Dec 22, 2014