Why do a mere handful of cities attract startups while so many of them fail? What should aspiring startup cities do to boost their odds of success?
I set out to answer these questions in my recently published book, Startup Cities: Why Only a Few Cities Dominate the Global Startup Scene and What the Rest Should Do About It (Apress, February 8, 2018).
Forget San Francisco, San Jose or Boston. Let's take Wenatchee, Wash. as an example.
Would you guess that a rural town near Washington state's Columbia River is rapidly attracting capital to fund startups? Probably not.
But by February 2018, well over $100 million in investment was headed to Wenatchee, Wash. thanks to its abundant supply of the country's cheapest hydroelectric power (2 to 4 cents per kilowatt-hour -- up to 80% cheaper than the nationwide average of 10 cents).
The startups hungry for that cheap power are cryptocurrency miners who create more bitcoins by using powerful computers that require massive amounts of electricity to solve difficult math problems.
Between October 2017 and February 2018 alone, Wenatchee's hydroelectric utility had received four bitcoin mining inquiries for 100 megawatts each which would require more than $160 million to build, according to the Wall Street Journal.
Meanwhile, Wenatchee's 30 recently opened bitcoin mines were turning an old laundromat, a former fruit-packing warehouse, apartments, and free-standing cargo containers into 25-by-25-foot rooms sucking up as much power as 1,000 homes.
Indeed, all that power demand was straining local electricity systems, melting wires, overloading transformers, and caused a power outage resulting in a local grass fire.
The Wenatchee bitcoin mining boom makes it clear that becoming a startup hub can be a two-edged sword. The inflow of capital and jobs boosts local tax revenue and hoists real estate prices. But it also strains local infrastructure which pressures local leaders to act.
Wenatchee's success highlights an important insight for other cities and towns --there is no point in trying to become the next Silicon Valley.
Instead local leaders seeking to attract startups must identify what makes their region uniquely compelling in the eyes of entrepreneurs. Doing that effectively requires the city to conduct a rigorously objective analysis of what founders view as its world-class asset.
The world hosts over 4,000 cities with more than 100,000 citizens and in the last decade a rapidly growing number have hosted startup accelerators.
A 2016 Kauffman Foundation report found that the number of accelerators in the U.S. grew at an average annual rate of 50% -- from 16 programs in 2008 to 170 in 2014 -- and held mostly steady thereafter.
In 2016 there were 579 accelerator programs worldwide hosting 11,305 startups which received about $207 million in capital, according to the 2016 Global Accelerator Report. Most (52%) of that capital was invested in the U.S. with Europe capturing 24% with the rest going to South America, Asia, and the Middle East.
But the concentration of venture capital in a few U.S. cities reveals three insights:
- Accelerators, while evidence of global entrepreneurial aspirations, are a mere sideshow;
- Most of the venture capital goes to a tiny number of regions; and
- That capital allocation reveals which cities investors believe are most likely to generate the highest returns - and which they view as money-losers.
According to the PWC Moneytree report, Northern California - with $7.9 billion -- dominated the 2017 VC scene with San Francisco attracting $5.2 billion in investment and Silicon Valley receiving another $2.7 billion; New York Metro garnered $2.9 billion with New England in third place with $2.1 billion in funding.
Startup Cities presents the idea of a Startup Common - a collection of six regional resources -- pillar companies, universities, human and investment capital, mentor networks, and values -- with the potential to encourage a cascade of fast-growing startups over generations.
What was interesting to me was that some cities, such as Stockholm, have created very lively Startup Commons over a relatively short period of time.
The key for Stockholm was a two decade change in its culture. While Stockholm had universities that produced great technology talent, the local culture thought entrepreneurship was shady until Ericsson, one of Sweden's biggest employers, started firing tens of thousands of great people.
Swedes realized that working for a big company was no longer the key to a secure life. That - coupled with government policies that encouraged startups - led some of them to conclude that they should try to start companies.
They did, and some of those companies - mostly in gaming, music streaming, and wireless payment services -; were acquired. This enriched their founders, who invested their time and money in more startups. It also provided local role models that drew others into the startup scene.
Now Sweden leads the world in unicorns (startups worth at least $1 billion) per capita.
What should cities do? Local leaders should build a compelling vision of their startup hub based on their region's world-class skill. Chapter eight shows how they can achieve this.
If your city wants more startups, read my book to learn how to turn that vision into a reality.