Move over, Palo Alto: A tiny city on the eastern shore of Lake Michigan has some of the best business resources--and lowest corporate costs--in the United States.

With a population of just 33,051, Holland, Michigan, was named the No. 1 small city for launching a business in 2016 in WalletHub's list of the Best and Worst Cities to Start a Business. The study evaluated 1,268 cities with residential populations of between 25,000 and 100,000. Factors taken into account included the overall business environment (which considers growth in the number of companies, average revenue, and industry variety), access to resources, and cost of starting up. 

Source: WalletHub

 

The list came with many surprising data points: Muncie, Indiana, was named as the city with the best access to financing, and Southern California (otherwise lauded as the "Silicon Beach") was said to have one of the least educated work forces in the U.S.--in the cities of Bell Gardens, Maywood, Coachella, Soledad, and Wasco. While one might expect small cities across Northern California to be fertile ground for new companies, it turns out that Menlo Park, home to Facebook and numerous other startups, such as Poshmark and Magisto, actually has the most expensive office space in the U.S. and ranks No. 1,233 overall on the list.

"Many small cities in California are still struggling from an economic standpoint and have not fully recovered from the recession," says Jill Gonzalez, an analyst with WalletHub. "While some northern cities are still recruiting top talent, many Southern California cities are not as fortunate in the startup department. The businesses in these small cities have declining revenue and little to no industry variety," she added.

The data suggests that high-profile cities, which already house startup darlings, are not actually the ideal places to launch a new business.

What a small city like Holland has to offer

Although operating in a small city has its disadvantages, most obviously, less access to venture capital than you would find in urban centers like New York City, Boston, or San Francisco, analysts point out that there are still major benefits.

"In a small city, it will be easier to get to know the best service providers, such as lawyers, your banker may likely be someone you know, and you can more easily create a name for yourself," said Chuck Sacco, assistant dean of strategic initiatives in the Charles D. Close School of Entrepreneurship at Drexel University.

Startups in Holland benefit from a tight-knit community. While the city is small, it also has the second-highest number of engineers per capita in the country, according to Liz Hoffswell, the vice president of the Michigan West Coast Chamber of Commerce. That gives companies a leg up when it comes to hiring.  (Overall, Michigan has the most engineers per capita of anywhere in the U.S.--60,000 coders to its 9.9 million residents--while California has 62,000 for its 38 million residents, according to the Center for Automotive Research.)

"We make things here," Hoffswell says. "For any company involved in manufacturing or design, this is a great place to be." 

Craig Hall, a serial entrepreneur and investor based in Holland, notes that the city's history of entrepreneurship emerged from economic necessity.

"We've had a long-term culture of entrepreneurialism, mainly because we had to," Hall says. "It always seemed that all of the resources went to Detroit, so we had to create our own opportunities." 

Hall, who has started eight companies and invested in 35, created an angel investment fund in 2004 called Grand Angels, in an effort to bring more capital into western Michigan.

"I'd had a successful exit before [TLC, which was acquired by Ryder for an undisclosed amount in 2011,] ... and I thought I was pretty well-connected," Hall adds. Still, even he found it difficult to raise financing for a subsequent venture, and launched the investment group to help other entrepreneurs score fast capital on their home turf. 

Lessons from industry leaders

The Holland metro area is the birthplace of competing furniture industry giants Herman Miller and Haworth. It's also home to LG Chem Michigan, a U.S. branch of the South Korean battery maker, which manufactures advanced battery cells for electric cars. LG Chem Michigan has received $303 million in financing, half of which came from the  U.S. Department of Energy.

Startups to watch in Holland include EBW Electronics, a manufacturing firm that specializes in print circuit board assemblies, or PCBAs, which grew revenue by 67 percent between 2011 and 2014, making the Inc. 5000, at No. 4,171, in 2015. Another company, New Holland Brewing, is a restaurant and microbrewery that recently expanded distribution to California and the greater Houston area, bringing its total footprint to 30 states.

While some finance resources exist on the ground in Holland, including the SmartZone, which provides infrastructure and support to growing companies--and aims to invest $7.5 million in Holland startups over the next 10 years--businesses are well aware that the funding climate is not especially strong.

"We don't have a large pool of investors within our community," Hoffswell adds. "It's not like we have the VC opportunities that you have other places."

Still, some entrepreneurs have adapted accordingly, raising funds through angel investors or by bootstrapping.

Cheaper than urban centers

Overall, Holland is a cost-effective place to launch a company. The median home price in Holland, which ranked as the No. 65 city for business costs, according to WalletHub, is just $118,000--significantly lower than the overall U.S. median home price, which is $301,400, according to the most recent available data from the U.S. Census Bureau. Leasing office space there is much less of an investment than it would be, say, in Menlo Park.

While many might continue to associate the economic malaise of Detroit, where President Obama issued an auto-industry bailout in 2009, with Holland, Hoffswell flags that the city has experienced a rapid recovery and looks nothing like the Motor City these days.

Across the town, small-business owners and their families benefit from a high quality of life; in 2009, Holland was designated the second-happiest city in America, according to a Gallup poll.

Though Michigan faces brutal winters, Holland, for one, has built heated pipes beneath sidewalks in the city center, which suck away the melted snow, leaving the area fresh.

Published on: Apr 20, 2016