The New Laws of Startup Attraction
Tech startups are drawn to cities with small but frequent funding opportunities and plenty of social networking
Based on the research of Rajiv Garg
For cities looking to attract technology startups, the connections they offer matter more than big money.
New research from Texas McCombs shows that while startup location matters — just not for the same reason as with other businesses — today’s successful tech entrepreneurs gravitate to areas where they have a strong social support network and can obtain multiple rounds of relatively modest funding.
“If you’re starting a restaurant, location matters and large funding matters,” says Rajiv Garg, assistant professor of Information, Risk, and Operations Management at Texas McCombs. “But if you’re building a mobile app, the cost is low and nobody cares where you’re located, so the factors that influence a move are very different.”
No Need for a Windfall
To pinpoint those factors, Garg joined Management Professor John Sibley Butler and Bryan Stephens, postdoctoral research associate at Duke University’s Fuqua School of Business. They used economic indicators made publicly available by the U.S. government, investment information from CrunchBase and PricewaterhouseCoopers, and data from LinkedIn to analyze 1,418 U.S. entrepreneurs who had secured funding for their firm in the last 10 years.
Surprisingly, the amount of money available in a location did not significantly affect a startup founder’s decision where to operate, Garg says. “Twenty years ago, if you asked someone where they would go to start a company, they would likely say Silicon Valley, because they could get much more funding from venture capital firms.”
The big money is still there, but the number of startups in that area has exploded, making the chance of getting that money a fraction of a percent, he says. Plus, real estate and other costs of living are deterrents to starting firms in places like Silicon Valley and New York City. Instead, today’s entrepreneurs are gravitating to cities like Austin, Seattle, San Diego, and Denver.
“Now, people say, ‘I don’t need $2 million to launch my firm. All I need is to build a really cool app, raise $50,000 for cloud-based services, and hire a user interface designer who could work from anywhere in the country.” — Rajiv Garg
That lowers the need for large amounts of funding.
Instead, the entrepreneurs in the study were concerned with steady access to smaller sums — with hopes for bigger sums after they bring in some profit and build a strong customer base. “We found angel investors play a huge role, because they give a small amount of money but a much larger volume,” Garg says. Equally attractive, he says, are venture capital firms that are willing to distribute, for example, $10 million of funding among 10 startup firms, versus directing all of the funds to one.
Cultivate an Innovation Culture
Researchers also observed the strong role of social networks in tech entrepreneurs’ decision where to locate. The more LinkedIn connections they had in a city, the more likely there were to stay based there. This concentration of social connection had the same “sticky” effect for people who had not yet started their business, strongly predicting whether they would stay or move before their launch.
“We found that having more connections in a particular city not only pulled talent to that area, but it kept them there.” — Rajiv Garg
The draw of a strong social network is especially impressive, because the research revealed that tech entrepreneurs were less likely to move than other types of entrepreneurs.
This emphasis on social connectivity is fairly unique to tech startups, because they are free from the burden of other considerations. “If I’ve created a food product that will be distributed throughout the country, I’m going to pick a location that is connected with a highway system, versus picking a location where I have more friends,” Garg says.
“After the inception, to grow your startup, you need new customers, and you find them by becoming popular online, getting a strong following on Instagram, Twitter, or YouTube. That’s how people will discover the startup,” Garg says, “and we found that an entrepreneur’s local and online friends are essential in spreading the word.”
So cities looking to attract entrepreneurial talent would do well to foster these social connections, through events or organizations such as the South by Southwest megaconference and nationwide accelerator program TechStars.
“We need to build more incubators — places where entrepreneurs can interact with likeminded people and generate an innovation culture.” — Rajiv Garg
They also need to draw young entrepreneurs, just not too young. The target age for these entrepreneurs is early 30s, the research found: Entrepreneurs in this age range were the most successful, boasting youthful energy coupled with maturity and work experience. “When people start their companies around age 20, they have really cool ideas, but they don’t have the right execution strategies,” Garg says. In their 30s, founders are more likely to get funding and be more successful, but by the mid-40s, that probability for success with a startup begins to diminish.
“This is very important for cities that are shrinking or dying because of their location,” Garg says. “They aren’t in a great hub, but they could make themselves more appealing to tech entrepreneurs just by following a few simple steps.”
“Social Networks, Funding, and Regional Advantages in Technology Entrepreneurship: An Empirical Analysis” published online Dec. 3 in Information Systems Research.
Story by Judie Kinonen
