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Startup Culture Geography: What's Changing?

YEC
POST WRITTEN BY
Jack Tai

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The phenomenon of startup culture has transformed local economies and driven innovation. However, it's more localized than it may seem at first glance.

The geography of startup culture reveals that in certain locations, the right mix of conditions produces a large share of innovation and entrepreneurial growth. As global economies shift because of the Covid-19 pandemic, these local startup hubs will also morph.

What are the local factors driving startup culture?

First, let's look at the makeup of startup cities and the factors that drive a culture of innovation.

Silicon Valley and the San Francisco Bay Area may go down in history as having reigned as the startup capital of the world. However, strong startup ecosystems also exist in major hubs such as New York, Los Angeles and Toronto. The success stories of these global cities are underpinned by the types of economic diversity and opportunity that provide ripe conditions for new businesses.

It's not only the major cities that provide the right conditions for startup growth. Emerging cities have also started to make a mark as entrepreneur hubs.

What do the cities with a strong startup culture have in common?

First, there's talent. The metros tend to have growing clusters of knowledge workers. This gives companies access to skilled workers, and it means that ideas can be exchanged freely in communities. Typically, there are strong high-tech skills along with a forward-thinking approach and an early adopter mindset.

The metros are also entrepreneur-friendly. Younger startups may be better able to get off the ground in places with low costs of living and real estate. Infrastructure such as fast internet and business-friendly regulations is also essential.

Startup culture is also driven by a pipeline of new ideas and people. This is usually supported by a strong education system, including a local university or research institution.

Having a major institution presence changes the local economy, increasing creativity, funding and research opportunities. Cutting-edge skills are especially important for tech startups where margins of advantage can be razor thin. Plus, young graduates will be ready to make their mark. When a city leads in higher education, startup culture frequently follows.

Which cities have strong startup cultures? 

Unlike traditional corporate culture, which is steeped in history and process, startup culture is about fresh ideas and new ways of thinking.

Over the past decade, startup funding has become more concentrated in the top startup cities. As Richard Florida explains in HBR, there is a "winner-take-all geography" where venture capital is concentrated in a handful of cities.

About 70% of all early stage VC funding in the United States is allocated to startups in the top 10 hubs of San Francisco; San Jose, California; New York City; Los Angeles; Boston; Seattle; Chicago; San Diego; Austin, Texas; and Washington, D.C.

In addition to these major metros, there are also emerging startup hubs across the country. These occur predominantly in college towns. For example, startup financing has been strong in cities including Boulder, Colorado, home to the University of Colorado; Columbus, Ohio, home to Ohio State University; Bend, Oregon, near Oregon State; Indianapolis, home to Indiana University and Purdue; and Gainesville, Florida, home to the University of Florida.

How will startup hubs change during the aftermath of the pandemic?

Both major startup cities and emerging entrepreneurship hubs will likely see a degree of economic disruption because of the Covid-19 pandemic. Investors at all stages are expected to look closely at their portfolios to assess each startup's strengths within the new market conditions and the company's ability to pivot to new offerings.

In particular, I predict that there will be a shakeup in the geography of funding opportunities. Covid-19 may cause a resurgence of entrepreneurs' reliance on local funding sources, for example.

A report by PitchBook/Morningstar explains that for early stage investments, the shift from in-person meetings to videoconferencing could change opportunity access for entrepreneurs. While the meeting content could be the same in a different format, videoconferencing may not be able to support the type of trust and confidence that is necessary for major deals between startups and investors. This could prompt investing and startup growth to rely on localized networks where trust, reputation or networks have already been established.

If local reliance is teamed with resiliency, then factors such as talent and innovation can persist for small businesses working in smaller startup economies. This means that startup culture will continue to grow, and as the economic outlook improves, venture capitalists will return.

Startups will bootstrap until boom time.

In these emerging startup cities, entrepreneurship won't stop, nor should it. Instead, there could be a rise in bootstrapped startups until funding opportunities normalize.

This business pattern of small-scale startups existed during the economic recession of 2008-2009, according to an analysis by Sara Moreira, a faculty member at Northwestern's Kellogg School of Management. During the recession, startups that launched didn't have the resources to scale up quickly. This had lasting effects, and these companies grew, on average, 1.4% slower than companies that launched during boom times.

The reason for this slow growth is not product development, production or scaling. Instead, it's a demand-side issue. In strong economic times, higher consumer demand buoys brand reputation and awareness. This, in turn, set the company's early growth curve for the long run.

As VC investments change in emerging startup economies, there is an increased importance of marketing and advertising for startups to strengthen consumer perception. Then, as economic conditions improve, pent-up demand combined with increasing venture capital investments could create a tailwind for the growth of startups and their regional hubs.