From the January 2008 issue of Entrepreneur

Small towns have venture capital, too. That's the finding of a recent Federal Reserve Bank of Boston study that sought to pinpoint cities outside the 40 largest U.S. markets with the most VC activity. While half of all U.S. venture capital is handed out by VCs based in Silicon Valley and Boston, Fed Bank researchers Carole Carlson and Prabal Chakrabarti identified 20 smaller ("secondary") cities with thriving VC communities. Then they identified key traits these markets share that have helped them become hot VC markets:

  • Clusters and Networks: These towns offer ample opportunities for entrepreneurs to meet others in their sectors and connect with VCs. The research also found that most markets had a critical mass of companies in a particular industry, with major companies spinning off several entrepreneurial startups. For instance, top-ranked Boulder, Colorado, has an internet-related technology cluster, says angel investor David Cohen of Colorado Startups LLC. Several hundred tech entrepreneurs convene monthly to network at the New Tech Meetup, where five entrepreneurs each get a few minutes to present their ideas.

    Tim Miller, 45, CEO of Boulder-based Rally Software, says VC firms in town are easy to approach. Along with co-founder Ryan Martens, 42, Miller raised $8 million in 2006 led by locally based Vista Ventures. VC investments in Boulder County in the third quarter of 2007 alone topped $100 million. Says Miller, "I know several firms here with a policy that they'll basically meet with anybody--at least briefly--and hear their pitch."

  • Investor Presence and Past Success: Hot VC towns often had a major corporate success story or two in the recent past, spinning out new entrepreneurs and creating wealthy locals with capital to invest. In Westborough, Massachusetts--ranked third in the study--a recent round of M&A deals freed up entrepreneurs to start new companies, says Dan Klein, senior associate with Westborough-based VC firm Vesbridge Partners. Solid payoffs from the deals also left previous investors pleased and ready to invest again.
  • Technology Transfer: Strong research universities in these towns are focused on ways to commercialize new technologies. In second-ranked Salt Lake City, the state will have approved nearly $600 million in tech-transfer initiatives by 2011 to aid colleges' efforts, reports Heidi Huntsman, a Salt Lake City-based partner at UV Partners.
  • Quality of Life: These markets are usually desirable locales, making it easy for companies to attract experienced managers. For instance, scenic, outdoorsy Boulder is so appealing that after he held a summer workshop for budding tech entrepreneurs, Cohen says six to eight out-of-state companies decided to move to town. "It's a nice place to live," he says, "and they've met a bunch of investors and built a network."