Why Startups Should Look for Opportunity Between the Coasts

Dozens of cities around the nation have everything Silicon Valley does, except the crushing costs.

learn more about Alexi Harding

By Alexi Harding

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Tech entrepreneurs are the cool kids on the block. Whereas young people once aspired to be rockstars or astronauts, today they dream of being startup founders, flush with venture capital and working out of sleek, open-plan offices in San Francisco's trendy SoMA district or New York's bustling Flatiron neighborhood.

Every year, countless founders make their way to these golden cities, armed with little more than a dream and a prayer. But truth be told, these entrepreneurs are making a key (and possibly fatal) mistake: they're focusing narrowly on a handful of established startup hubs where rents, taxes and regulations are out of control. The competition is fierce and unrelenting.

The picture is much more favorable outside the coasts: there are many emerging tech centers throughout the country offering the same high caliber of intellectual talent and expertise, but at a fraction of the cost.

Let's look at two reasons to move away from the coasts, two cities you may wish to consider, and two examples of companies that have flourished inland.

Related: The 10 Best Tech Hubs to Live and Work (Infographic)

Venture capital

Believe it or not, Silicon Valley and New York are no longer the best places to find funding. True, nearly 47 percent of all venture capital investment in the United States went through California ($78.4 of $140 billion overall), while New York accounted for a slightly lower proportion ($10 billion). But from 2015-17, Silicon Valley's share of venture capital declined by half, from a whopping high of nearly $9.5 billion in Q3 2015 to $4.02 billion in Q1 2017.

More importantly, Silicon Valley investors are ditching sunny California, instead looking elsewhere for their next unicorn. The regions that garner the most investment from Bay Area-based venture capitalists include upstarts like Austin, Chicago, Denver, Portland, Atlanta, and Salt Lake City–hardly traditional tech hubs. In fact, these five cities accounted for nearly $1.1 billion in seed capital, a small but growing portion of investment; controlled for size, both Denver and Austin are within the top ten cities for VC investment per capita.

Besides, by their nature, investors are always seeking the next cash cow, and there are plenty of unorthodox, forward-thinking VC firms that aren't tied down to the Valley. The best-known is Revolution LLC, which has invested $840 million in startups outside California, New York, and Massachusetts, seeking to spread economic growth throughout the country; one of its partners is Steve Case, a founder of AOL. Towards this end, Revolution created Rise of the Rest, a nationwide initiative that promotes regional entrepreneurship and innovation in places as diverse as New Orleans and Atlanta.

One promising Southern startup is Cardlytics, an Atlanta-based, purchase-intelligence firm that raised $200 million in funding. Though Cardlytics faced initial obstacles, such as difficulty in finding local funding, it was eventually able to secure capital from Canaan Partners and Polaris Ventures. More importantly, Cardlytics' founders cited Atlanta's comparatively lower overhead (and their knowledge of the local tech scene) as crucial factors in their success.

Related: 9 Cities You Wouldn't Think Are Hubs for Tech Startups

High cost of living drives a brain drain.

But it's not just venture capital that's leaving the coasts; top tech talent are also fleeing en masse for sunnier, cheaper cities.

A brain drain looms over Silicon Valley. Overall, 34 percent of job seekers aged 31-40 were looking to relocate; among employees who are between 45-54 years old, the number is closer to 50%. Today, there are serious talent shortages in the Bay Area, leading to hiring headaches like longer processes and increased costs per new hire.

This isn't surprising, especially considering that even with an annual salary of $100,000, affluent (if not exactly rich) tech workers still struggle to make ends meet in the Bay Area sinking nearly half of their net, take-home pay into rent if they wish to avoid long commutes. Besides, San Francisco and New York are the two most expensive real estate markets in the world: a monthly bedroom averages an unbelievable $3,728 in San Francisco and a breathtaking $2,698 in New York.

And don't forget your other expenses, such as childcare costs (in 2015, this was as high as $16,250 annually) or transportation (despite its notorious inefficiency, New York's mass transit still costs 75 percent more than the national average).

No wonder everyone is leaving while they can.

Related: 6 Regions Where Tech Jobs Boom the Housing Is Scary Expensive

Life between the coasts.

So where is everybody off to? Well, cities like Austin and St. Louis, where the monthly rents average $1,245 and $962, respectively.

Silicon Hills: But it's not just low prices are just part of the picture.

Austin provides a clear template for the kind of environment that so attractive to startups and their young, restless employees: low cost of living, high livability, plenty of cultural (and culinary) attractions, and a collaborative ecosystem worlds away from the insanely cutthroat atmosphere of a big city like New York. Equally important, Austin has its share of top-caliber talent, clustered around hubs like the Austin Technology Incubator, South by Southwest (SXSW), and the massive University of Texas at Austin, home to nearly 40,000 students.

And lest you think that Austin is all hype and hipsters -- it's not. Look at Twitter and Foursquare, two startup success stories (and now household names) that were launched at the city's South x Southwest Festival, a multifaceted event celebrating tech, film, music, and art. Today, though Twitter has faced ceaseless profitability problems, Foursquare has successfully monetized its model, using its check-in app to generate reams of business intelligence. As evidence of how thoroughly the company has mastered big data, in 2016 Foursquare CEO Jeff Glueck predicted that Chipotle's sales would fall by 29 percent.

He was on the money, as Chipotle reported a $26.4 million loss later that year.

Related: SXSW: How a Small Festival Brought Austin Big Business

Tech's final frontier.

But it's not just Austin; the South and the Midwest have the fastest growing tech scenes in the country, particularly cities like St. Louis and Kansas City (confusingly, located in Missouri instead of Kansas).

St. Louis, in particular, is a case study for cities desperate for entrepreneurs: by blending public initiatives and private institutions, the city government has created a tech boomtown.

How? Rather than relying on overused gimmicks like tax breaks or government subsidies, the St. Louis government instead followed this playbook:

  • Created programs like Arch Grants, a startup competition that offered promising entrepreneurs $50,000 in grants and free services if they agreed to move to St. Louis.

  • Helped develop institutions like the Skalandaris Center, which aim to improve human capital by training and networking entrepreneurial and tech talent.

  • Created a highly connected, entrepreneurial network. Previously, St. Louis entrepreneurs existed in their own, separate spheres; organizations like Arch Grants, the Skalandaris Center, and the IT Entrepreneur Network (ITEN) deliberately brought these silos together, often by sharing services and clients.

Contrast this with Startup NY, New York State's disastrous $1 billion attempt to "supercharge" the regional economy by declaring tax-free zones around upstate Rust Belt cities like Buffalo. Rather than transforming vast stretches of suburban and rural New York into a tech wonderland with 4,100 new jobs, Startup NY only created 408 jobs over two years. More importantly, instead of taking a page from St. Louis' program, state legislators doubled down, insisting that the program was fundamentally healthy, and that no changes were needed.

With attitudes like that, small wonder that cities like Austin and St. Louis are thriving.

Now, one can't say for sure whether more startups will pay their new hires to move to less expensive, inland areas, but one thing is obvious: New York and the Bay Area are no longer the sole sources of technological innovation. Just as startups have thrown numerous industries into disarray, so too are these two tech titans being disrupted by a swarm of smaller, scrappier competitors.

All that's left is to see how swiftly the mighty will fall.

Alexi Harding

Senior Managing Director of OPES Group

Alexi Harding is a seasoned Financial Services professional with over 12 years of experience in business development, relationship based selling, enterprise risk management and client relationship management. Harding transitioned from the insurance industry to venture funding in 2009 when he formed Galatica Corp, an angel investment partnership, to develop new businesses and rehabilitate distressed businesses. He has set up The Opes Group to further expand his business development services.

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