One of the biggest decisions a startup will have to make is whether they are going to stay in or leave their hometown. For startups in major cities, this decision is likely to be influenced by the current and anticipated cost of living in their area. However, other factors matter too. For instance, a different — perhaps larger — market may make more sense if it will enhance the customer base and provide opportunities to develop overall business needs.
However, for startups beginning in smaller towns, the question is more complex. When you approach or get approached by a city, a lot of great people, from city officials and economic development groups to everyday citizens, will try to pitch you on why you should start your startup there. For the most part, each city will give you a similar pitch and usually list all the resources there and the great reasons to relocate.
We all know that larger cities have more resources, access to larger programs, etc. The biggest negative for big-city startups is usually that you are just one of many beginning the startup process. In the beginning, most startups have limited resources and are trying to find a home that will help them in any way possible. This is usually when many smaller cities aggressively play the “hospitality” card. They try to sell the idea that initiating a startup in their city would be a more intimate experience, backed by a strong community. In theory, this is great. You are going to have a community supporting you from the start. You’ll be one of a only a few, allowing for more individual attention.
In many ways, these offers are similar to the sales pitches smaller colleges give prospective students to compete against larger universities (smaller class sizes, more intimate learning environment, etc.). The best way I have seen a startup growth model explained was that one should think of a startup as a highly motivated student athlete.
The Incubation Phase (The High School)
A startup wants to find a “high school” that can give the entrepreneur a stage to show off, develop their talents, and start building a network. In doing so, “the athlete” is trying to get a scholarship to a major university.
The Accelerator Phase (The Powerhouse College Sports Program)
Here, a startup finds the best mentors, advisors and coaches to get them into the pros. Here, a startup gets access to the most relevant resources, information and players in the game.
The Investment/Revenue Phase (The Pros)
A startup has financial resources that it uses to build their professional team and hopefully develop a dynasty.
Once a startup has moved past the incubation stage, the startup will have financial support, a large network and many other resources that will make them valuable to any community. A startup will now have to decide where to spend those resources. Whether it is job creation, network sharing or simply resources in the community, big-city markets become very attractive for these startups.
When smaller cities have slow growth in the areas of technology and venture capital, they have to rely heavily on hospitality and low cost of living to attract and keep startups. Unfortunately, they run a great risk of losing startups that don’t have a large customer base or extensive network in that community. This risk increases alongside the cost of living.
One thing that startups consider and compare across cities is the cost of office space relative to the market access and networking opportunities they are likely to acquire. From a startup perspective, acquiring an office base for $300 per desk in a city with restricted resources and market access is less desirable than office space that runs $400 to $500 per desk in a larger city like Kansas City, St. Louis, Chicago or San Francisco. Their calculations are likely to favor a decision to move to a larger market, where they perceive they can get a bigger return on their overall investment.
I think it is fair to say that the majority of startups and founders want to support their local communities. But if their community is not growing fast enough or providing them with the relevant resources and talent they need, simple hospitality does not suffice in attracting or keeping startups. Just as we see with college graduates, once they go to larger cities with greater opportunities, it’s very difficult to bring them back home.