Startups are the largest job creation engine in cities; they create over 56% of new jobs. However, when it comes to jobs programs, rather than focusing on job creation, many city leaders chose to import them by enticing employers to relocate from other cities. This is bad policy for three reasons:
- It creates a race to the bottom where cities’ main bargaining power is their willingness to undercut their tax base or ease zoning regulations
- These newly relocated companies do not have roots in the community and are at risk of moving when they receive a better offer elsewhere.
- It’s a zero sum game; for one city to win, another must lose.
What’s worse, that above approach doesn’t even work; for all the effort, fewer than 2% of new jobs come from relocation. This proves true even in times of economic stress. During the Great Recession, the Kauffman Foundation found that young firms, those less than five years old and with fewer than twenty employees, grew by 8.6% while older larger firms shrank.
Okay, so now we know that the startup ecosystem has a disproportionate impact on a region, how do you set out to build one? To find out, Jim Brisimitzis, who runs Microsoft’s start-up business in the US, and I attended the Angel Summit in Chattanooga. The summit is the brain child of Leslie Jump who works with smaller sized cites to help serve entrepreneurs, investors, and civic leaders build a start-up ecosystem.
To start a new company all an entrepreneur needs is a great idea and access to capital. Creativity is surely distributed evenly throughout the country, however, capital is not. Some 70% of VC money goes to the San Francisco Bay Area, Boston, and New York City. A more vibrant investment community would allow more entrepreneurs to secure funding for their ideas because not everyone can pick up move to one of these top three markets.
For the investor, limiting one’s investment opportunities to just three large urban centers means missing out on great companies found in smaller markets. Plus, all that VC capital is likely chasing too few opportunities and probably overpaying in the end.
Lastly, for the cities themselves, tapping local capital for its local companies means that investors not only earn positive returns, but they help grow the local economy which amplifies their initial investments.
Better yet, start-ups diversify an economy and help rejuvenate it. As old industries wane, start-ups help position cities for the next wave of innovation just like high tech startups replaced the aerospace industry and orchards here in Silicon Valley.
