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The location of your startup could have a big impact on its growth and eventual success. The interest of investors in your startup, the availability of talent in the local labor pool, and an area’s cost of living can all work in a company’s favor or against it.
Startup culture is centered in a few regions in the United States. The Silicon Valley Bay Area accounts for 45% of total venture capital investment in the U.S. When you add in other startup hubs, such as New York, Boston, and Seattle, it covers nearly three-quarters of the country’s venture capital investment. Many experts have called out so-called “second tier” startup cities, such as Portland and Austin, but even those regions are now becoming costly and saturated for would-be entrepreneurs.
In order to discover the best untapped cities for startups, Fundera gathered data on 50 mid-sized cities with a population under 500,000 residents. We measured each city’s access to a talented labor pool, average labor cost, office space cost, average cost of living, and proximity to a larger startup ecosystem. Our findings indicate that cities with high potential for startup success exist across the country.
Here are some of our key takeaways:
Read on to see the complete ranking of the best untapped cities for startups. This information is useful for prospective and current founders, investors, and startups that are considering multiple locations.
Most startup businesses, whether the founders intend to raise venture capital or not, typically start out on a shoestring budget. As a result, the magic recipe for a startup-friendly city is one that has access to a relatively inexpensive, but high quality, talent pool from which to recruit workers.
At the same time, the cost for the founding team to live in the city and rent office space there should also be reasonably affordable. Although the number of venture capital deals in a region was only a small factor in our analysis, venture capitalists like to invest locally, and a critical mass of startups that already exist in an area can be a positive pull-factor for investors and other startups.
Accounting for all of these variables, the following 11 cities are the best untapped startup destinations:
The beautiful city of Madison, Wisconsin is number one on our list, due to an excellent balance of startup-friendly factors. Madison boasts a well-educated population, with 57% having a bachelor’s degree or higher. This city also has the highest concentration of millennials compared to any other city in the country, making it a particularly great option for young startup founders and their teams.
A young, well-educated talent pool is coupled here with low office rental prices that are falling year-over-year. The cost of living isn’t outrageously high with a $12.44 living wage cost, and the average median income of $64,101 is just a hair above the nationwide average. At just 73 VC deals over the last three years, Madison may best represent what it means for a city to be untapped. The startup scene here is small, but there is potential for immense growth.
The second city on our list—Plano, Texas—also benefits from its proximity to a nearby powerhouse metropolis—this time, the Dallas-Ft. Worth area. Many corporations already make their home in Plano, from Frito-Lay to J.C. Penney, and now it’s time for startups to see if they can follow in the footsteps of these companies.
Plano scores relatively high on our most important metric, with 57.5% of the population holding at least a bachelor’s degree. Although the average lease cost of office property is on the higher end, at $22.22 per square foot, Plano has actually seen a slight decline in that cost year-over-year of late.
Plano has a low cost of living thanks to its location in Texas (which has no state income or estate tax), and sees some benefit from its short distance to Dallas-Ft. Worth in the form of decent VC interest. That said, the median income is high, at $93,012, so your startup might not be able to hire a large local team.
St. Paul, MN rounds out the top three cities on our list. While St. Paul’s population isn’t as well educated as its sister city of Minneapolis (which ranked 12th), St. Paul commands a distinct advantage in the cost of operating a business. Office space costs on average $13.63 per square foot per year to rent, and year over year growth has also remained at a steady 2.2% rate. Over the last three years, St. Paul, along with Minneapolis, has attracted 146 venture capital deals. All of this indicates that the city is growing at a steady clip, but costs haven’t become out of reach for startup owners yet.
Where St. Paul could do better is in access to a talented labor pool. The University of Minnesota, which ranks among the top 30 colleges nationwide both for undergraduate and graduate engineering programs according to U.S. News and World Report, is nearby. That means St. Paul is a great city to source tech talent. However, only 40.1% of the population has a bachelor’s degree or an advanced degree, which means it might be more difficult to recruit talent in other areas.
Although Toledo and Cleveland rank in the bottom half of our list of cities, Cincinnati claims the fourth spot. This city, similar to St. Paul, performed only fairly in terms of access to an education workforce, but did well in terms of affordability. Only about one-third of the city’s residents have a bachelor’s degree, but both median income ($43,585) and cost of living ($10.93) are among the 10 lowest of all the cities we analyzed in this report. Even office space costs are decent, hovering around the average.
Cincinnati is quickly becoming a leader for startup businesses. For one thing, the city has its own seed fund, CincyTech, that has invested more than $55 million in 80 startups across southwest Ohio. The city also has successful accelerators and mentorship programs for founders from minority backgrounds.
The city of Durham rounds out the top half of our list. Many people recognize Durham and its sister city Raleigh (which placed 19th) as startup-friendly cities on the rise, mainly due to the location of Duke University and the University of North Carolina nearby, both nationally top-ranked universities. However, Durham has a lot going for it besides feeder universities and great barbecue.
For one, the city has a well-educated workforce, with over 50% of the population holding a bachelor’s degree or higher. The cost of living and average median income are middle-of-the-road, especially compared to other top cities in states like California, Colorado, and New Jersey. The Raleigh-Durham region brought in 159 VC deals over the past few years, so this area is already being recognized for what local startups have accomplished.
Office rent prices ($17.79 per square foot per year) and growth levels (3.3% year-over-year on average) are on the higher side, but getting in now or in the near future means you’ll still get a better deal than in markedly more expensive cities in the southeast region, such as Atlanta, Miami, and Tampa.
St. Louis is home to what city leaders call three “innovation districts”—in agritech, biomedical, and technology. There are several for-profit and nonprofit organizations that assist local startups financially, with the strong support of the city and county government.
St. Louis didn’t perform particularly well on every metric we measured. Only 37.1% of the city’s population has a bachelor’s degree, and office rental costs ($18.38) are pretty high. However, stand-out areas for the city were growth in the cost of office space and median income. The cost of office space is actually experiencing negative growth of 0.4% year over year, and the median income was higher only than Cincinnati when you consider the top 11 cities overall.
Dallas, Houston, and Fort Worth often get all the attention from larger companies, but a great smaller city for a startup to locate is Arlington, Texas. Arlington is just a 45-minute drive from Plano, but presents different opportunities. Whereas Plano has the second-highest overall percentage of residents with a bachelor’s degree, Arlington’s percentage of residents with a bachelor’s degree or higher, 27.9%, was the lowest in the top 11 and below the national average (32%).
Arlington beats out Plano on the costs of doing business, however. Office rental costs were just $14.95 to begin with, and declining year-over-year. The median income was $63,091, and the hourly living wage was $11.71.
Both Scottsdale and Chandler, Arizona are top 11 contenders on this list—and both benefit greatly from their association with Phoenix. Of the two cities, Chandler has a less well-educated population, with 43.8% of the population having a bachelor’s degree or higher. However, Chandler has cheaper office space ($18.21 per square foot per year) and less furious rental price growth than Scottsdale.
As mentioned above, most of the VC interest that Chandler can claim is due to its proximity to Phoenix. The Phoenix area attracted 122 VC deals over the last three years. Plus, being a short drive away from one of the biggest cities and one of the busiest airports in the country is a strength that startups can and should take advantage of.
The city of Henderson, Nevada is often thought of as a residential suburb of Sin City, or a place to get close to nature when you’ve spent too much time inside the casinos. But there’s more to this city. Henderson is an affordable place for startups to locate in a region that has a growing startup scene.
The Las Vegas region first bloomed as a startup zone in 2012, after Zappos CEO Tony Hsieh contributed $350 million of his personal money to revitalizing downtown Las Vegas. Many startups that have launched in the area since then have had successful acquisitions or exits. Although talent shortage can be an issue in Henderson, and Las Vegas in general, the office space rental cost is just $15.31 per square foot on average and declining slightly year-over-year. This put Henderson into the top 11, while nearby Reno ranks number 34. Henderson’s living wage is also pretty low at $11.32 per hour, lower than St. Paul and Arlington, for example.
Kansas City and St. Louis border opposite ends of Missouri, and these cities are pretty distinct, other than the common factor of making the top 11. The going rate for office space rentals in Kansas City is $17.13, and the city is seeing 3.3% year-over-year growth in office space rental prices. Kansas City performed better than St. Louis in terms of median income and cost of living. This city even brought in 56 venture capital deals between 2016 and 2019.
In the second half of the 20th century, Kansas City lost a lot of jobs to other parts of the country. However, the city has recently been embracing tech innovation and has a vibrant startup scene. Kansas City was the first in the world to get Google Fiber broadband internet, and the first in the Midwest to offer electric mass transit in 2016. If your startup moves fast enough, you could be one of the first to make a big name for yourself in this city.
Scottsdale tied with Kansas City for the last spot in our ranking of the top 11 untapped cities for startups. Scottsdale has a highly educated population, with 56.8% of residents having at least a bachelor’s degree. The city also has a well-deserved reputation for attracting affluent residents. With a median income of $88,071 and an average living wage, you’ll need to be prepared to hire fewer people for your startup and pay them more.
However, this is made up for in cheaper operational costs. Office space in Scottsdale rents out for an average of $22.36. This is expensive compared to other cities in our top 11, but significantly less so than large startup hubs like San Francisco and Seattle. That said, it’s a good idea to move your company to Scottsdale sooner rather than later, given that office rental costs are rising more than 7% year-over-year.
Here’s how all the cities in our analysis stacked up:
Number of VC deals (Q2 2016 – Q2 2019)
*Note that in some cases, small cities were grouped together with larger nearby cities. For example, the number of venture capital deals for Anaheim, California is based on data for the Los Angeles region.
In order to create a list of untapped cities for startups, we started our search by limiting our field to the 50 largest cities with a population under 500,000 residents. This allowed us to focus on cities that were large enough to be attractive to a startup founding team, but small enough to be affordable.
The premier startup cities in the U.S. are big cities. New York, San Francisco, Los Angeles, Austin, Boston—all of these cities have over half a million residents. They’re also some of the most expensive cities that you could choose to live and work in. With that in mind, we limited ourselves to smaller cities that would still have many of the factors in place to cultivate a startup scene in the not-so-distant future.
Here are the factors we included in our analysis:
A startup will need an expansive pool of educated workers from which to build their workforce. As a baseline for education level in each city, we tracked what percentage of the population has a bachelor’s degree. A bachelor’s degree demonstrates that someone has a baseline of writing, communication, and thinking skills that are critical to thriving in a startup environment.
For this factor, we used estimates pulled from the Census Bureau’s 2017 American Community Survey.
Once it comes time for a startup to rent office space, an important consideration is how much of a drag that space will be on the startup’s bottom line. Expensive office space makes it more likely that you’re competing with a glut of well-established corporations and businesses for the space to exist. As the phrase “untapped cities” implies, we looked for places that allow startups to get in before prices and competition skyrocket.
Hand-in-hand with the average cost of office property rentals is the rent growth year-over-year. If a city has explosive office rent growth, it’s only a matter of time before these costs could force a startup out of business. A couple of our cities have actually experienced negative rent growth, meaning they may become a relative bargain in the years to come.
To assess office property rental cost and rent growth, we used LoopNet, an online marketplace for commercial property. For each city, we tallied the average asking rental rate per square foot per year (in 2016, the most recent year for which data was available), and the year-over-year growth in rent.
Your startup can only be as good as the people you hire, and it can be difficult to hire a large team in a costly job market. Therefore, another important factor to consider when measuring the cost of building a great team is a city’s average median income. A lower average median income, combined with a well-educated workforce (factor #1), means that you can hire a large, talented team who have the skills you need to scale your company.
For this factor, we consulted the Census Bureau’s estimates of 2018 median household income in each city.
Cost of living is another hugely important metric for determining how much money you’ll need to spend in order to be an attractive option for top talent. The less that people need to spend in order to live well, the further their salary goes. In effect, you can offer people a large raise just by enticing them to move to a city where the cost of living is low. In addition, a city’s cost of living also impacts how much a founding team needs to spend on their own daily necessities.
For this factor, we used MIT’s Living Wage Calculator, which reports 2019 cost of living data for cities around the country.
Finally, a good sign that there is an ecosystem in place for startups to thrive is whether or not venture capitalists are willing to invest in companies in the area. You’ll be more likely to get meetings with VC firms or investors—and establish yourself as a key player—in a city with a rising startup scene.
For this factor, we calculated the number of VC deals that took place in a city from Q2 2016 to Q2 2019, using PwC MoneyTree Explorer tool. Some cities on our list benefited from being grouped with larger, more established startup cities, such as Chandler and Scottsdale’s proximity to Phoenix. Proximity to a startup hub is beneficial because investors are already in the hub meeting founders, and it isn’t a leap to think that what is today a nearby commuter city or a suburb could become a future startup zone.
The startup scene is diversifying globally, so much so that the next hugely successful startups might not even be in the U.S. However, there’s a key set of factors that make a place friendly to new businesses. These include access to high quality but inexpensive labor, accessible office space, a decent cost of living, and ideally, proximity to an area which investors already frequent. This is a difficult recipe for any city to achieve, but local, state, and national governments should focus on investing in universities, job training, and real estate affordability to gain a competitive advantage.