Free Enterprise Staff  | July 20, 2016

Innovation That Matters: Inside America’s surging startup cities

America is on the cusp of a technological revolution that will impact every sector of the economy and every corner of the country. In the same way some cities rose and others faltered during the industrial era and the first technological revolution, this next wave of innovation and disruption has the potential to redraw America’s economic map as new cities emerge as leaders in the digital world.

Question is, which of our nation’s urban areas are positioning themselves to thrive in this new era, and which ones are on the verge of being left behind?

Not surprisingly, longstanding tech hubs like Boston and the San Francisco Bay Area remain the leaders when it comes to fostering innovation and entrepreneurship, and as of today, they’re the most well positioned to lead in the digital economy. However, they have mounting competition from some unlikely up-and-comers, according to the Innovation that Matters 2016 report—a joint research effort by D.C. startup incubator and venture fund 1776, Free Enterprise, and the U.S. Chamber of Commerce Foundation.

“How cities have thrived in the past 100 years will no longer lead to success in the digital economy,” Donna Harris, one of the co-founders of 1776 and the lead author of the study, writes in the report, which was released Wednesday. “The cities that succeed in creating a brighter new future will rely on an entirely new playbook.”

This second installment of the Innovation That Matters (ITM) study analyzed 25 U.S. cities to discover how urban leaders are supporting startup activity, determine what’s working and what’s not, and identify which cities are setting themselves up to capitalize on the shift to a digital economy. Researchers used a wealth of data and entrepreneur surveys to rank each city’s innovation economy by concentrating on six key areas: level of talent, capital, industry specialization, density, connectivity and culture.

Nipping at the heels of Boston and the Bay Area are three perhaps unexpected contenders: Denver, Colorado, the Raleigh-Durham area in North Carolina, and San Diego, California. Unexpected, that is, only to those living outside these cities. In each case, these cities have fostered vibrant startup and innovation ecosystems by tapping into some of their unique strengths.

America’s surging cities

Denver’s rapid climb up the innovation ladder has been fueled in large part by an influx of talent. In recent years, the Mile High City has attracted a strong supply of young talent from across the country thanks to the city’s high quality of life and booming job market. Denver also scored high marks for its “highly involved investors” and supportive ecosystem, which have strengthened the city’s position as a future digital leader.

“It’s a big town that acts like a small town,” says Kristen Stiles, cofounder of Sitter.me, a Denver startup that helps parents across the country find babysitters. “It’s a place that people want to live, so it’s easy to attract the right people – and that’s the big reason why I stay. I don’t have to battle other startups in huge markets like San Francisco to find the smartest people.”

Still, there are hurdles. If the city hopes to continue its ascent, it will need to solve its capital shortage (the city ranked only 14 out of 25 for overall investment and IPO) and lure in more global talent to supplement its local workforce. There’s also an opportunity, the report showed, to help startups more easily break into Denver’s strong real estate and transportation and logistics sectors.

Like Denver, the Raleigh-Durham area may not come immediately to mind when someone says “startup town,” but the region is quietly developing a first-rate digital economy thanks in large part to its well-connected technology ecosystem and flourishing startup culture. It should come as no surprise that the region—home to several pharmaceutical companies and medical centers—has a particularly strong network of health startups.

In addition, while the area’s overall startup community is among the smallest (in terms of total number of startups) on the ITM list, it managed to excel in providing business-friendly regulations, strong community ties, and dense startup centers, all of which help local entrepreneurs thrive.

“A strong openness to new ideas, a high quality of life and a favorable regulatory environment have created a world-class culture for attracting entrepreneurs to the area,” Harris writes of the Raleigh-Durham corridor, commonly known as North Carolina’s Research Triangle area.

Surprisingly, the region’s strong network of universities (which includes Duke University, the University of North Carolina, and North Carolina State University) apparently haven’t been a driving force behind the rise of the local startup ecosystem (the area ranked 12th for university engagement), according to the study. By better tapping into the resources at some of these local institutions, startup leaders in Durham and Raleigh have a chance to strengthen an already vibrant entrepreneurial ecosystem.

Meanwhile, San Diego—nicknamed “America’s Finest City”—is slowly transitioning into a digital powerhouse, too. Its rise to the fifth spot in the ITM rankings is due in part to its growing presence in the health startup sector and its increasingly skilled population.

The city’s relatively strong startup density and capital funding activity (it ranked fifth in both categories) have also contributed to its budding appeal for entrepreneurs, and that may help San Diego lure promising startups and bright entrepreneurs from in-state innovation heavyweights like Los Angeles or San Francisco.

“San Diego is home to world-class innovators and tech pioneers that are creating jobs and boosting our region’s economy,” Congressman Scott Peters said last year about nurturing the city’s downtown thriving startup ecosystem.

Ranking America’s innovative cities

Boston

San Francisco Bay Area

Denver

Raleigh-Durham

San Diego

Austin

Los Angeles

Philadelphia

Washington, D.C.

New York City

Seattle

Chicago

Portland

Pittsburgh

Nashville

Minneapolis

Salt Lake City

Baltimore

Dallas

Houston

Atlanta

Miami

Phoenix

Kansas City

New Orleans

 

 

 

 

 

 

 

 

 

 

 

No city was free from critique in the report—not even America’s most celebrated tech hub, California’s Silicon Valley. Despite having more money, talent and startups than any other U.S. city, this famed startup breeding ground was eclipsed by Boston in the overall rankings, due partly to the Bay Area’s reportedly deteriorating quality of life and lack of collaboration. As Harris pointed out in the report, some of Silicon Valley’s resident entrepreneurs suggested that the region was simply becoming “too cutthroat to inspire success.”

And as for Boston, which climbed to the summit in this year’s rankings, there’s ample room for improvement in areas like recruiting talent (eighth in the rankings) and fostering connections within its technology ecosystem (also eighth on the list). And while it leads the nation in terms on important metrics like startup density and capital access, Boston ranked sixth in terms of how well its regulatory environment supports innovation.

In other words, every town across the country—even those that are leading the way today—has immediate opportunities to foster even more startup activity and encourage more economic growth in the digital age.

Opportunities for improvement

One area where virtually every urban area can get better? Building bridges between startups and established companies. Regardless of city or industry, entrepreneurs lamented the amount of support they receive from local companies and civic institutions. Only 32 percent of those surveyed said that they receive support from established companies.

Less surprisingly, another chief concern among respondents was lack of access to funding. Researchers noted that more than a third of entrepreneurs cited funding as an area in need of improvement in their respective cities.

In order for cities to succeed as digital economies, they must better understand the technological tools used today by startups and businesses across the country—whether that’s artificial intelligence, drones, or smart devices. The role these tools play in today’s society will inform and impact which cities become the leaders of tomorrow.

“Becoming a leading city for the digital era means deeply understanding technology, embracing the inevitable role it will play in every arena of life, being willing to question long-held norms of how we live and work and imagining and implementing entirely new ideas,” researchers write in the report.

In addition, local leaders must find ways to leverage their city’s unique assets and strengths to expand their entrepreneurial footprint, Harris says. “Whether cultural, tied to industry expertise or some other resource, every city has a fountain of untapped potential that can be the cornerstone for their digital economy,” she writes.

For example, cities such as Pittsburgh (14th overall), Baltimore (18th overall) and New Orleans (25th overall) have had success attracting young entrepreneurs by creating the “right cultural foundation,” the report suggests, although they at times continue to struggle economically.

While entrepreneurs often view securing funding as critically important to success, connecting these burgeoning businesses with corporations can be just as important and provide cities with a path to long-term success. Cities must promote collaboration between startups and corporate entities, which can also be mutually advantageous to both groups.

“As uncovered in last year’s report and furthered in this year’s research, entrepreneurs and corporations need each other for their different perspectives, ideas, capital, influence, access and connections,” Harris writes. “Winning cities will bring both to the table and create lines of collaboration that accelerate results.”

And finally, for cities looking to create more vibrant startup ecosystems, leaders must put more emphasis on creating government rules and frameworks that benefit innovators, the ITM research showed.

“Most rules were put in place decades before today’s technologies were even a glimmer of an idea,” Harris says. “As technology has advanced, governments have been playing defense while innovators take random shots on goal, leaving us with a patchwork of laws and tension between key actors.”

What lies ahead?

It’s impossible to predict what will happen next in this technological revolution, just as it’s impossible to foresee with certainty, which urban areas will rise to the top as that revolution unfolds. However, the insights gleaned from the ITM research give us some helpful hints, shedding light on which cities have put themselves in the best position to thrive in the years ahead and which ones must strive for improvement.

More importantly, though, these findings offer actionable advice for civic leaders, business executives, and up-and-coming entrepreneurs who hope to cultivate stronger startup ecosystems and give their cities the best shot at a rich future in the digital age.

“The further technology embeds into every aspect of life, the more innovators will shift from straightforward apps and tools to solving much harder challenges,” Harris writes. “Herein lies the duality at the heart of the digital era. What is a challenge to all cities will be a massive opportunity to the few.”