Non-capital resources like working space, proximity to universities and strong networking opportunities count for a lot.
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You’ve heard it before: Most startups fail.
Even with the most generous possible accounting, it’s estimated that at least 70 percent of tech startups will eventually flame out.
Yet startups are raising more capital than ever before. When the dust settles, it’s expected that venture capitalists will have pumped over $ 100 billion into the U.S. market last year. With so much money available, why aren’t startup success rates going up? Maybe because money isn’t the problem.
When startups are figuring out where their business is going to grow, there are critical, non-monetary resources that they must consider. And picking the right place could mean all the difference in when — and whether — their business grows.
The real estate adage of location, location, location applies to startups, too. So here are five things to consider when looking at where to set up shop.
1. Talent pool
Talent might be the most critical non-capital resource for startups, no matter which stage they’re in. And location will dictate whether you get the right talent to scale your business.
You can have the best idea in the world, but you don’t know what you don’t know. Just because a founder has a disruptive product and a brilliant engineering mind doesn’t mean they know how to put together a scalable business model, make a winning pitch or grow a business.
The ability for highly innovative firms to scale depends on their access to experienced managerial and C-level talent. In other words, they need access to experienced, serial entrepreneurs who know how to turn an idea or a product into a successful scalable venture. And they need to consider talent beyond C-level: Where are you going to find engineers that will understand and get behind your product? There needs to be a critical pool of talent close at hand — as well as a clear government and leadership commitment to growing that talent pool — for startups to grow their enterprise successfully.
2. Networking potential
Every good location for starting a business has an ecosystem that drives social capital and enables startups to thrive. Look at any startup hub in the country, from Silicon Valley to Boulder, and you’ll find networking is a hallmark of their approach.
It’s through relationships that innovation happens, through the clashing and evolution of shared ideas. In its simplest form, this can occur through meetups and networking events. Founders can find like-minded individuals, share war stories and make connections to potential mentors. The right talent brings in networks of their own, and as this ecosystem grows it can be tapped for mentorship, board members, generate deal flow, partnerships, investment, sales — the list goes on and on.
To access and participate in these ecosystems, startups need to consider cities and regions that have a strong foundation of fostering meaningful relationships.
3. Proximity to higher learning institutions
One of the major characteristics that distinguish cities/states with high levels of entrepreneurial activity is the interaction that occurs between companies, higher ed research institutions and the venture community. Until fairly recently, Pittsburgh wasn’t known as a startup hub. Yet today it ranks fifth in the country in attracting and growing tech talent, ahead of traditional startup hubs like Seattle, thanks in large part to the role played by its largest research university.
Pittsburgh is transforming from a city of steel to a city of technology in large part thanks to Carnegie Mellon University (CMU). Through CMU’s Center for Technology Transfer and Enterprise Creation (CTTEC) over 288 companies have been formed since 2008, either directly or indirectly.
Yale University is known for driving New Haven’s bioscience sector, having spawned 50+ companies and attracted $ 700 million of venture capital (plus $ 6 billion in equity investment) in the past 15 years. But today, Yale and New Haven are on the cusp of creating an opportunity with immeasurable potential: quantum computing. Yale has made quantum science a priority investment, one whose commercial impact is just emerging.
For example, Quantum Circuits, Inc., a startup out of Yale, opened a 6,000-square-foot state-of-the-art development and testing laboratory for quantum computing last January. The facility that will include in-house manufacturing employing 20 scientists and engineers. While quantum computing as a large-scale business sector may be decades away, Yale, New Haven, and their partners are already at work developing the ecosystem to support it.
In short, if you’re shopping for a location, seek out those places where local research universities create, support and partner with companies in your sector. As Pittsburgh and New Haven demonstrate, research universities are at the heart of their competitive advantage as locations.
4. Existing ecosystem
Inherent in every type of non-financial capital is domain expertise. Startups should find where they will be able to thrive and utilize the human capital that’s there because creating it themselves is nearly impossible.
Trying to build an ecosystem locally or luring experts in your field to move where you are is a very tough proposition. Instead, find somewhere that’s already cracked the code. In Boston it is biotech, in Austin, it’s digital tech and CMU is turning Pittsburgh into an AI and automation hub.
If you’re going to need engineers and talent and resources that are well versed in a certain area, you need to go where those resources already exist.
5. Real estate costs
What if startups didn’t have to burn tons of cash on office space?
Simply having a place to work is a critical resource that either propels startups forward or leaves them wallowing in debt and frustration. According to the Economist, the sheer cost of Silicon Valley is driving startups away.
Startups now have more geographic options, and the opportunity to find a location that has made working space affordable — or in some cases, free. Incubators and accelerators help offer space and mentorship in exchange for equity. Policymakers in a number of cities and states, eager to attract entrepreneurs, are subsidizing and underwriting more affordable office, lab and manufacturing space. A city that is making space more affordable can be a huge plus for startups considering locating there.
Related: The 25 Best Cities for Entrepreneurs
Money can solve a lot of problems, but it shouldn’t be the only benchmark for where you decide to set up shop. If it is, you risk losing out on the non-capital resources that are actually behind every successful startup story.