In theory, it is supposed to be possible today to be an entrepreneur anywhere. All you need, supposedly, is a reliable Internet connection and periodic access to a coffee shop.
In reality, however, the logic of what economists call “agglomeration effects” means that we continue to see entrepreneurs and talented workers cluster together in a handful of places. Ian Hathaway has shownthat 81 percent of high-growth firms are in large metro areas—those with at least one million residents. The new 2019 Global Startup Ecosystem Report (#GSER2019) from Startup Genome has updated data on the extent to which economic value from high-impact startups continues to be geographically concentrated.
So are entrepreneurs locked into starting their business in a big city? What if you want to start and grow in a small city?
Recently, WalletHub attempted to answer these questions with its list of “Best and Worst Small Cities to Start a Business.” This list, covering an impressive 1,261 small cities, scored them on 18 metrics, such as average growth of business revenues, working-age population growth, and office-space availability. These cities have populations between 25,000 and 100,000 people.
Medium and small cities have sought for several years to develop vibrant entrepreneurial ecosystems that can help them compete with large cities for talent and companies. Part of this has been a strategy to recruit “boomerang” workers who grew up in a small city, moved to a larger metro for college or a job, and may now return to raise families.
So if you’re one of those boomerang workers, does your hometown offer a favorable environment for starting a company? If you’re an entrepreneur looking for startup success outside of high-cost big cities, where might you consider? And, if you’re a mayor or economic development official or civic booster, what can you learn from the leading small cities?
Let’s start with the top 10 small cities:
- Holland, MI
- St. George, UT
- Fort Myers, FL
- Redmond, OR
- Cheyenne, WY
- Huntsville, TX
- Bozeman, MT
- Aberdeen, SD
- Bend, OR
- Wilson, NC
That’s a pleasantly diverse list, with nine states represented among the top 10—six of them are in the West. There’s plenty of performance diversity at the top, too. Holland might be number one overall, but it ranks 351st in the Business Environment factor and 81st in Business Costs. The leading city in Business Environment is Huntsville—which is 668th in Business Costs. Bozeman is one of the best on Access to Resources, but ranks 279th and 230th on the other two factors.
You might be thinking, however, that some of the “small cities” at the top aren’t really small cities. I immensely enjoyed a family vacation to Fort Myers, but it’s part of a metro area with 740,000 people; not exactly the same thing as Bozeman, its own “micropolitan” area with 100,000 people and hours away from other cities. Nearly a fifth of the top 50 small cities (nine, to be precise) are part of the Miami metro area. Again, quite different from a small city like Tupelo, MS. Some of the cities on the WalletHub list, moreover, are not included in the Small City Economic Dynamism Index from the Atlanta Fed.
For a better understanding of where entrepreneurs can find small-city opportunity, then, let’s look at “true” top small cities. Of the top 50 on the WalletHub list, 28 are true small cities, classified as their own metro or micro- areas, and not suburbs within a larger metro. The Small City Economic Dynamism Index not only ranks cities but also groups them into performance quartiles. Among our top 28 true small cities, we find wide variation in their dynamism scores:
- Six of the top WalletHub cities score in the top quartile (High) in the Atlanta Fed index: Asheville, NC, for example, ranks 39th in the former and number two overall in the latter.
- Nine of our top 28 true small cities are in the second quartile (Medium-High) in the Small City Economic Dynamism Index, including Wilson, NC, and Rapid City, SD.
- Ten fall into the third quartile (Medium-Low) of performance: Huntsville, TX, for example, ranks sixth overall in the WalletHub ranking but 537th (out of 816) in the Atlanta Fed scoring.
- Three of WalletHub’s top small cities find themselves in the bottom quartile (Low) for Small City Economic Dynamism. This includes the number two overall city in the WalletHub ranking: St. George, UT, which is 625th in the other index.
So what does all this ranking and scoring tell entrepreneurs and economic development officials about small-city startup opportunities? A few common characteristics emerge from the analyses.
Quality of life: it’s no accident that Western small cities are highly represented among the top 50. The outdoor-oriented quality of life is a huge attraction for anyone, including entrepreneurs and their potential employees. This same element definitely contributed to the rise of Boulder as a thriving startup hub. Personal reasons are the main reason entrepreneurs might move to a new location, and quality of life is a big consideration.
Smallness: In a paper examining tech ecosystems in Bozeman and Missoula, my former colleague Yasuyuki Motoyama (and others) highlighted “dense networks of active local support organizations” that help entrepreneurs. Many communities are home to support organizations, of course, but the difference in small cities may be that entrepreneurs are actually aware of them because the city is so small. A persistent gripe from entrepreneurs is that they can’t find the resources they need when they need them. Correspondingly, many support organizations (and their public and private funders) complain that entrepreneurs don’t know they exist. A small city naturally eases this mismatch.
Going global is required: Most high-growth firms in the United States are in major metro areas because they serve those large regional markets. But the best and most sustainable way to scale your business is to target global markets. In a small city, this is pretty much your only option, so entrepreneurs must think global from the very beginning. Don’t fool yourself into thinking that your only going-global option is in a big city.
One last observation. Poor business conditions appear to be more concentrated than favorable conditions: just 10 states account for the 50-lowest ranked small cities, while 20 states appear among the top 50. That’s obviously a small sample from the whole list, but does indicate that state business conditions are an important factor. North Carolina and Montana—each with three cities among our true top 28—have A grades in the Thumbtack Small Business Friendliness results. Cities in California account for 24 of the bottom 50 cities in the ranking: the state gets a D grade from Thumbtack.
There is much more to learn from WalletHub’s ranking and resources like the Atlanta Fed and Thumbtack. Let us know what you think, too: what makes your city stand out as a good place for starting a business?