🏙️ What Makes a Startup City?

A framework for thinking about tech hubs

When I was investing as a Limited Partner, we’d often get pitched by VCs who exclusively focused outside of the more established venture markets of the SF Bay Area and Silicon Valley. Most claimed that markets outside of the Bay got overlooked by VCs and that this posed an opportunity because: 1) there are enough good companies being founded outside of the Bay, 2) local founders appreciate local investors, and 3) valuations in those markets are immune to the inflated, Bay Area company valuations.

For these types of funds, in addition to evaluating the merit of the VC, we also needed to account for the risk of solely investing outside of the Bay Area. Over time, after evaluating enough of these funds and their respective markets, it was clear that prototypical startup cities shared a similar set of characteristics.

As more people discuss the idea of leaving the Bay Area in hopes of establishing new, or even competitive startup cities elsewhere (e.g. in Austin or Miami), I’m reminded of these shared characteristics, which I’ve used to create the below framework for thinking about the viability of a startup city. It starts with the thesis that there are great founders and startups everywhere—this is not a trait unique to the Bay Area or even the United States. However, for a startup city to truly rival the Bay Area in terms of opportunities within tech and venture, there needs to exist what I’m calling a “startup funnel” ™️

A Startup City = a Strong Startup Funnel

The drivers of a startup funnel

There are many parts to a startup funnel, but the main aspects that truly drive the funnel are:

1. 🏫 Strong local universities and learning institutions

These drive the top of the funnel and bolster an ecosystem of people interested in, and learning about, tech and startups. These institutions and their respective, tangential communities also naturally attract and grow would-be founders.

2. 🏢 Large, successful, and well-funded local companies

These are critical because they drive every part of the funnel by: (a) attracting top talent who might eventually leave to start their own companies locally (“spill off”) ; (b) their founders and execs serve as angel investors and advisors to earlier-stage founders; and (c) they’re viable exit options for local startups via acquisition.

3. 💵 Capital at every stage

When there are enough local VCs who invest at every stage (from incubators > Seed > Series A & B > Series C+), local startups can continue raising money exclusively from local VCs until they eventually exit. This further strengthens the brands of local VCs, and provides more of an incentive for founders to start companies in that city. Other capital-related factors like a low cost of living and business-favorable laws can also improve a startup’s bottom line, but they’re not as impactful as continuous capital investment, which also comes with an expanded network and potential advisors.

It’s important to note that every startup city doesn’t need a strong startup funnel across all industries, but one should exist in at least 1-2 core industries (e.g. media in LA, fintech in NY). It’s also important to note that startup funnels take decades to really come to fruition.

As more industries (including VC) move online and remote, it’ll be interesting to see how aspects of a startup funnel change, and just how important it is for each aspect to exist truly locally vs in a hybrid online/offline way. Nonetheless, the same infrastructure is required, which is a bit more than a wave of people and a handful of companies moving somewhere.