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Rotman Insights Hub | University of Toronto - Rotman School of Management

Cities should embrace their 'boring' nature to attract young businesses

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Kevin Bryan

Many places envy cities with a thriving start-up ecosystem. Having young, ambitious companies launch in your town can lead to employment opportunities, big-dollar acquisitions and other activities that aid the local economy.

Some cities try to become start-up hotspots by bolstering university programs, funding incubators and accelerators, engaging venture capitalists and promoting livability. But the reality is, no matter what you do, you probably can’t turn yourself into Boston or Silicon Valley.

“It’s not the case that places are totally out of luck if they’re not already a start-up hub,” says Kevin Bryan, associate professor at Rotman. There’s an alternative: get promising young companies to relocate to your town.

“The kind of cities that have trouble creating start-ups are going to have to pursue policies that are better for attracting start-ups,” he says.  

The study “Entrepreneurial Migration,” which appeared in The Review of Economics and Statistics, explores the factors that cause new businesses to move, offering an evidence-based recipe for regions that want to welcome more small companies with big potential.

“You see cities put in skate parks and food halls” to attract young, hip entrepreneurs, he says. His research, however, suggests better strategies than such lifestyle-related changes.

Bryan and his co-author Jorge Guzman, a Columbia Business School associate professor, tracked 27 years of headquarter locations of more than 400,000 start-ups in the U.S. deemed to have high-growth potential.

About 6.6 per cent of high-potential start-ups move in their first five years. Some will move for what the study calls “idiosyncratic” reasons, such as the founder wishing to return to their hometown — as Bill Gates did when he moved Microsoft to Seattle.

The majority of nascent companies have a more predictable trajectory. Those younger than two years old tend to move to regions that incubate start-ups. However, those between three and five years old will unpack in places such as Dallas, Phoenix and Charlotte and avoid pricey regions, including some university towns and start-up hubs, as well as small cities with a poor education level, as they lack a good employee base.

These young, but more mature, start-ups prefer regions that make it easy to run a business and live. Most importantly, it must have an appealing tax code that doesn't overly punish highly profitable ventures and owners. "A start-up, if it makes money, it makes a ton of money," says Bryan, so it's prudent for companies to prepare for this eventuality ahead of time.

The authors call magnet cities “boring, business-friendly locations.” These less-than-hip cities — many in the U.S. Sunbelt, as pleasant weather is another common draw for companies — offer affordable real estate (for the office and for homes); ample, low-cost and educated potential employees; decent K-12 schools; and local government programs that support businesses.

One reason start-up migration has been seldom studied is the challenge of identifying these companies. Guzman, however, has a previously developed technique for doing so. To start, the researchers found companies that have been registered in both Delaware and a second state. The latter is where a company actually operates, but registration in Delaware offers it access to the state’s notoriously fast and reliable commercial courts.

“If I’m paying extra money to register my company [in Delaware], there’s no reason I would do that if I was just going to run a convenience store,” says Bryan. Companies that want to buy others, be acquired or deal with other ambitious issues will some day need a commercial court — Delaware offers that service.

Meanwhile, the team looked at factors such as company name to signal growth intention. “If I named my company Kevin’s Burgers compared to Quantum Genomics, it’s pretty obvious my growth intentions,” says Bryan.

The study’s conclusions could aid regions in the U.S. and beyond in luring companies. “With better attraction policies, you could increase the number of high-growth start-ups in your city by 20 to 30 per cent,” says Bryan. For small cities, even gaining a handful of such organizations could have a huge impact.

Bryan hopes some cities will realize that putting in place the complex and expensive infrastructure to become a place that incubates start-ups is out of their reach, but that’s OK.

Enticing great companies to relocate is much simpler, and entails things some cities are already doing. “How would I attract a plant to my region, like a car plant? It’s not that different for how I attract a four-year-old start-up. I need to provide a good business environment.”

Kevin Bryan is an associate professor of strategic management at the Rotman School of Management.