2015's Best Cities to Found a Startup Outside Silicon Valley and New York (and How They Did It)

Posted in: City Reports, best cities, Startups

Certain cities have a way of creating a thriving startup ecosystem with access to capital, affordability for pre-funded companies, and other founders who can motivate and mentor new entrepreneurs. A startup's location can have a major impact on its success, from getting face-to-face meetings with potential investors to affording rent long enough to get some traction. And while San Francisco, New York and Palo Alto dominate the startup news, other cities have created a thriving startup scene in areas like healthcare technology, design and agriculture.

With early-stage startup funding less available, a strong network and culture of growth matter more than ever. The right city can help foster a successful climate that provides new companies the capital to develop their products, and the resources to help them scale. DataFox crunched the numbers on over 12,000 U.S.-based, pre-Series A companies in our database to find the best cities to found a startup.

The big takeaways:

  • Universities are catalysts for early-stage startups. From MIT in Cambridge, to Arizona State in Scottsdale, to Carnegie Mellon in Pittsburgh, universities anchored a number of startup ecosystems. Not only do students provide intellectual capital, but successful alumni provide financial capital as well. A close city-university partnership gives students hands-on experience and provides a pipeline for graduates to become entrepreneurs.
  • Centralized hubs are key. Particularly in sparsely populated areas, a strong community of mentors and peers is a major attraction for entrepreneurs. Fayetteville, St. Louis and others built their identity on being their regions' best source for capital and connections.
  • Not every startup city has to be like San Francisco. The fast-moving, consumer-focused startup atmosphere that dominates Silicon Valley and New York doesn't have to apply to every entrepreneurial city. Providence, for example, leveraged nearby RISD's talent to become a design startup powerhouse; Boulder's athletic culture drew a loyal following of outdoorsy founders. They didn't try to copy San Francisco. Instead, they embraced their own identities.

The best cities to found a company outside Silicon Valley and New York

1. Cambridge, MA

Buoyed by top-notch universities and hospitals, Cambridge has established itself as a leader in biotechnology and healthcare innovation. Kendall Square is bursting at the seams with entrepreneurs, venture capitalists and advanced degrees. Unlike New York or San Francisco, Cambridge's startups tend to focus on healthcare or enterprise technology, tapping into billion- and trillion-dollar markets with clear plans for revenue.

Key initiative: Anchor-plus

Cambridge has followed an "anchor-plus" model: supplementing an anchor institution (MIT) with companies in related areas and facilitating new, spinoff companies. Since the 1800's, MIT has leased land to entrepreneurs and private companies, fostering a connection between the area's world-class academics and Boston startup activity. Building on its proximity to Massachusetts General Hospital and MIT, Cambridge has established itself as the healthcare and biotechnology startup capital.

2. Santa Monica, CA

Often overlooked in favor of the larger (and more expensive) Los Angeles, Santa Monica benefits greatly from a high density of early-stage startups in the area. In fact, it has a whopping 1.3 pre-Series A startups for every 1,000 people, 14 times the average of cities we looked at. Along with its most famous startup, Snapchat, Santa Monica boasts a variety of consumer, media and other companies.

Key initiative: Incubate and support

Within a 12-block area, Santa Monica has an impressive 15 different coworking spaces, incubators and accelerators. By providing young entrepreneurs with networking opportunities and mentorship, not to mention a respite from the Los Angeles commute, Santa Monica created a thriving culture for first-time founders.

3. Fayetteville, AR

Ironically, Fayetteville's startup community is supported by three huge multinational companies: transportation giant J.B. Hunt, Tyson Foods and Walmart. These three companies offer capital, mentoring and a market for young startups. In fact, one of its high-profile accelerators, Startup Junkie's 2.7.0. Accelerator, is specifically focused on developing logistics, food and retail ventures. Another, ScaleUp Ozarks, is focused on companies with high growth potential and boasts a cohort that is 79% female, minority or veteran. Fayetteville also boasts a strong density of early-stage startups - nearly 10 times the average of cities analyzed - and its very low cost of living is a major draw for pre-funding companies.

Key initiative: Involve large companies

Startups and large, established companies have a lot to offer each other. The former bring fresh ideas, adaptability and new talent; the latter are more able to bear risk and so are a steady source of funding. Between the good sources of capital for retail, food and logistics companies and the low cost of living, Fayetteville makes funding a startup much easier.

4. Boulder, CO

With a close-knit community and an outdoorsy bent, Boulder has made a name for itself as a place where entrepreneurs can build great companies and enjoy work-life balance. It too has a high early-stage startup density, anchored by the big-name investor and accelerator TechStars and veteran entrepreneurs like Kimbal Musk (yes, Elon's brother). Though Boulder is slightly more expensive than some other cities on this list, it makes up for the higher cost of living with an involved network of venture capitalists.

Key initiative: Embrace the city's culture

Boulder didn't try to be yet another Silicon Valley or New York. Its startup scene built on the city's existing character: a love of the outdoors and a small but strong network. By sufficiently differentiating itself, Boulder is able to attract a certain type of entrepreneur who wouldn't want to be anywhere else.

5. Wilmington, DE

Wilmington already had the building blocks for a successful business ecosystem: a very favorable tax climate combined with access to decision-makers is fertile ground for new companies. In recent years, the city has worked to attract startups in particular, building incubators and selling entrepreneurs on the low cost of living, easy transit to the other Northeast Corridor states, and the availability of mentors and policymakers alike. Wilmington makes our list due to its high early-stage startup density and the strong growth of those companies. With a close-knit, successful community, Wilmington's startup presence is growing right along with the entrepreneurs who call it home.

Key initiative: Building a startup community

Wilmington had a favorable business climate in general, but has worked to tailor its pitch to early-stage companies in particular. A major part of that pitch is a network of mentors, incubators and coworking spaces, and programs like the University of Delaware's Horn entrepreneurship program. An initial investment to bring in startup veterans and coworking spaces can have a major effect in attracting talent down the line.

6. Pittsburgh, PA

Pittsburgh's startup ecosystem is anchored by the 40 colleges and universities in the surrounding area, and particularly the twin powerhouses of Carnegie Mellon and University of Pittsburgh. In addition to a bent toward entrepreneurship, the universities attract a substantial amount of federal research dollars, which serves as a catalyst for healthcare and science startups. Throw in state programs like the Keystone Innovation Zone and Ben Franklin Technology Partners, and Pittsburgh becomes an excellent choice for early-stage entrepreneurs.

Key initiative: University entrepreneurship programs

Carnegie Mellon, the nation's top university for computer science, and University of Pittsburgh, a research and science powerhouse, emphasize commercial applications of academic learning early and often. Not only does the study of robotics, health, and engineering lend itself to new technology, but many alumni founders stick around to offer advice and funding. For example, seed investor and incubator Innovation Works was founded by CMU graduate and startup veteran Rich Lunak. Pittsburgh's deep ties with, and support of, university entrepreneurship programs helps students turn their ideas into companies, and entices alumni to return with expertise and capital.

7. Atlanta, GA

Atlanta came fast and furious onto the startup scene, and in addition to the prestigious Georgia Tech, boasts a number of hubs for entrepreneurs including Switchyards, which focuses on B2C companies; Tech Square Labs, which emphasizes technical founders; and the more general Atlanta Tech Village. Atlanta makes our list primarily because its early-stage companies show strong growth, and because it's more affordable than many other startup centers. With a focus on scaling and low cost of living, Atlanta is the perfect place to grow a company from one employee to 100.

Key initiative: Top-down commitment

Atlanta's startup scene owes a great deal of its success to Mayor Kasim Reed. He recruited economic development veterans to build out the Invest Atlanta staff, deepened ties to nearby Georgia Tech, and hosted Govathon, a city-wide hackathon focused on civic projects. Through networking, strategic partnerships and staying involved with startups, Reed has put Atlanta-based companies on the early-stage map.

8. Scottsdale, AZ

Scottsdale fosters deep connections between entrepreneurs, students and community members: for example, SkySong, the live-work center for resources and capital for entrepreneurs, is the result of a collaboration between the city and university. And according to Hoover's, the city boasts over 13,000 companies founded since 2010 that had at least $5 million in annual revenue. Scottsdale is a particular standout in three of our four metrics: it combines a low cost of living with a high startup density and strong company growth.

Key initiative: University partnerships

With a student body of over 80,000, ASU Scottsdale has a strong presence in a city of 227,000. It follows that joint initiatives by the city and university are the foundation of Scottsdale's startup scene. In addition to Skysong, there's also the Eureka Loft, the Edson Student Entrepreneur Initiative, the ASU Startup Accelerator, and the Furnace Technology Transfer Accelerator. According to ASU, over 300 students, faculty, alumni and external companies have gone through the university's accelerators in the past 10 years. By building connections with student entrepreneurs, Scottsdale gives them a reason to stay beyond graduation.

9. St. Louis, MO

St. Louis was above average in all four criteria DataFox analyzed: availability of capital, early-stage company growth, startup density and affordability. The city collaborates with Washington University in St. Louis, which offers an MBA track specifically for social entrepreneurship. In addition, the downtown offers incubators like Cultivation Capital and T-Rex, which support a strong network of founders as well as provide a source of capital to up-and-comers. Finally, St. Louis is much more affordable than San Francisco and New York, or even Boston and Boulder. The low cost of living and community atmosphere are major attractions for pre-funded or bootsrapped companies.

Key initiative: Integrated support

St. Louis built its startup community on just that - community. With a strong focus on social entrepreneurship and impact, it's no surprise that the city's entrepreneurs reach out to help each other. Grantmakers, investors, incubators stay in touch and form a solid network, providing support  at every stage of growth. And it pays off: a Kauffman Foundation study found that dense, interconnected networks were a main driver of the city's entrepreneurial success.

10. Durham, NC

In the space of a few decades, Durham went from cigarettes to startups. Though this point of the Research Triangle has always benefitted from nearby Duke University, North Carolina State and University of North Carolina Chapel Hill, the startup scene truly took off in 2000 when the Capitol Broadcasting Company bought the abandoned American Tobacco campus - all million square feet of it - and began to turn it into the kind of place entrepreneurs could call home. The campus (now called American Undergound) now houses over 200 startups and accelerators that, according to CNBC, have raised over $20 million in 2014. Combine that with a high growth rate for young startups and a high density of entrepreneurs, and Durham has established itself as a leader for early-stage companies.

Key initiative: Create a one-stop shop for entrepreneurs

Growth, mentorship and access to capital can determine whether a company succeeds or fails, but the decision to move is often based on emotional factors: is there a strong community? Could you raise a family there? How's the cultural activity? By building an easily accessible hub and seeding it with good restaurants, lively activity and a warm community, Durham is able to keep alumni in the area and supplement research giants with young talent.

11. Cleveland, OH

Cleveland's affordability and centralized hubs for startups make it an ideal location, especially for first-time entrepreneurs. In fact, Cleveland is above average in pre-Series A startup growth and startup density, but its cost of living is a standout even among other cities on our list: it's the most affordable city among the 15 we profile here.

Key initiative: Build a centralized, vibrant hub

Cleveland's StartMart opened just a few months ago, and already houses more than 100 startup employees. With 35,000 square feet, the downtown hub provides office space, wifi and most importantly, the chance to bounce ideas off other founders and raise capital from local investors. By bringing young companies under one roof, Cleveland is able to foster the same high-charged atmosphere as Silicon Valley, without the steep cost.

12. Salt Lake City, UT

For companies just starting out, Salt Lake City provides a culture of growth, a high startup density and a low cost of living. Our study shows that the city combines a close-knit entrepreneurial community with above-average early-stage growth to create a successful ecosystem. In addition to big SaaS companies like Adobe and WordPerfect, Salt Lake City boasts six business incubators including the Impact Hub, part of a global network of socially minded entrepreneurs. And as cliched as it sounds, a heavy Mormon population makes for a ready crop of salespeople.

Key initiative: Focus on the (founder's) family

Tech startups and potential acquiring companies aside, Utah's main selling point is the high quality of life. A founder with a family can buy a large home with a backyard in Salt Lake, rather than an overpriced condo she'd struggle to afford in San Francisco. The state ranks fourth in the nation in well-being, and residents put a premium on kindness and community - not to mention the skiing and snowboarding. Not all entrepreneurs are single twenty-somethings who are willing to join a city of transplants. For the ones who want a family-friendly, deep-roots environment, Salt Lake is the ideal place to start a company.

13. Austin, TX

Austin is no longer a secret in the startup scene: its music and nightlife scene has attracted young people, creative types and entrepreneurs alike. The city bills itself as light on regulation and heavy on connectivity. Though Austin doesn't have as much venture capital as Silicon Valley, when it comes to early-stage companies, it doesn't have to: a $50,000 seed round goes a long way for an entrepreneur just starting up. In fact, a study by the Austin Chamber of Commerce and Austin Technology Council found that the city's strength was in seed- and early-stage funding. More affordable and less saturated than the Valley, Austin has made a name for itself as a the right place to start a business.

Key initiative: Careful city planning

Austin didn't charge blindly into its plan to revitalize the downtown area. The city followed detailed plans developed in consultation with architects and city planners, focusing on building a cultural and retail hub first and a tech scene second. Helped by high-profile events like Austin City Limits and SXSW, Austin became a draw for young professionals on its own merit as a lively, livable city.

14. Seattle, WA

Seattle is hardly just about Microsoft and Amazon anymore. As Washington-based startups found their way to high-profile exits and tech giants opened offices in the Pacific Northwest, the city became a magnet for top engineering talent. Successful startup veterans stick around to mentor first-timers, and quality engineers abound. Our analysis shows that Seattle is particularly strong in early-stage company growth and startups per capita, creating a culture of action and agility beyond the established behemoths.

Key strategy: Attract talent first

Ever since Amazon, Boeing and Microsoft set up shop, Seattle has been a top destination for engineers. Young companies often rely on top-notch first technical hires to survive, and co-founding with or recruiting those hires is easier in a city where talent is key. Coupled with good universities and an entrepreneurial spirit, Seattle was able to leverage its large-company success to build an early-stage ecosystem.

15. Providence, RI

A 45-minute train ride from Boston, and just down the hill from Brown University and the Rhode Island School of Design, Providence's downtown area hosts a number of burgeoning startups. Though Rhode Island's economy took a hit during the recession, its tech scene remains a bright spot and source of pride. The cost of living is much lower than nearby Boston, and Providence boasts intellectual and cultural capital to spare. The city stands out in our study for the rapid growth of its young startups, as well as its affordability high density of entrepreneurs.

Key strategy: Specialize around existing strengths

Providence already had a vibrant music and arts community, anchored by RISD, one of the top design schools in the country. Add in Brown's medial school and bent towards social entrepreneurship, and you've got a city tailor-made for design and socially impactful companies. The city also boasts a low cost of living, so recent graduates can start ventures while still paying the bills. Providence is doubling down on young founders: Rhode Island offers loan forgiveness for entrepreneurs who start businesses in tech and design. Recognizing the specialized output of local universities, Providence has established itself as a leader in social entrepreneurship and design.

Our metrics:

  • Availability of capital. Access to capital and the ability to keep the lights on are important for any startup, particularly in its early days. Using funding information from the DataFox company database, we compared the average amount of funding pre-Series A companies raised to determine whether the city has a strong network of seed and venture investors. This information comes from DataFox's company database, which draws from Crunchbase and other sources.
  • Affordability. Since a city's cost of living can significantly lengthen or shorten the time a company has to prove itself, we used the U.S. Bureau of Economic Analysis' real purchasing power metric to rank cities' affordability. This data is published by the Bureau of Economic Activity, which measures how much a dollar spent goes in each area. We sourced it from the Tax Foundation.
  • Success of early-stage companies. A good startup may not have revenue in its early days, but it often has the markers of future success: high-quality investors, capable hires and a strong marketing presence. We used our proprietary Growth Score, a predictor of future revenue growth, to measure how successful a city's early-stage companies are. DataFox's growth score is the output of a machine-learning algorithm that predicts revenue and factors in headcount growth, investor quality and other metrics.
  • A community of entrepreneurs. Newly founded startups also benefit from a network of other companies in similar stages, so that they can learn from and be motivated by other entrepreneurs. We considered the "startup density" of pre-Series A companies. For each city, we divided the number of pre-Series A startups in our database by the U.S. Census 2014 population estimate.

Because growth and community have a disproportionate impact on a company's future success, we weighted those metrics twice as heavily. We also only considered cities with at least 35 pre-Series A startups in our database.