What makes a city a top destination for startups? Access to capital? Costs? Taxes? Culture? Ecosystem? While certainly intangible factors that go into the success of a startup are not to be downplayed, objective, tangible measurements are of course a natural place to start...plus it's best to leave the intangible startup analysis to @BrandMother http://brandmother.tumblr.com/.
So what objective factors should be considered? GoodApril recently ranked top startup cities by costs and taxes through a report highlighted by entreprenuer.com. This is what they found:
By no means were these seven startup cities a surprise, but it got us thinking—how does Buffalo compare to Austin, New York, Boston, and the San Francisco Bay Area? We spent some quality time researching the data points used in this study and here is what we came up with for Buffalo:
Starting a business in Buffalo by costs and taxes:
- Median Tech Wage: $78,769
- Income Tax Max: 8.97%
- Sales Tax (Erie County): 8.75%
- Property Tax: 7.69%
- Housing Cost: $124,000
- Office/Sq. Ft.: $15.21
What the data tells us is that the costs associated with starting a business in Buffalo are comparatively quite low. In fact, the cost of starting a business in Buffalo is less than any of the top seven startup cities. Buffalo has lower cost of wages, lower housing costs and lower costs per square foot for office space. When we compared taxes however, the picture started to change. While sales tax and income tax are within a range that is fairly comparable to most of the top seven cities (we’ll get to Austin later), property taxes in Buffalo are significantly higher.
Fortunately New York is starting to take some measures to combat not just high property taxes, but also sales and state income taxes for businesses. In addition to a 20% property tax credit and relief from state income tax for qualified manufacturing companies, New York recently enacted the Startup NY program which creates tax free zones for 10 years for qualifying startups in New York (mostly upstate). Under Startup NY, the costs and taxes of doing business in Buffalo would look as follows:
Starting a business in Buffalo by costs and taxes under a Startup NY tax free zone:
- Median Tech Wage: $78,769
- Income Tax Max: 0.00%
- Sales Tax (Erie County): 0.00%
- Property Tax: 0.00%
- Housing Cost: $124,000
- Office/Sq. Ft.: $15.21
Unfortunately the Startup NY tax free program has yet to include tax on capital gains (we’re still holding out hope), so you’re going to have to pay a max 8.97% state tax (plus federal) on any gains when a company is sold. That being said, the Startup NY tax free zones take Buffalo from looking like perhaps it should be part of the conversation of top startup cities, to why weren’t we on the list of top startup cities?
I promised we’d get back to Austin. So how exactly does Buffalo Compare to the #1 startup city Austin and the #7 startup city San Francisco when looking at the cumulative costs of operating and exiting a startup? Here is what GoodApril put together for these two startup havens:
Here are the same data sets we came up with for Buffalo:
Comparing Buffalo with Austin (#1) and San Francisco (#7)
How much you’ll spend on salaries for your 10 person team: $787,690
How much you’ll spend on your office for 12 months (200 sq. ft): $36,504
How much money you have to raise to operate for 12 months: $791,344
Equity given up to raise 12 months operating capital at $5MM valuation: 15.83%
How long until you can afford a house down-payment if you pay yourself a market salary: 3.1 years
How much you’ll pay in state income taxes on your portion (20%) of a $10MM exit: $179,400
Again, the comparative costs of starting a business in Buffalo are looking pretty good. In fact, every data set except income tax was lower than every other top startup city…and lower cost ultimately means lower risk. Particularly noteworthy is the fact that a startup in Buffalo will ultimately have to give up less equity in a funding round than both Austin and San Francisco. In contrast to San Francisco, a startup in Buffalo will save 12% in equity related costs, which on a $10MM exit could mean an additional $1.2MM for the founder.
So we asked ourselves, where exactly then is there room for improvement for the Buffalo startup community? What will it take to make Buffalo the top city for startups? To start with, tax on capital gains could easily be alleviated for startups under the Startup NY program—especially when you are competing with Austin who has no state tax on capital gains. From a practical standpoint, this is the difference of $179,400 in taxes on $2MM for a founder with 20% on a $10MM exit. Eliminate tax on capital gains for startup companies under the Startup NY tax free zones and Buffalo becomes the number one startup city based on costs and taxes (someone please forward this point along to the folks in Albany). This could even be used to incentivize angel and venture capital investment in Buffalo and other upstate New York companies.
Outside of costs and taxes, perhaps the biggest improvement that could be made for startups in Buffalo is access to capital. According to a recent article by Bill Flock in the Washington Business Journal, venture funding raised in upstate New York in Q1 of 2014 was $1.7MM on 6 deals. By comparison, over this same period of time New York City had 105 deals funded for a total of $960MM. The tech-mecca of Silicon Valley—321 deals funded for a staggering total of $4.69BN. That looks something like this:
(you may have to zoom in to see upstate)
Expanding this even further from 2012 to Q3 of 2013, NYC had $4.3BN invested in 718 deals. Silicon Valley meanwhile had $19.8BN invested in 2,130 deals. And upstate NY you might ask? $106MM in 48 deals.
Data from PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reuters
We can’t deny that Buffalo has long way to go before it is competing with New York City and San Francisco for venture funding, but things are heading in the right direction. Access to capital is steadily improving with several new funding streams coming online recently: the Buffalo Angels, the Rochester Angels, Innovate NY Fund, and most recently the $5MM, world’s largest business idea competition, 43North. Moreover, with significantly lower costs, Buffalo startups do not necessarily need the same access to capital as a startup in New York or San Francisco to have the same impact on their potential growth.
While admittedly a fair portion of capital in upstate New York is ultimately coming from the State, expending public resources to create a vibrant startup community in Buffalo is not only justified, it should be a priority. According to a September 2012 article from the Small Business Administration Office of Advocacy, small businesses make up 99.7 % of U.S. employers and 64% of net new private-sector jobs. Maintaining and furthering investment in Buffalo will ensure that what is already a tremendous place for startups becomes second to none.
Of course there are many factors to consider when deciding where to start a venture beyond taxes, costs, and access to capital--Buffalo just so happens to be worth a look while you’re checking out other top startup cities!
#StartupGrindBuffalo @StartupGrindBuf @MatthewPelkey
*Data obtained from www.zillow.com, www.erie.gov, www.ci.buffalo.ny.us, the U.S. Census Bureau, The Buffalo Niagara Partnership, 2013 CBRE MarketView Report, Buffalo Business First, the Washington Business Journal, and PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reuters. Property tax rate includes an average of homestead and non-homestead property tax rate in the City of Buffalo, Erie County property tax, and City of Buffalo school tax.