Part 2: Evaluate The Financial Situation
Previously, part one of this series took a closer look at deciding what city to start up in based on the individual needs of the business. Part two will examine some of the financial considerations to make while in the early stages of starting up. Most early stage startups are funded by the founder(s), and their immediate acquaintances. If you are going to be bootstrapping your business, then you will be operating on a shoestring budget. You could be killing your business before an official launch if you do not consider the additional costs associated with your business.
Access to capital, funding, and incubators
If for no other reason, Silicon Valley has been such a prime location to start up in based on their access to capital in the form of investors. Hearing about young twenty-somethings dropping out and moving to this corner of the Golden State is commonplace. Where it may have once been the default mentality to go to college after high school. The entrepreneurial minded seem to have developed a similar view to moving to The Valley to start up in. That may still be a viable and even obvious choice for many companies with little to no overhead needed other than a bed to sleep on and a place to charge a MacBook. A good idea and strong set of programming skills can take you very far in San Francisco. Having a set exit strategy with substantial (and timely) ROIs will help when looking for seed funding or running a Series A for investments. AngelList can help with the search for angel investors. If a Venture Capital firm is more of what you are looking for, Silicon Valley had 16 out of 25 of the top VC firms in the US, with 4 in Pennsylvania, 3 in Massachusetts, and 2 in New York. Granted, this is where the firms are headquartered in, they have other offices in cities like Washington DC and other large metro areas.
Now, a biotech company working on experimental research would need a place to work. A strong board of advisors would be needed that were knowledgeable, and possibly near a place where access to technology could be found without having to foot the cost of several $40,000 pieces of equipment. Working near a research university or other program could ease up substantially on costs as well as providing valuable guidance and feedback.
Joining TechStars, Y Combinator, or Breakout Labs can give small startups in early stages a means to access funds as well as advising to avoid common pitfalls. Programs like this are common in Colorado, the East and West Coasts, and Texas. Unsurprisingly, these locations also have large business plan and startup competitions as well as thriving coworking locations that can help a small business grow. All of these accelerator and incubator programs can be a stepping stone for growth. F6S can be a resource to navigate the dozens of programs, but you will likely have to do some sifting to find what you need. All told, major metro areas will be the most developed, and for the seemingly endless supply of money swirling around, California is a very strong candidate in terms of access to funding.
Hidden Costs
However, if you need employees, you may need to reconsider San Francisco or Seattle. The minimum wage is steadily increasing. Both have passed a gradual increase to bring the minimum wage up to $15/hr. Additionally the cost of living , cost of living can play a huge factor in the growth of a business if you aren’t prepared for that. The top 10 most expensive cities to live on based on cost of living rant NYC at #1, San Francisco at #2, Washington DC at #6 and Boston at #7. San Francisco has a median housing value of about $750,000, and rentals weighing in at about 300% of the national average. Finding office space can be difficult, especially in areas like San Francisco and Boulder. PivotDesk is quite possibly one of the best resources for finding office space or coworking space in some of the larger startup hubs.
When it comes to statewide policy, the ranking of the Small Business Policy Index can help you figure out the costs impacting small businesses and entrepreneurs across more than 40 metrics in regulation, taxation, and government spending. The best 5 states: South Dakota, Nevada, Texas, Wyoming, and Florida. Ranking at the lowest were Minnesota, Hawaii, New York, New Jersey, and finally, California.
Government and Local Incentives
There are many locations that will have additional benefits to starting up in their state such as a purposefully cultivated and curated culture that the government, local businesses, or universities help facilitate. Areas that encourage businesses in the fastest growing industries or that have research clusters are likely to have some of the healthiest overall economic health. Fort Collins, Colorado has been growing in interest in the startup scene because of their holistic approach they are taking to startup scene, including grants for companies in their cluster research. They focus on geological proximity for research to foster innovation and collaboration. This is also seen in their economic development programs that are zoned non-profits in the city such as the Rocky Mountain Innosphere. Similar programs exist in Las Vegas, New York City, among other metro cities across the US.
These local incentives are usually to bring people into the cities to start their businesses. Some are willing to offer financial support while others may be willing to lessen the regulatory burden to draw in business. In any event, it is important to see what, if any, programs are offered where you are looking to start up in.
There is obviously no unified answer to what cities are the most economically friendly to startups. There are dozens of ways to classify them, and it is up to the founding team to determine what the most important aspects are to them and their business. If you have a need for research support and but need to have a team of employees early on, more rural areas by universities or labs may work out for you. If you need to find a VC and you are part of a team of two working in software development, then you should still consider California. It is better to understand the comprehensive lists of costs you will face than to be over budget and blindsided by additional regulatory fees to run your business.
---
About the Writer
Siouxzanna Downs is the CEO of Farnsworth Downs Technology. 2 Billion Under 20. Roller derby playing nuclear engineering with a penchant for Wyoming. Once upon a time hosted a political radio show. Currently residing in Colorado.
This was written by a SG contributor.
Click here to become a writer and reach 170,000 readers.