Geography of Startups

Picture: CB Insights

Answering the question why companies of the same industry are often concentrated in the same geographic region, a famous economist Alfred Marshall commented that there is "something in the air" (Marshall, 1979). When Marshall was describing his theory, he had in mind Victorian manufacturers. However, his ideas of geographical proximity seem to stand true for modern technology companies as well. Young people with bright ideas, such as Mark Zuckerberg, move to northern California and other regions and cities where tech companies are clustered. New York, London, Berlin, Tel Aviv, Moscow, these are the emerging cities in tech industry.

Economic theory suggests why companies might be clustering in the same regions. First reason is natural resourses. Some industries may depend on coal, and then it would be rational for those firms to settle in the areas rich with that particular resource. Second reason is firms in particular industry require specialised labour. It creates a pool of professionals that  is beneficial for both professionals themselves and the firms. Thirdly, trades with subsidiaries increase in volume in order to supply "specialised inputs" ("Something in…”, 2012). Lastly, according to Marshall, ideas spill over from one company to another.

The first reason does not seem to be valid anymore. It could be explained in the past when communications and computing were significantly more expensive, slow and attached to a particular area. Now, however, technology is relatively cheap and access to the Internet is enough for the company to function. This would make some think that there is no other reason for companies to stay in the areas such as Silicon Valley, where cost of living is high, and cities like New York and London, where not only cost of living is high, but they also lack a tech industry history. Berlin is cheaper than the former ones, however, Europe has many other places to offer that are cheaper. But, money is not the reason.

Although it is possible to find startup companies anywhere, the small ones tend to be organised in clusters. According to the Trulia's chief economist Jed Kolko, it is due to the attraction of the pool of professionals, “The less an industry needs to be near natural resources, its suppliers or its customers, the more it’s likely to cluster where its workers want to live”, he said ("Something in…”, 2012).  For the technology industry, workers want to live either in areas where they can find jobs easily, such as Silicon Valley, or in the more livelier cities such as London, Berlin and others. One of the benefits of big cities such as New York is also a wide variety of industries they have. That gives an opportunity for startups to rely on those industries ("Something in…”, 2012). For example, the Mayor of Berlin, Klaus Wowereit, in his interview with McKinsey’s Holger Haenecke, Katrin Suder, and Lea Thiel, emphasised that currently startups in Berlin are primarily focusing on healthcare, logistics, IT, media and optics (Haenecke, Holger, Suder, and Thiel, 2014).

Compass.com with the support of Crunchbase prepared the Global Startup Ecosystem Ranking for year 2015, that chose the best areas for startups according to 5 main criteria: performance, funding, talent, market reach and startup experience. According to Compass Inc, the best 10 places for startups are Silicon Valley, New York City, Los Angeles, Boston, Tel Aviv, London, Chicago, Seattle, Berlin and Singapore. Silicon Valley being number one on the list. Some other major cities are also on the list. Paris occupies place 11, Moscow appeared on the 13th position, Sydney on 16th and Amsterdam on 18th (Blank, 2015).

However, after all it seems that Silicon Valley is significantly stronger than other cities on the list. It got the first place in all sections of the Compass.co's research but market reach. There it received position number four, just behind New York City, Los Angeles and London (Blank, 2015). When choosing a location companies decide what they need the most. While Silicon Valley can be the best option for raising capital, it might not be convenient for every industry such as a fashion startup for which industry markets are located in cities like London, Paris and New York.

By Nik Rollinson