The agglomeration effect has a long history, with the wealth of connections and resources widely known to attract prosperity and success for individuals and organizations. This was emphasized by a recent study from the University of Texas at Austin, which showed that for startups, the connections available in a major city are more important than any capital they can find there.
The research suggests that the best entrepreneurs today tend to gravitate towards cities where they can tap into a strong social network, whilst also obtaining a degree of financial support.
“If you’re starting a restaurant, location matters and large funding matters,” the researchers say. “But if you’re building a mobile app, the cost is low and nobody cares where you’re located, so the factors that influence a move are different.”
Support networks
The researchers examined economic data from the US government alongside investment data from CrunchBase and PwC and demographic data on entrepreneurs from LinkedIn. In total, they analyzed nearly 1,500 American entrepreneurs, all of whom had secured funding over the last 10 years.
The analysis showed that the amount of capital available in a city was not really a major factor in where the entrepreneur decided to locate their business. Real estate and the various other costs of living in a city are a factor however, and that is deterring entrepreneurs from starting businesses in places like New York and Silicon Valley, and instead migrating to more affordable places, such as San Diego and Seattle.
The entrepreneurs were less concerned about access to finance, with a tendency to prefer steady access to relatively small sums to begin with. They appeared confident in the fact that larger sums would be forthcoming when they started earning a profit. Angel investors tend to fit this profile.
What was perhaps most important, however, was the role social networks played in the location decisions of entrepreneurs. The data suggests that the more LinkedIn connections an entrepreneur had in a city, the more likely they were to base their business there.
“We found that having more connections in a particular city not only pulled talent to that area, but it kept them there,” the researchers say.
Lack of mobility
This is quite important, as the data suggests that entrepreneurs were actually less likely to move location than the average professional, with tech entrepreneurs especially wedded to their place of choice.
As such, if cities wish to attract the best tech entrepreneurs, the researchers believe that creating ways for those entrepreneurs to develop connections can be crucial. This could be via events and conferences or via establishing branches of accelerators with a much broader reach. The ideal age for these entrepreneurs seems to be the early 30s, as these are most likely to be successful as they have the mix of youthful vitality and professional experience.
“This is very important for cities that are shrinking or dying because of their location,” the researchers conclude. “They aren’t in a great hub, but they could make themselves more appealing to tech entrepreneurs just by following a few simple steps.”
