The Amazon Model: The Rise of Urban Start-Ups in Smaller Tech Hubs

A look at the patterns of venture capital investment in Seattle, Austin, and Chicago.

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Associated Press
Amazon likes to be seen as unique among this nation's high-tech giants. In contrast to nearby Microsoft as well as Facebook, Google, and Apple in Silicon Valley, it has long preferred to locate its headquarters in the urban center. For years, they worked from a converted hospital close to Seattle's downtown core. The company moved its headquarters to the revitalizing South Lake Union last winter, and over the past year it has committed to an unprecedented building spree in the surrounding neighborhood.
 

A natural contrast to neighboring tech giant Microsoft, headquartered in suburban Redmond, Amazon has brought capital and wealthy, young new residents downtown. “I think they’ve single-handedly defined a whole region,” Bryan Trussel, the CEO of the South Lake Union-based start-up Glympse, told The New York Times. “Now everyone wants to be there.”

Amazon provides a powerful example of the urban tech campus, and now that model is spreading beyond Seattle to cities across the nation. Continuing my series on the urban shift in venture capital and start-up activity, I took a closer look at the geography of investment by zip code in Seattle (home to Microsoft and Amazon as well as industry leaders like Starbucks, REI and Costco) and two other metros that number among America's top ten centers for venture capital-backed start-ups: Austin, where Dell is headquartered, and Chicago, which has begun to rival and even surpass these other two metros in venture capital investment in recent years.

Using detailed data on venture capital activity at the zip code level made available to me by Dow Jones, I tracked the degree to which venture capital and start-up activity in these metros is located in suburban versus urban locations. Zara Matheson of the Martin Prosperity Institute mapped the patterns.

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With Microsoft’s massive headquarters in Redmond, Seattle has long been thought of as a center for suburban tech. But, as illustrated on the map above, Seattle too reflects the shift to urban tech. The Seattle metro attracted nearly $600 million ($591 million) in venture capital investment in 2011. Of this, the city of Seattle accounted for $377 million in investment, more than 60 percent (62.8 percent) of the metro total. Bellevue, an increasingly built-up suburb with a dense and walkable core, attracted nearly $118 million in venture capital investment, far outpacing outlying suburbs like Redmond.

The table below shows the top five zip codes for venture capital investment in the Seattle area. Three of the top five are in the city. Seattle is home to the leading zip code by far, 98104. This area, which includes the downtown neighborhoods of Pioneer Square and First Hill, attracted nearly $140 million in venture capital. The neighboring zip code 98101, which covers much of the central business district, brought in another $67.2 million in venture investment. Together these two districts attracted more than $200 million in venture investment, more than half of the city's total and nearly a third of the metro's overall investment. The third ranked zip code was in the mixed use, close-in suburb of Bellevue, while the fifth is in suburban Kirkland.

Top Five Zip Codes for Venture Capital Investment in Seattle
Rank Zip Code Neighborhood and Features City  Investment (millions)
1 98104 Pioneer Square, First Hill Seattle $139
2 98101 Central Business District, Pike Place Market Seattle $67
3 98004 West Bellevue, Northwest Bellevue Bellevue $46
4 98134 Industrial District, Harbor Island Seattle $45
5 98033 Suburban Kirkland Kirkland $41

 

In contrast to many of the other regions we've covered so far, the shift to urban tech is not a completely new development in Seattle, with Amazon's downtown headquarters a prominent example. As recently as 2000, a Brookings Institution report by Paul Sommers and Daniel Carlson, then both of the University of Washington, found that Seattle proper was home to nearly half (47 percent) of all firms that experienced an initial public offering (IPO) between 1994 and 1999. Nearly 30 percent of these firms were located in the city’s downtown central business district, while 53 percent were headquartered in traditional suburban locations. But the trend toward urban tech has clearly accelerated over the ensuing decade, as predominantly urban zip codes account for more than 80 percent (83.7 percent) of the region's venture capital investment in 2011.

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Austin has long been seen as a leading exemplar of the nerdistan, with tech companies like Dell out in the suburbs. But as the map above shows, while venture investments are spread out across the region, there is a substantial urban tilt, with concentrated investments in and around the city’s core.

In fact, venture investment in Austin today is overwhelmingly urban. The Austin metro attracted $630 million in venture investment in 2011. Nearly 90 percent (88 percent) of this was located in the city itself.

Top Five Zip Codes for Venture Capital Investment in Austin
Rank Zip Code Neighborhood and Features City  Investment (millions)
1 78701 Downtown, University Medical Center, State Capitol Austin $231
2 78744 Southeast Austin Austin $75
3 78759 Northwest Austin Austin $72
4 78730 Northwest Hills Austin $51
5 78731 Northwest Austin - River Place, Lake Austin Austin $41

 

The table above highlights this, showing the five leading zip codes for venture capital investment in the region. The top-performing zip code in the region (78701) includes much of central downtown, the Texas State Capitol, and the University Medical Center. Startups located in this central district attracted 15 deals for a total of $230 million. The second and third leading zip codes were also within the central city: 78744, in Southeast Austin, and 78759, in Northwest Austin, each netted slightly more than $70 million in investment. Together these three urban zip codes accounted for more than $375 million in venture investment, about 60 percent of the entire region's total in 2011.

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Chicago is a great city with a bustling, revived downtown, but high-technology has traditionally preferred its suburbs, where Motorola and other companies have long had their headquarters. The metro attracted $668 million in venture capital in 2011. As the map above shows, venture capital investment in Chicago also has begun to reflect the urban shift. The city itself attracted more than $300 ($313) million in venture investment, 47 percent of the metro total. Predominantly urban zip codes accounted for 50.4 percent of all investment across the region. In Chicago, there remains considerable venture capital investment in the suburbs as well.

Top Five Zip Codes for Venture Capital Investment in Chicago
Rank Zip Code Neighborhood and Features City  Investment (millions)
1 60062 Suburban Northbrook Northbrook $134
2 60654 River North Chicago $105
3 60614 Lincoln Park, Sheffield, DePaul University Chicago $71
4 46394 Downtown Whiting, Robertsdale Whiting, IN $54
5 60517 Suburban Woodridge Woodridge $50

 

The table above lists the top five leading zip codes for venture investment in Greater Chicago. The top zip code was 60062, in Northbrook, IL. The next two high-performing zip codes, however, are both located in revitalizing neighborhoods in and around downtown Chicago — 60654, in River North; and 60614, slightly north in Lincoln Park, including the campus of DePaul University. The River North-based 60654 also saw the highest number of individual deals in the metro area, with 15 different venture capital investments occurring in 2011. Together these two zip codes attracted more than $175 million in venture capital investment, roughly a quarter of the total for the metro.

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The metros I've covered today — Seattle, Austin, and Chicago — all reflect the urban shift in venture capital and start-up activity. In all three cases, more established companies like Motorola, Microsoft, and Dell have long made their homes in suburban nerdistans. But, as of 2011, a considerable share of venture capital and start-up activity has lately been concentrating in the city, especially in downtown neighborhoods near their urban cores.

In two of the three metros — Seattle and Austin — urban tech is the clear standard. In Seattle, 60 percent of investment was in the city itself, and more than 80 percent in predominantly urban zip codes. In Austin, the city and urban zip codes accounted for more than nine in every ten dollars of venture investment. In Chicago, the pattern is more mixed; the city brought in slightly less than half of all venture investment, while predominantly urban zip codes netted slightly more than half.

Next week, I'll wrap up this series on the new geography of venture capital start-up activity and explain why I believe urban tech is the future of innovation, one that both reflects and reinforces America's emerging economic landscape.

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This is the eleventh in a series of posts exploring the new geography of venture capital and high-tech start-ups, and the degree to which these start-up communities are shifting from their traditional locations in the suburbs to urban areas.

About the Author

  • Richard Florida is Co-founder and Editor at Large of CityLab.com and Senior Editor at The Atlantic. He is director of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at NYU. More
    Florida is author of The Rise of the Creative ClassWho's Your City?, and The Great Reset. He's also the founder of the Creative Class Group, and a list of his current clients can be found here