Why Today's Start-Ups Are Choosing Urban Lofts Over Suburban Office Parks

Today's high tech companies are flocking to downtowns across the country.

Image
Flickr/David Basulto

Ever since its birth 50 years ago, venture capital-financed technology has had a suburban orientation. Suburban "nerdistans" sprouted in low-rise office parks just off highway interchanges across California’s vaunted Silicon Valley; in the suburbs that line Boston's Route 128; and in Redmond, where Microsoft is located, to name just a few.

Recent evidence, both anecdotal and quantitative, suggest a major shift is underway. Over the last two months, I have looked at the changing geography of venture capital investment. Looking at metropolitan areas, telephone area codes, and postal codes, I have compared the prevalence of start-up activity across America's urban and suburban landscapes.

The upshot is that the long-standing model is giving way to "urban tech." The numbers clearly back this up.

San Francisco proper is the nation's largest single jurisdiction for venture capital investment. And New York City — a place which had very little venture investment a  couple of decades ago — hauls in nearly $2.5 billion a year. 

Particularly over the last few weeks, my zip code data analysis has demonstrated that the urban shift in venture capital and start-up activity is an emerging norm for high tech, as small and promising firms locate in a dense, urban network of investors, collaborators, and competitors.

The table below summarizes the top 11 metro areas for venture capital investment in 2011, using zip-code level data made available to me by Dow Jones. 

Venture Capital in Urban vs. Suburban Zip Codes – Ranked by Investment (dollars in millions)
Metro Total Investment Urban Venture Investment Urban Share Suburban Venture Investment Suburban Share

San Francisco Bay Area

  • San Francisco
  • San Jose (Silicon Valley)

$13,597

$8,449

$5,014

$11,649

$6,935 

 $4,668

85.7%

81.6%

93.1%

$1,948

$1,564

$345

14.4%

18.4%  

6.9%

Boston $3,275 $2,391 73.0% $884 27.0%
New York $3,147 $2,447 77.7% $701 22.3%
Los Angeles $2,461 $1,941 78.9% $520 21.1%
Washington/Baltimore $1,127 $772 68.5% $354 31.5%
San Diego $942 $865 91.8% $78 8.2%
Chicago $668 $360 54.0% $307 46.0%
Austin $630 $555 88.0% $75 12.0%
Seattle $591 $495 83.7% $97 16.3%
Philadelphia $341 $53 15.6% $288 84.4%
Dallas $251 $157 62.7% $93 37.3%


Predominantly urban zip codes accounted for just over half of venture capital investment in Chicago in 2011, more than 60 percent in Washington, D.C., and sprawling Dallas, and roughly three quarters of the investment in Boston, New York, and Los Angeles. Urban zip codes accounted for more than 80 percent of venture capital investments in San Diego, Seattle, Austin, and San Francisco. Nowhere is this urban shift more apparent than in New York, where all but one of the metro's top ten zip codes for venture capital investment could be found in midtown or lower Manhattan. The proportion of venture capital investment centered in suburban zip codes is especially low (below 20 percent) in western cities like Austin, Seattle and San Diego, at least in part a function of the more generous history of suburban annexation throughout the 20th century. Of the metros we examined, only Philadelphia has a lingering suburban orientation to its start-up scene.

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The urban tech shift is a result of several trends.

First and foremost is access to talent. More and more techies are choosing to live in denser, livelier, and less car-dependent urban locations. As venture capitalist Mark Suster notes, "Young people want to live where the action is. They want to live amongst other young people. They want nightly restaurants, bars, dance clubs, karaoke, or whatever other late night activities are available to those with fewer encumbrances." He suspects that this "shift from the burbs to urban environments" is a trend that won't go away any time soon. Reflective of this preference for urban living, many of the big Silicon Valley tech companies run buses to ferry people from their San Francisco neighborhoods to their Silicon Valley jobs, as Sarah Goodyear has written before.

Cities are denser and more efficient, especially for start-ups. Large, established tech companies like Apple, Google and Facebook require (and can afford to build) large corporate campuses, which are easier to accommodate in suburban areas — and which try to emulate many of the features of proximity and interaction that occur in cities. Older buildings in urban locations can be much more affordable for small start-ups. Many of the most promising young tech companies coming out of the Bay Area — like Pinterest, Twitter, Zynga, Yelp, Square, and Salesforce — chose to locate or relocate to San Francisco.

As Silicon Valley entrepreneur and investor Paul Graham has noted:

"For all its power, Silicon Valley has a great weakness: the paradise [William] Shockley found in 1956 is now one giant parking lot. San Francisco and Berkeley are great, but they're forty miles away. Silicon Valley proper is soul-crushing suburban sprawl. It has fabulous weather, which makes it significantly better than the soul-crushing sprawl of most other American cities. But a competitor that managed to avoid sprawl would have real leverage.

The changing nature of technology has a bearing on this as well. High-tech industry today is less focused on hardware, which requires factory-sized settings. Cloud computing allows those companies to shrink their footprints even more. Though the suburbs are rich in techies, the talent pools in cities are more diverse, with better access to designers, composers, scenarists, marketers, copywriters, and so on, who are just as important to these newer enterprises as engineers. 

"Technology innovation doesn't occur in a vacuum. It happens in a dialog with society," is how New York venture capitalist Fred Wilson explains it. "[T]hat's one of the reasons that many of the most interesting bay area start-ups are choosing to locate themselves in the city. And it is one of the reasons that NYC is developing a vibrant technology community. Society is at its most dense in rich urban environments where society and technology can inspire each other on a daily basis."

Cities bring diverse collections of talented people together, allowing them to combine and recombine their ideas and swiftly mobilize entrepreneurial resources. As such, they have long been leading epicenters of creativity and innovation. It is not the rise of urban tech, but rather the movement of industry and people to the suburbs and the short-lived dominance of high-tech nerdistans, that stand as the historical aberration not the permanent new paradigm that many took it to be.  
 
Today, the locus of innovation and entrepreneurship is shifting back to the great urban centers that have served as their true catalysts all along.
 
Top Image: This year, Pinterest moved from Palo Alto into a converted warehouse in San Francisco's SoMa neighborhood.  Photo courtesy Flickr user David Basulto.

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This is the twelfth 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 commnities 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