Hint: It's not favorable tax rates.
Creating high-growth, high-impact entrepreneurial enterprises has become a common goal of cities. Metros and states have cut taxes, implemented entrepreneur-friendly business policies, launched their own venture capital efforts, and underwritten incubators and accelerators – all in the hope of creating the next Apples, Facebooks, Googles, and Twitters.
But what really attracts innovative entrepreneurs who create these economy-boosting companies?
The answers: talented workers, and the quality of life that the educated and ambitious have come to expect – not the low-tax, favorable-regulation approach that many state and local governments tout.
These are the findings in a new report from Endeavor Insight, the research department of the non-profit Endeavor, which focuses on fostering and mentoring "high-impact" entrepreneurs. Based on surveys and interviews with 150 founders of some of the country's fastest-growing companies, the report answers the basic question, "what do the best entrepreneurs want in a city?" It offers basic evidence that cities should focus on factors and conditions that attract the talented, educated workers that fast-growing entrepreneurial enterprises need.
Looking at this sample of America's most successful new businesses, Endeavor identified two fundamental patterns.
For one, size matters. These top business-creators gravitated towards cities with at least a million residents in the metro area. This offered the scale and diverse array of offerings needed to attract talent.
A city also needs to be able to appeal to the young and the restless. The entrepreneurs surveyed were a highly mobile bunch when they first started out. They moved often and easily in the early phases of their careers, following personal ties or certain lifestyle amenities while also seeking the right environment to launch their enterprises. But eighty percent of respondents had lived in their current city for at least two years before launching their companies, meaning that cities had to catch them early. And once they started their first company, these business leaders rarely moved. So attracting this mobile group at an early age is key.
The report then dug deeper into exactly what these entrepreneurs reported as the most important part of their location choices.
The top rated factor by far was access to talent. Nearly a third of those surveyed mentioned it as a key factor in their decisions for where to live and work (many specifically prized access to technically trained workers). Entrepreneurs explained that they proactively sought out the places that educated and ambitious workers want to be.
As one Seattle-based entrepreneur put it:
"Employees want to live and work here. We knew that when we moved here and later started the company"
Or as another based in Boston explained:
"I chose Boston because of the cultural life: symphony, colleges, theater, beautiful architecture, etc. These things attract the kind of intelligent people we’d like to employ."
The study found that two other key factors in the location choices of entrepreneurs are major transportation networks (like airports and highways that can connect them to other cities) and proximity to customers and suppliers. This echoes MIT’s Eric von Hippel's claim that end-users and customers are key innovators.
Perhaps even more interesting from the perspective of urban policy are the location factors that did not make the cut – those that high-growth entrepreneurs found to be of little consequence in their location decisions. At the very bottom of the list were taxes and business-friendly policies, which are, unfortunately, exactly the sorts of things so many states and cities continue to promote as silver bullets. Just 5 percent of the respondents mentioned low taxes as being important, and a measly 2 percent named other business-friendly policies as a factor in their location decisions.
To drive this point home, Endeavor tracked more than 100 of the most common descriptive words that entrepreneurs used to answer the question, “Why did you choose to found your company in the city that you did?” Tax doesn’t make the top 50, falling below "rent," "park," "restaurants," and "schools." In fact, it barely manages to edge out the word "girlfriend." Of the top ten most popular words, "lived," "live," and "living" all make the cut. Talent takes the first slot.
The report’s conclusion is clear, and I agree. “The magic formula for attracting and retaining the best entrepreneurs is this,” they explain: “a great place to live plus a talented pool of potential employees, and excellent access to customers and suppliers.”
Top Image: San Francisco Mayor Ed Lee, third from bottom left, crosses Market Street in front of Twitter Headquarters Monday, Nov. 4, 2013. Twitter is part of a wave of tech companies returning to the city of San Francisco proper (AP Photo/Jeff Chiu).