Flickr/Halsenberg Media

Affordability and public support is helping a handful of Southern U.S. cities seem more attractive to entrepreneurs. But can it last?

Some of Louisville's brightest start-up entrepreneurs gathered together two weeks ago. The event was cordial and in some ways predictable: Light refreshments were served while local and visiting venture capitalists led a series of discussions. Nevertheless, underlying the niceties was a sense of urgency, embodied in the event's title: “Stop Thinking Small, Louisville."

Brian Wallace, a local tech entrepreneur who organized the event, wanted to deliver a blunt message: Louisville is missing its opportunity to poach start-up activity from coastal giants like New York and San Francisco.

“It’s crazy how far behind we are,” says Brian Wallace, the president and founder of Nowsourcing, a digital infographics company. “I feel like there’s a lot of these cool, styley [innovation] groups already, but they’re not looking at it globally or even regionally,” he adds. Wallace fully believes Louisville can be America’s next great start-up city. It's a belief driven in part by the success he had in ditching New York for this mid-size city.

Nine years ago, he launched his web-based company in New York City, his hometown. The big city's robust investment activity made it a no-brainer as Nowsourcing’s initial home base. In 2012, ten percent of nationwide venture capital investment flowed through NYC-based start-ups. But after just one year, Wallace felt the city’s exorbitant costs were holding the company back. He was familiar with Louisville, attracted by its proximity to universities, and believed Nowsourcing could achieve newfound affordability there. Leaving the deep pockets of New York City investors was risky, but it proved to be a wise gamble.

Nowsourcing has more than doubled its revenue and tripled its labor force in the past four years. Moreover, Wallace has found the friendly, mild pace a nice change from the bustling East Coast. (Living among the country's largest bourbon producers has its benefits, as well.) But what specifically makes Wallace believe that start-up entrepreneurs should follow his lead and flee the East and West Coasts? If your business flops in a city like Louisville, he says, your landing can be a lot softer.

“This is a great, safe place to fail because you don’t have the same start-up costs,” Wallace says. “If you fail in a place like New York you essentially die. Your burn rate can be much better out here.”

Despite the irony of this pitch, the comparative cost of failure is part of a larger advertising campaign mid-size cities are using to woo young, tech-savvy entrepreneurs and investors away from coastal cities. They're unable to offer the Golden Gate Bridge or Fenway Park to a recent college graduate with the next great idea. But they can offer affordability and an increasingly attractive urban culture. As they see it, they just need to spread the word.

Chattanooga's relative affordability makes it an attractive choice for start-up entrepreneurs.
Sources: Chattanooga Chamber of Commerce,

Three-hundred miles south of Louisville, 10 start-up entrepreneurs from across the country will descend on Chattanooga, Tennessee, early next month. There, they’ll take part in a five-day “Innovation Delegation”—Chattanooga’s latest attempt to promote its ambitious start-up scene. In 2010, the city famously completed construction on a $330 million ultra-fast fiber-optic WiFi network. For $70 a month, city residents get wireless Internet that’s 50 times faster than the U.S. average. Though specifics have yet to be laid out, the city’s mayor recently announced his support for turning downtown Chattanooga into an “Innovation District.” These initiatives have given the city a tech infrastructure foundation that's among the best in the country, some residents say. Convincing visiting entrepreneurs of its competitiveness is the next goal.  

“This is really a way for our city to step into the major leagues in terms of defining Chattanooga as the tech hub of the South,” says Joda Thongnopnua of WayPaver, a local start-up lab that’s hosting next month’s Innovation Delegation. WayPaver is keen on attracting delegates from outside Chattanooga to the event. They’re eyeing start-up entrepreneurs from Silicon Valley, Washington, Boston, and other vibrant tech hubs. At its conclusion, the 10 participants will present recommendations to Chattanooga’s mayor and business community to strengthen the city's tech economy. Arguably more important, however, is that the gathering enables the city to pitch itself. According to Caroline Daniels, an expert on entrepreneurism at Babson University, the city could lure entrepreneurs away from traditional start-up cities by advertising their low costs and robust tech infrastructure.

“You want to look at two things: cost and access to resources,” Daniels says. “So you want to find a city and city government that just opened an entrepreneurship center. You want to look for a university or college, because those typically have entrepreneurship centers that attract investors,” she adds.

Chattanooga’s proposed “Innovation District”—and the city’s five colleges—will likely strike a chord with the delegation’s participants. But some tech innovators fear mid-size cities can only support start-ups for initial periods. At a certain growth point, resources—especially talent—become too finite.

“Small cities like Chattanooga will always have some areas to support small businesses, but they can’t be great at everything because they don’t have enough people,” says Phil Beene, president of Nudge, a mobile health app. Launching Nudge in Chattanooga enabled Beene’s venture to start with extremely low costs. He and his business partner rented an apartment for around $500 per month. They connected to the city’s supercharged Internet at coffee shops and wifi hotspots. And they received mentoring from Co.Lab, a local start-up accelerator that Beene calls the “front door” for any entrepreneur trying to break into the city. As time passed, however, Beene and his partner needed resources that went beyond cheap housing and Starbucks coffee served alongside ultrafast Internet. They needed more money.

“[W]hat you’re seeing now is smaller cities becoming really good at supporting early stage companies, but then they get up and leave,” Beene says. (Nudge recently relocated to Richmond, Virginia.) He’s not fully comfortable using the term “headquarters,” but the start-up’s foothold in Richmond will be much more permanent than the day-to-day hustle they employed in Chattanooga. And despite being relatively small itself, Richmond's budding health industry and proximity to Washington, D.C., presented Nudge with far more investment opportunities. Chattanooga's impressive tech infrastructure was simply outmatched by Richmond's pocketbook.

“Bigger cities offer greater pools of talent and investment that becomes attractive as companies grow,” Beene says, leaving ambitious mid-size cities in a difficult position. They're wisely choosing to “Stop Thinking Small,” but simultaneously need to prioritize long-run competitiveness. Otherwise, their most innovative start-ups—the ones they're working hard to attract right now—may simply flee for more prosperous cities after a few years.  

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