AOL headquarters in Virginia, 1997. By 2000, AOL was the biggest Internet provider in the country and valued at $125 billion.
AOL headquarters in Virginia, 1997. By 2000, AOL was the biggest Internet provider in the country and valued at $125 billion. William Philpott/AP

Hook Local Startups, Not the HQ2 Whale

City leaders will find that cultivating relationships with small homegrown companies is smarter—and cheaper—than trying to lure in an outside behemoth.  

Readers of CityLab have likely seen numerous arguments condemning the competition among North American cities to land the second Amazon headquarters. Urban policy experts are nearly unanimous in their opprobrium for the HQ2 selection process and their skepticism that the “winning” city will reap the rewards of economic growth and job creation that Amazon has promised. (And even if it does, the price tag for accommodating HQ2 may negate or severely diminish any fiscal benefit.)

For cities eager to lay the groundwork for long-term economic growth, what are better options? Can any single development gambit generate such a windfall of new jobs?

Yes, but it will not happen through a development strategy based on luring outside corporations with taxpayer incentives. Rather, this kind of big bang is far more likely to happen when a homegrown local startup gets acquired or goes public, transforming early employees and investors into millionaires.

These beneficiaries can become invaluable mentors and investors for a succeeding generation of local startups; many may use their earnings to become entrepreneurs themselves. A major business acquisition or IPO—not the HQ2 charade—is the kind of jackpot that economic developers should pursue.

I have seen how the effects of such a big bang rippled through the Washington, D.C., region, where I live. During the 1990’s AmericaOnline (AOL), then based in Tysons Corner in Northern Virginia, dominated the dial-up consumer internet market. AOL was valued at $125 billion when it merged with Time Warner in 2000, a transaction that made many executives and employees very wealthy.

That merger was not ultimately successful, but the imprimatur of AOL remains visible across D.C.’s business landscape two decades later. Along with several AOL alumni, company CEO Steve Case went on to found Revolution, a Washington, D.C.-based venture firm with hundreds of millions in capital that has made numerous investments into local startups like Optoro. Case also founded Revolution Health, which employed hundreds of people in the early 2000’s, including Tim O’Shaughnessy, the future co-founder of e-coupon company LivingSocial, which at its peak was valued over $1 billion. O’Shaughnessy now makes venture investments as president of DC-based Graham Holdings, while LivingSocial alumni have founded local startups such as Framebridge and Galley. All of this activity loops back to one company: AOL and its merger with Time Warner.

Or jump to a city on the other side of the coast: Seattle. In his book The New Geography of Jobs, economist Enrico Moretti notes that in the 1970’s, Seattle was a struggling industrial city whose fortunes were closely tied to that of its major employer, the aerospace firm Boeing, which had downsized dramatically during that decade. But in 1979, the region became the beneficiary of what may have been the most consequential business relocation of all time: Microsoft’s move from Albuquerque to Bellevue at a time when the company employed just a couple dozen people. (Note that Microsoft received no public incentives to induce its move, and I’ve found no evidence that economic development officials took particular note of it). Microsoft thrived in the early days of personal computing, going public in 1986. Since then, its employees have founded a slew of companies that are today at the center of Seattle’s thriving tech scene, from Zillow to Inrix to Vulcan Capital.

These sorts of economic big bangs can happen anywhere, not just on the coasts. Just last December, Birmingham-based e-delivery startup Shipt was acquired by Target for $550 million. Shipt was founded by a Birmingham entrepreneur who managed a local team of over 200 and raised capital from Alabama investors—all of whom got a windfall. Birmingham is poised to reap the benefits of the Shipt acquisition for many years to come, including a bevy of new mentors and investors supporting a new generation of startups.

So what is the lesson for your town’s economic development boosters? City leaders are wise to stay close to startups that are starting to scale, meeting with them regularly, congratulating them on raising a new round of capital, and solving whatever issues arise regarding regulation, workforce, or infrastructure. Once a company has hundreds of employees, it’s likely that other states will dangle big checks in exchange for relocation. A company whose leaders and employees feel tied to its community is less likely to be tempted to jump ship.

And if an incentive battle does break out, the city where the startup is based will enjoy home court advantage, with employees already settled into their homes and commutes and their children enrolled into local schools. Meeting and maintaining relationships with fast-growing startups may seem obvious, but in my experience economic development leaders are often unaware which local companies have raised the most venture capital—an obvious indicator of future growth.

Last fall, 238 cities invested countless staff hours putting together proposals for Amazon, hoping to prevail in an economic development competition so intense and expensive it has earned comparisons to the Olympics. Most cities have been quiet about what it cost to draft their HQ2 proposals, but not all. Virginia Beach, for example, spent $100,000, not including staff hours that could have gone toward other projects.  

But what if cities like Virginia Beach had instead invested those resources into outreach to learn about their five fastest-growing local startups and solve their most pressing challenges? Regulations could have been streamlined, new community college courses created, and zoning requirements tweaked—at a fraction of the cost of a corporate relocation incentive package. And the cities’ time and money would have been much more likely to spark an economic big bang than the frivolous pursuit of HQ2.

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