David Zipper is a Resident Fellow at the German Marshall Fund and a Partner in the 1776 Venture Fund, where he oversees investments in smart cities and mobility ventures. Following his tenure as director of NYC Business Solutions in Mayor Michael Bloomberg's administration in New York City he served as director of Business Development and Strategy for two mayors in Washington, D.C.
Cities are right to pour their energy into home-grown businesses. But they should think twice before becoming those businesses’ first customers or investors.
HQ2—Amazon’s very public search for a second headquarters in North America—has attracted applications from over 200 cities offering an array of taxpayer subsidies as part of their pitch. But the expense and distraction of the HQ2 competition have also created a backlash, as skeptics question whether corporate relocation should drive a city’s economic development strategy. Many, myself included, have thrown water on the HQ2 euphoria, suggesting that city resources are better spent nurturing local startups loyal to their hometown rather than on front-loaded incentives for companies like Amazon based elsewhere.
But if a city is going to shift its economic development strategy toward a “grow-your-own” orientation, where should it focus resources? There are a number of potentially powerful approaches to choose from. But there’s at least one tactic city officials should avoid. Just as corporate relocation packages like HQ2 generally aren’t a good idea given the cost of incentives, neither are large contracts to local startups for untested or inferior products. City officials are often asked to make such deals to support ambitious local entrepreneurs. They should resist the temptation.
Although a fast-fashion app or a manufacturing process tool won’t probably want city contracts, a wide array of startups in sectors like education, construction, and transportation see local government as a potential customer and respected validator. There is a reason why most cities’ economic development offices get a steady stream of pitches from local entrepreneurs.
City officials may understandably want to find ways around normal procurement rules to buy the entrepreneurs’ products, both to spend tax revenues locally and to publicize city support for hometown startups. But that would be a mistake. City officials are actually doing their local startups a disservice if they don’t vet them the same way they would other companies.
I can offer a personal example of the risks a city runs when it becomes an initial customer for a local startup. When I worked in the Washington, D.C., mayor’s office several years ago, the city gave a substantial contract to a local company called New Brand Analytics, which had previously sold software to help restaurants and hotels manage their online reputations. The city contract allowed New Brand Analytics to develop a new product line for city agencies to monitor feedback from residents, with the goal of scaling it to other cities nationwide.
But the new product did not scale. After its initial contract with D.C., New Brand Analytics did not close another city deal. In 2015 the company was quietly acquired by Sprinklr, based in New York City.
It shouldn’t be a surprise that an initial contract like the one New Brand Analytics had with the D.C. government wouldn’t necessarily lead to other contracts. After all, other cities’ officials aren’t likely to weigh the startup’s home address when deciding whether to become a customer. Rather, they will focus on price and quality of the product. And a city optimizing for price and quality will almost always choose to work with a company located outside its jurisdiction. If Birmingham wants to buy a new sensor system in its municipal trash cans, what are the odds that the best solution for trash can sensors happens to come from a startup in Birmingham? Not high.
An uncomfortable truth for city officials is that they actually become a dangerous crutch to local startups if they pay for an inferior or untested product. The market can be brutal, but a successful business has to master it. City officials who allow local entrepreneurs to avoid that reality aren’t ultimately helping them.
The good news is that there are plenty of ways for city leaders to support startup-fueled economic development without dipping into public coffers. An easy process for business licensing and registration can nudge prospective entrepreneurs to take the plunge (and make life a little easier for existing businesses, too). Creating a startup advocate position within city hall—as Seattle has done—can give founders a useful “front door” when they have questions about setting up shop or navigating city government. Cities can also provide funding and support to create a startup hub that brings together students, entrepreneurs, investors, and corporations—much as Boise did when Trailhead launched in 2015. Each of these techniques can improve the urban environment for startups and make it easier for new ventures to launch and scale.
At the same time, city leaders can also lend a helping hand to individual startups that show potential to scale. For instance, a mayor could visit a startup’s office or tweet about their product. A testimonial from a city official can be a powerful lift to an entrepreneur building a brand and show legitimacy to prospective customers. A mayor could also deploy her network to help a local startup, providing connections to city businesses that could become customers or partners. And if she really believes in a startup’s new product, a mayor could offer a chance to test it through an unpaid city pilot. Some startups may ask for a token payment to show they can close a deal, and that’s OK, too.
To summarize, if you’re a city official ready to adopt a grow-your-own economic development strategy, make it easier for prospective entrepreneurs to take the plunge and celebrate them when they do. Simplify business regulations, tweet about successful startups, offer to do a city agency pilot, and introduce entrepreneurs to resources in the community—and while you’re at it, pat yourself on the back for doing something more productive than climbing aboard the HQ2 bandwagon. But if a startup asks you to cut a big check, best to think hard before you say yes.