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Location, location, location.

The axiom might be a real estate cliche, but it has merit in real-world practice. The idea is intuitive; if a business isn’t placed near an interested consumer base or rooted in an area that could use its services, it will probably end up shuttering its doors before long. After all, what use would a boat vendor be in an Arizona desert? How long would a Michelin-starred gastropub be in a tiny town frequented by quick-stop truckers? There are no two ways about it -- a business’s services need to fit the area.

Of course, some might argue that tech firms and Internet-savvy startups are the exceptions to the rule. Based as they are in online innovation, these companies can vend their digital products to a global consumer base. They don’t usually need to adhere to geographical restrictions or determine which communities would be most amenable to their services.

In theory, a startup could set down roots in a small town in the Midwest or a big city on the East Coast and enjoy the same level of connection to consumers and wildly different real estate costs. Given this, it would seem logical for startups to find the cheapest office spaces they can and grow from there -- and yet, we see the biggest tech companies gather in hubs like New York, the Silicon Valley, and Dallas. The question is, why?

As it turns out, there are benefits to location that have little to do with consumers or geographical characteristics. According to a 2017 report published by the Silicon Valley Leadership Group and the Silicon Valley Community Foundation, rates of innovative activity tend to be higher in areas where tech-centered businesses cluster together. Currently, Silicon Valley’s hub leads nationwide innovation growth rates at 8%, with Austin following at 7% and New York City at 4%.

These hubs far outstrip other areas when it comes to innovation industry growth. Take the Silicon Valley as an example; over the last decade, the GDP of the region’s tech-adjacent fields (software, technology manufacturing, internet and information services, etc.) rose almost 150%, while that of the non-tech fields rose a comparatively anemic 60%. These numbers indicate that when tech companies cluster, they can bring a significant benefit to the local economy and achieve greater rates of innovation than they would when isolated in, say, a rural town.

A few factors have to come into confluence to create one of these high-achieving “innovation ecosystems” -- and all are inextricably tied to location.

Proximity to Research and Development Labs

D labs are essential to success in innovation. These centers help tech companies take theoretical ideas and create commercially-available products. A tech firm might receive the lion’s share of the praise for groundbreaking ideas and products, but few accomplishments would be possible without the foundation an R&D lab provides.

As one writer for CityLab puts the matter: “There would be no Silicon Valley without the R&D that takes place at Stanford University; no Boston-Cambridge tech miracle without MIT; no Pittsburgh revival without Carnegie Mellon. In fact, it is hard to name a major tech hub around the world that does not have one or more great research university.”

Conversely, it’s relatively rare to find a high-profile research institution that isn’t based in or near a major hub. According to a recent study published in the Journal of Urban Economics, prominent R&D labs tend to cluster on the coasts. Researchers found that roughly a third of all R&D labs worked in the Boston-New York-Washington, D.C. Corridor. Where these labs chose to settle is generally split by industry; those in the Northeast tend to focus their research on chemicals and business services, while those on the West Coast center more on electronics, data processing, and machinery.

Given all this, it would make sense for a startup to settle in a hub that offers easy access to relevant R&D labs.

Proximity to Universities

Where better to find top-tier talent than at a top-tier university? Tech firms that settle within a few hours of high-ranking universities can source their employees from a pool of high-caliber thinkers and innovators. They can also establish a pipeline of formal internships and research programs to ferry promising students into post-graduate employment.

Businesses should try to find universities that have high-quality programs in their specialty -- and then, be proactive about establishing formal connections with the school’s internship and postgraduate development office.

Proximity to Investors

Access to funding matters too, regardless if a business is newly-founded or well-established. In the U.S., investors tend to cluster on the coasts; currently, the top ten metropolitan areas (New York, Austin, Boston, etc.) account for 75% of startup venture capital funds, while the Bay Area alone accounts for around 45%. A business that chooses to settle in or near one of these VC-stocked hubs may have a better chance of securing the funds they need to grow.

The fact of the matter is clear: location matters, even for businesses that don’t need to appeal to an in-person consumer base. A startup needs to choose where they set their roots carefully; otherwise, they may find themselves struggling to keep up with their better-oriented peers.

Location, location, location: cliche or not, it matters.

About the Author(s)

Bennat Berger, Co-Founder and Principal of Novel Property Ventures

Bennat Berger is a property development expert with extensive experience in multifamily and commercial property investments.

Co-Founder and CEO, Novel Property Ventures