“Major coastal cities are becoming too expensive for individuals to afford, much less startups, which makes smaller cities much more desirable. Office space is cheaper and colleges in the area can help drive innovation through its local talent.”
One might expect those words to be spoken by a tech leader in Birmingham, Cincinnati or Raleigh-Durham, but less so by someone who built their career in Silicon Valley. But Randi Zuckerberg, technology executive, entrepreneur and STEM advocate, explained to Hype last year why she chose to launch her latest venture, a pop-up tech-enabled restaurant for kids, in the mid-sized municipality of Chattanooga, Tennessee.
“Chattanooga is a beacon of industry that is often overlooked because it’s not one of the more popular coastal cities. But I say people are missing out!” Zuckerberg said. “Startups, nonprofits and government entities work side-by-side, making Chattanooga the perfect city to launch an innovative and forward-thinking company.”
Chattanooga recently recorded another accolade to add to its startup star chart: the designation as the cheapest city to launch a startup, according to an analysis using data from personal finance website SmartAsset.
While the most expensive list is fairly unsurprising, with San Jose, San Francisco, Washington D.C., New York City and Boston gracing the top five, the least expensive cities were notable for a fairly concentrated regional distribution in the southeastern corner of the country.
What you already know: Office space in southern cities is cheaper. Here’s how much
Compared to $442,000 to start a company in San Jose — the cost of which factors in filing fees, 1,000 square feet of office space, utilities, legal and accounting fees and payroll for five employees — in Chattanooga that looks more like $232,000.
In fact, Tennessee is very well-represented in the cheapest 10, with Chattanooga, Knoxville and Memphis all making the list. For many reasons, entrepreneurs are increasingly choosing the Volunteer State — from 2012 to 2016, capital investment more than doubled from $189 million to $428 million.
“We have the ability to be one of the best testing grounds right now because of the connectivity we have,” shares Ken Hayes of The Enterprise Center, an entrepreneur-focused non-profit based in Chattanooga. Chattanooga was the first city in the U.S. to implement a city-wide, high-speed fiber network. It’s free, so detract that from your upfront office costs.
“So that gives our entrepreneurs a little bit of a head start. We’re also attracting tier one researchers from around the country into Chattanooga,” Hayes says, mentioning that all of these entrepreneurial minds are drawn by access to “the gig.” The Enterprise Center, located in Chattanooga’s emerging Innovation District, also provides free or low-cost resources such as event space and help with grant applications to entrepreneurs.
The analysis says that new companies only need to spend $15,200 annually on office space in Chattanooga, about 7 percent of their total budget.
Contrast that with a comparable office in New York, which would cost a little less than $70,000, or 17.5 percent of their budget.
“Our vision is to make Tennessee the most startup friendly state in the country,” shared Charlie Brock, CEO of public-private entity Launch Tennessee. The organization has been aggressive in pushing for state legislation to give tax credits and financial incentives to both angel investors and entrepreneurs.
What may surprise you: Founders in smaller cities might pay better
While office space may be an obvious draw for founders seeking affordability, job-seekers searching for startup employment might be deterred by what they perceive as lower salaries. However, when compared percentage-wise, founders in more affordable cities actually invest more of their total budget in their team.
For example, the analysis indicates that in New York, a startup would allocate an average of about 80 percent of their total budget to payroll. In Louisville, KY, the tenth-cheapest city, that percentage skyrockets to 91 percent. Though the actual numbers change as commiserate with cost of living, this seems to indicate that startup employees in affordable cities can expect a generous salary.
Of course, spending more on office space and other resources in the more expensive cities detracts from salary allocations. However, another reason for higher salaries in smaller cities could be the need to pay generously to attract and retain the top talent.
Founders are also more committed to their local ecosystems. Kela Ivonye, a hardware startup founder who
recently completed the prestigious 500 Startups accelerator in Silicon Valley, returned to his hometown of Louisville following the program. He explains that being in the smaller city “allows us to be well-grounded.”
He also was able to find an investor in a local manufacturing company, allowing him to manufacture his device in Louisville and cut down on shipping costs. More connected local economies can thus provide economically-beneficial partnerships and clients for startups.