Overview

In ancient times (i.e. roughly 15 years ago), the location decision for technology entrepreneurs was fairly straightforward. You either picked the city where your customers were – for example,  product companies selling to the Media industry would set up shop in New York. Or you picked the city where you could most easily find good developers – like the Bay Area, or college towns like Boston.

Most SaaS startups today can have customers and users anywhere in the world, who don’t care a whit where the developers are working physically. A tech entrepreneur therefore has tremendous flexibility on where to set up their business.

But with this great flexibility comes great indecision. Where should you set up your development center to optimize your costs and still be able to hire great talent to build your product? Almost every major metropolitan area is trying to sell itself as the “next Silicon Valley”. Amazon literally ran a beauty pageant that had cities falling over each other to give them the best tax deals.

Our teams at eNamix and Quantilus are always looking for ways to help aspiring tech entrepreneurs maximize their chances for long-term prosperity (after all, that will mean they’ll use our recruiters to hire more people). So we put our collective heads together to quantify and compare the major metropolitan hubs to help the budding tech entrepreneur make an informed location choice. Think of this as the exact same study done by Amazon to pick their second HQ, but one that is available for the excellent price of absolutely free.

Evaluation Parameters and Data Sources

So without further ado, lets get to the grand city pageant. First we considered the parameters that are most relevant to the tech entrepreneur in making the location decision. Our next step was to identify valid verifiable sources of data for each of these parameters (or proxies for the same). Many hours on a whiteboard, extensive Binging (yes, that’s a thing!), and many gallons of coffee helped us narrow it down to the following parameters and sources:

1. Access to Talent: Tech startups need good developers, testers, analysts, project managers. And they need to be able to scale teams quickly. The availability of resources in a city affects relocation costs, hiring costs, retention costs, and overall project downtimes in case of turnover. Data: Data from the Bureau of Labor Statistics was used to determine the relative number of computer professionals in each metropolitan area; and the relative number of tech companies in each metropolitan area. A company’s access to talent is a combination of these two factors – the available pool of talent and the competition in the market to hire that talent.

2. Relative Salaries: This is the largest expense for any tech company, and it is a constant battle for most tech companies to manage overall spend while still attracting the best people. Data: Data was obtained from the US Department of Labor’s Online Wage Library. Specifically, data was aggregated and compared for 5 different technical job roles.

3. Property Costs/Rents: Your team needs a place to work – and a company will either be paying rent or interest payments in the case of property purchase. Access to affordable quality real estate is critical to build a team and culture. Data: Data on the availability and pricing of commercial property was obtained from the United States office insight – Q2 2019 report, published by JLL.

4. Business Tax Rates (State/Local): We all hate them, but we all have to pay them (well, except if you’re one of the big guys who can afford the Irish/Dutch tax shenanigans). Some cities treat companies better than others, and none of them will roll over for startups like they did for Amazon. Data: The primary source for this data was KPMG’s Competitive Alternatives, Special Report: Focus on Tax.

Factors We Did Not Consider

We considered including the following factors in our analysis, but eventually decided against using them because we didn’t think it would add value to the overall findings. Or in some cases, using these may even give misleading results – most of the data in this area focuses on general businesses, and not tech businesses.

• Education Level of the Population: The general level of education does not factor into our analysis, since we are focusing on technology professionals only. Any discrepancies will be rolled into the “Access to Talent” parameter.

• Survival Rate of Companies: For a non-SaaS business this is a good indicator of the local market and business environment. But for a SaaS company selling nationally or globally, this is not very relevant.

• Cost of Living: Lower cost of living makes a place more attractive for prospective employees. However, it also results in lower overall wages, which we are already accounting for.

Relative Weights

These parameters can be weighted according to their relative effect on the total costs of the enterprise. The weights were determined by analyzing the expenses of 25 different startups, and identifying the proportion of the spend on each of these categories. Our analysis determined the following weights for our four parameters:

Availability of people: 0.08; Salaries: 0.67; Property Costs: 0.15; Business Taxes: 0.10

Note: The exact proportion of spend for your startup may be different. In that case, feel free to adjust these weights in our spreadsheet.

Location – Options

As much as we would all like to start our companies in our backyards, it is impractical to even consider cities below a certain size in most cases. Attracting and retaining talent to a smaller town is an obvious issue – but there are also issues with infrastructure, business culture and a business support structure. As such, we have decided to limit our analysis to only those metropolitan areas in the US with a population greater than (the somewhat arbitrary number of) 2,000,000. According to the US Census Bureau, these metropolitan areas are:

Access to Talent

Talent availability should largely be expected to correlate with overall population – the more the number of people the larger the pool of talented tech professionals. However, just because there are more professionals doesn’t mean your company will have an easier job of hiring. It also depends on the number of jobs in the market – basically the supply-demand equation has to be in your favor.

Therefore, we considered the following factors in determining the rank for each metropolitan area:

1. Availability of Talent – the aggregate number of tech professionals in the region.
2. Competition for Talent – the aggregate number of tech companies hiring in the region.

The consolidated Access score for each region is the Availability divided by the Competition. Yes, we know every tech professional is not applying for every job in the market, but this will serve as a fairly accurate indicator of the demand-supply ratio in that area.

One factor that we are not considering here is the concentration of specific skill sets by region. For example, there is a higher concentration of security tech professionals in the Washington, DC region – primarily because of the Federal government/defense agencies that have been focusing in this field. We do not have sufficient data to adjust for these cases at this time, but can look into expanding this study for specific fields if there is sufficient demand.

Note: Of course, the supply-demand ratio works in the opposite direction if you are a technology professional. For you, the best metropolitan area to be in is the place with the most job openings and the fewest tech professionals. Ironically, if a large number of tech professionals follow the numbers in these charts and move to the “best” cities for them, that will effectively ruin the numbers in our analysis. So do the unselfish thing and stay where you are!

Putting the numbers together, our rankings for Access to Talent are tabulated below:

Relative Salaries

This is a fairly simple and straightforward correlation between the relative wage rates and the overall cost of doing business in the city. Salaries make up the largest chunk of a tech startup’s costs, and companies can easily generate a few extra months of burn by locating in the right place. Or just as easily lose a few months of burn by locating in the wrong place.

The tabulated results are largely as expected here – with very few surprises. The Bay Area, Seattle, Washington, New York and Boston lead the way with average tech salaries in the six figures.

Property Costs/Rents

Property costs can significantly vary based on the quality of the building, specific location in a city and other factors. For instance, in New York City, rents can vary from as high as $125 per square ft for a Class A building in Midtown East, to as low as $25 per square ft in parts of the Bronx. For our analysis we have taken an average for the area, but entrepreneurs should be aware that this is the parameter where they can get significant discounts by getting creative with their office space. The numbers here follow a largely expected pattern – the Bay Area and New York City are almost twice as expensive as the next city in the list.

Business Tax Rates

This is the parameter that varies the most with time. States and cities love offering tax incentives to businesses to boost local economies. Unfortunately, these incentives are frequently temporary, and the qualification conditions are not always clear. For the entrepreneur, it is imperative to consider not just the tax rates but also the expiration dates of specific incentives and the possibility of qualification parameters changing.

Overall Ranking and Recommendations

On the basis of the data on the four parameters, we rated the different locations using the numbers for the New York City area as reference points. For each parameter, New York City was given a 1.00 rating and the ratings for the other locations were scaled accordingly. For example, a rating of 1.2 in the relative salaries column indicates that the average salary at the given location is 20% lower than the average salary in the New York City area for comparable skill-sets and experience levels. The higher the rating, the more favorable the location.

The parameters were then weighted according to their relative effect on the total costs of the enterprise. The weights assigned are:

Availability of people: 0.08; Salaries: 0.67; Property Costs: 0.15; Business Taxes: 0.10

Somewhat surprisingly, except for fans of the Buckeye state, the major C-cities in Ohio take three of the top four spots. Cleveland, Cincinnati and Columbus have a lot to offer a tech startup, including a large pool of resources, low property costs, lower than average salaries, and very favorable business tax rates.

The Mid-West seems to be the place to be, with the major coastal cities largely pricing themselves out of the equation.

Shameless Plug

If you are a tech entrepreneur, or are in a decision making position at a tech startup, reach out to us at info@enamix.com. Our team can help you recruit for and build out your team, whether in Cleveland or the Bay Area. Our services include:

• Sourcing candidates for your open positions.
• Technical screening.
• Video screening.
• Personality profiles and personality matching.
• Coordination of interviews.
• Salary negotiations.
• Background and reference checks.
• Immigration support, if required.
• Onboarding selected candidates.
• Contingent hiring, payroll processing, benefits for contractors.