Which States Have the Best Startup Environments?

In my last post, I crunched the data to see where Illinois ranked on a variety of metrics related to venture funding for startups. Turned out that no matter how you sliced the data, Illinois came out pretty poorly. This poor showing was a pretty strong indictment of the infrastructure, leadership, and general environment for startups here in Illinois - as far as I'm concerned, whether or not you want funding, being able to get funded is an indication of quality infrastructure and a strong startup environment.

So the obvious question is, if Illinois is so terrible, which states are good?

In my analysis of the data last time, I made two claims: 1) seed/startup funding is the best stage to evaluate, because those are the first dollars a new team is looking for. I believe that new dollars for a new team is the best indication for general environment, given the small dollars involved and the less company-specific nature of seed investing. (Nevada ties for dead last in the startup/seed data, no matter how you slice it, despite the success of Zappos.)  2) per-capita metrics, while a bit flawed due to network effects, are the best option we have, better than aggregate dollars or aggregate deals because per-capita metrics control for the "California is the biggest state, so it should see the most dollars" objection.

So, I re-ran the numbers to see what states had the highest per-capita dollars invested in startup/seed deals[1]. Here are the results for the one-, three-, and five-year spans ending 2007:

As you can see, there's a clear "step" between Massachusetts and California and the next tier. There's more than double the amount of money per-capita in Massachusetts and California in 2007 than there was in Minnesota and Washington state, the 3rd and 4th best on the list.

For the three year period of 2005-2007, just as for 2007 alone, Massachusetts and California dominate, with significantly higher per-capita dollars flowing to seed and startup deals than the next tier of states (from New York to Virginia, which has a range just slightly larger than the difference between New York and California).

Lastly, here's the data for the five-year period of 2003-2007. Delaware is skewed by very high per-capita amounts in 2003 and 2004 (the state had $23.60 invested per capita in 2003 and $49.05(!) in 2004 [2] ), but the rest of the chart is generally in line with the one- and three-year charts. Again, Massachusetts and California are heads and shoulders above the rest of the states.

In all three charts, you see strong showings from New York and Washington, which I wasn't surprised by. What I didn't expect was the strong showing by states such as Maryland and Utah. I know that Maryland may benefit some from federal money, but if that was so strong, we'd expect a stronger showing from Virginia and DC as well, which we don't. As for Utah, I know the Computer Science program in Utah is strong, and there are a number of technology companies in Utah (Omniture immediately comes to me), but still - it's astonishing. There must be something cultural in Utah that makes startups there more palatable than, say, Illinois.

When I talk to entreprenuers that want to start their own technology companies, the first question I ask is "do you have a co-founder?" The second I ask is "how committed are you?" The third I ask is "if you're so serious, why haven't you moved to California yet?" Turns out the data says that I should amend that last question to "why haven't you moved to California or Massachusetts yet?" (This, of course, assumes that you can syndicate a seed deal among angels in Massachusetts as easily as you could syndicate a deal in California. Again, I don't have angel data - see [1].)

Again, comments welcome on the data, methodology, and requests for other cuts of the data.

[1] Now, of course, the data I had was only about VC firms' funding - it was silent on angels. Knowing this was an issue with the PWC MoneyTree data, I've spent a fair amount of time since my last post begging for angel data. [1a] But, in the end, no one could find angel data to send to me. So, at this point, I've given up on angel data. (If you have some, please send it to me.)

[1a] I even managed to get promised an invite to the psuedo-TechStars demo day here in Chicago (it was actually an independent event, put together because so many of the Boston summer cohort had Chicago ties), but I never received it, despite a flurry of e-mails the day of. Many thanks to Brad Feld for trying to get me in; boo to whoever was supposed to send me the official invite. (I had time/location, but I didn't want to crash without an official invite.) I really wanted to get a headcount versus the Mountain View headcount and see who showed up. I was going to take that list and try to determine which Chicago-area angels actually had done deals in the last 12 months. As far as I know, Apex's seed investment in Appolicious is the only one in the last twelve months.

[2] Anyone have an explanation for these two outlier years? Delaware comes in at $0.00 per capita for 2005, 2006, and 2007 seed/startup deals, so I'm guessing just a handful of deals - maybe even just one or two deals - skew this chart, especially as Delaware is a relatively low-population state. The PWC data I got from SSTI is aggregated; I don't have access to the Thomson database with the deals themselves.
13 responses
Washington and Utah were the most surprising states for me in terms of per capita dollars. Do you know of any government funded VC arm ? Any expalanation why Washington is high up there.
The reason why Utah is so high is simple: it's Mormon. Mormons aren't anything if not highly industrious. Utah startups include: Novell, WordPerfect, the two startups that merged and formed Franklin/Covey, Evans and Sutherland, (ugh) SCO. Marriott was founded by the same kind of Mormon industrious culture, albeit in Maryland.
Considering the dollars for Virginia and Maryland are likely concentrated immediately around DC, it makes me wonder how the data would look when broken down by metro region.

Nice post

There are more non-numerical factors that favor California over Massachusetts, the most glaring being their respective attitude towards non-competes for employees. I doubt you could even quantify how much that is worth.
Wow! very interesting indeed. I know for one that most Israeli start-ups incorporate the companies in Delaware in the past because of tax issues. In recent years it has changed and become less advantageous. Maybe that is why Delaware stands so high in the 5-year analysis, but not as much in the 1 or 3-year analysis. I also think that the data is skewed with an inherent problem, as follows:
1. most VCs that invest in early stage companies, tend to invest in companies located maximum of an hour's drive from their offices. In later stage investments this is less true.
2. because of the issue above, it is inherent that the number of investments made in every state correlates strongly to the number of VCs in that state, and obviously California leads here.

I think if the analysis were conducted on anagles or on later-stage deals, it would hence vary significantly.
My 2cents.

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