It had to happen, but why is it happening now? Secondary tech hubs – outside the orbit of Silicon Valley and New York – are showing undeniable momentum this year.
I accompanied venture capitalists and team members from the early-stage venture capital firm Bloomberg Beta to Columbus, Ohio, and Pittsburgh, Pennsylvania, last week as part of the third round of the Comeback Cities Tour. I came away believing that it's no single factor behind that momentum, but rather a confluence of forces.
First, the logistical gap between working from somewhere else and a primary hub in San Francisco or New York has continued to close. Email and smartphones have been around for years, but it goes far beyond that now. Uber and Lyft are ubiquitous, which is why they were both in a position to complete their initial public offerings in recent weeks. Slack, also set to go public in 2019, and Zoom, which recently listed, have made remote collaboration easier. There are co-working communities like WeWork and Industrious in dozens of cities now. While many of these services have existed for years, their expansion and growth have reached critical mass in cities far beyond the top five or 10 metro areas in the country.
The second reason, related to the first, is that urban consumer amenities have spread everywhere – the Brooklyn-isation of America. While the biggest cities may still have a breadth and depth of choices that can't be matched, there are hip coffee shops and bars and CrossFit boxes everywhere. Local officials all over the country spend their days thinking about how they can attract and retain millennial talent and tech jobs, and they all know creating lifestyle amenities that those workers and companies want is a big part of that.
The third reason is costs. Coastal cities have long been more expensive than the rest of the country, but the gap has continued to widen – even though secondary cities have closed the gap in the value proposition. It may not be the primary factor for start-ups looking to change the world, but the value equation does matter for recruiting and retaining talent, and if nothing else cost will cause founders and investors to think about what location is the right one to start and grow a company rather than defaulting to one of a handful of cities.
The fourth and most recent reason is signaling from top tech companies. While we would like to believe that we are all rational, think-for-ourselves economic actors, the reality is that more than we'd like to admit we take signals from those we deem successful and mimic their behaviour. If Facebook, Google, Apple, Amazon, Microsoft and every hot start-up comes out of the San Francisco Bay Area and Seattle, then ambitious workers and founders are going to think they have to be out there too.
Along these lines, the most significant lasting impact of Amazon's HQ2 search may be the message it sent that it considered 20 other metro areas, including Columbus and Pittsburgh, to be worthy locations to place a second North American headquarters. Other large tech companies have started expanding outside the West Coast without the same level of fanfare.
As a result, founders and investors are growing more comfortable with companies being founded and scaled outside of traditional hubs. Columbus-based Root Insurance has fetched a billion-dollar valuation by helping its customers save money on car insurance using smartphone data to monitor their driving. Pittsburgh-based Duolingo has attained a $700 million valuation by helping its users learn foreign languages.
It's not clear right now just how transformative or long-lasting this trend could be for secondary hubs. Business people in both cities talked about challenges they share being in nontraditional tech cities: finding workers with start-up rather than traditional corporate experience, founders still being somewhat reliant on getting investors in San Francisco or New York to buy into their stories rather than being able to tap local capital, and a lack of successful startup exits or IPOs that would get the local community to have more confidence in start-up ecosystems.
But as the IPO wave of 2019 looks a bit like a victory lap for the San Francisco Bay Area start-up class of the early 2010s, there's at least the potential of the next big IPO wave showing more geographic diversity.