The Next Silicon Valley? Not Where You May Expect

Silicon Valley is America’s hub of entrepreneurial spirit, hosting all sized companies from established tech giants such as Google and Facebook to startup unicorns such as Uber and Airbnb. Ever since Silicon Valley has emerged as this tech hub, many have begun to wonder where the next center for entrepreneurship may rise up and challenge the Bay Area behemoth. Over the course of the previous decade, a few challengers have already emerged. Boston has emerged as one of the east coast’s largest competitors, producing several unicorn startups such as healthcare company Intarcia Therapeutics and daily fantasy football giant DraftKings. On the west coast, Seattle has gained prominence with several unicorns of their own, including Adaptive Biotechnologies. But these two have still failed to match the success of Silicon Valley and many wonder if the Valley will ever be caught. But one city has flown below the radar for years with the potential to emerge as the next Silicon Valley.

Located in central Texas, Austin is the eleventh largest city in the country by population. Over the past decade, this bustling city has become host to a burgeoning startup hub that has continued to gain prominence amongst the startup community. The city is already host to several prominent startups, such as computer chipmaker Ambiq Micro, software company Zilliant, and insurance search engine The Zebra, amongst many others. In addition, Austin has one of the youngest metro populations in the country, with the University of Texas at Austin residing in downtown Austin. Not only is the workforce of Austin young, but they are also entrepreneurial. Austin is host to several startup incubators and accelerators, such as the Austin Technology Incubator at UT-Austin and the Techstars Austin Accelerator. This presence of a young, talented, and entrepreneurial workforce is a major factor in becoming a startup hub. Along with the educated workforce, Austin also boasts a low cost of living compared to other large metro areas. According to CNBC, it costs around $38,369 per year to live in Austin. When you compare that to the $69,072 per year it takes to live in San Francisco (80% higher), one can begin to see the allure of Austin as a potential place to live. Lastly, in addition to the young, educated workforce and the low cost of living, the tax rates of Texas are a major appeal to small businesses. Texas boasts no corporate tax rate and no personal income tax on small business owners. These tax advantages provide entrepreneurs with extra money that they are able to invest in their own business.

While it is clear that Austin has many appealing aspects for a startup, the numbers show that there is still much work to be done in order to catch up to the competition. According to a CityLab report published in October 2017, Austin had $977 million in total venture capital investment to date, representing just 1.43% of total U.S. VC investment. When compared to Silicon Valley’s portion of $23.4 billion (34.13%), it is clear that Austin has a long way to go. Another thing to note is the trend of fewer but bigger deals within the VC market. This trend is evident in Austin as, according to a PitchBook and National Venture Capital Association (NVCA) report published in June 2018, Austin had 97 venture capital investments in the first half of 2018. If this trend were to continue, the city would end up with 192 deals in 2018, less than any year since 2012. However, those 97 first half deals raised $824.3 million in total funding, the most of any first half of the past six years.

So, what will it take for Austin to potentially catch Silicon Valley? Well according to Austin entrepreneurs, more venture capital firms in Austin would be a good start. There is a historical trend of venture capitalists (VCs) following the money, meaning that when a city becomes a startup hub, more and more venture capital firms pop up in that city. This trend has occurred in Boston, New York, Washington D.C, and Chicago. In Austin, however, this trend has not quite yet occurred. While there are several VCs already located in Austin, they do not nearly match the representation in other hubs. If Austin is to catch the Valley and other emerging cities, then it will require many more VCs to provide funding. The good news is that, according to CNBC, there are dozens of VCs in early stages trying to obtain funding, representing the start of a potential VC migration to Austin.

While it is clear that Austin has the potential to become a more developed hub, there are signs that this city is poised to become the next big place for startups. With a young, educated workforce, a low cost of living, and very low taxes, Austin represents an entrepreneur’s dream location. Should other VCs begin to recognize these trends and begin to invest in Austin startups, then there is no telling how large this city’s startup scene could become.

Works Cited

Florida, R., “Venture Capital Remains Highly Concentrated in Just a Few Cities,” CityLab, 3 October 2017, www.citylab.com/life/2017/10/venture-capital-concentration/539775/

Meisler, L., Cannon, C., “U.S. Venture Capital Swells and Spreads,” Bloomberg, 25 January 2018, www.bloomberg.com/graphics/2018-venture-capital-deals/

Pofeldt, E., “The top start-up mecca in America is far from Silicon Valley,” CNBC, 11 August 2016, www.cnbc.com/2016/08/11/austin-is-top-place-for-startups-in-america-not-silicon-valley.html

Im, J., “Forget Silicon Valley, these 7 cities are great for start-ups,” CNBC, 29 August 2018, www.cnbc.com/2018/08/29/best-cities-for-start-ups.html

“Unicorns,” Fortune, Last Updated: 19 January 2016, http://fortune.com/unicorns/

Kalyanaraman, S., “As Austin’s Startup Growth Continues, VC’s Pile More Money on Fewer Deals, Austin Inno, 10 July 2018, www.americaninno.com/austin/funding/as-austins-startup-growth-continues-vcs-pile-more-money-on-fewer-deals/