How Cities Lure Startups

By Karen E. Klein

How do cities successfully engineer conditions to attract high-potential small companies that will create new jobs in the future? Two California cities that have gone to extraordinary lengths to make their climates business friendly are Irvine in the south, with about 212,000 residents, and San Jose in the north, with a population around 946,000. Both cities suffered during the recession and are admittedly expensive places to do business, given California’s stringent regulatory climate and relatively high tax rates and minimum wage. But both cities have established successful public-private partnerships and programs aimed at encouraging businesses. Here are some of their strategies that others could apply in their own regions.

Maximize resources. The city of Irvine has a University of California campus within its boundaries. Both the city and the local chamber of commerce have tapped that resource extensively to boost local startups. "We draw on the intellectual horsepower of professors, interns, and students from UCI. It lends us a more educated workforce and higher standards for our local schools," says Christopher Lynch, vice-president for business and economic development at the Irvine Chamber of Commerce. The university has been open to extensive collaboration, with a business incubator next door, entrepreneur forums, and business plan competitions taking place on campus.

Focus on nurturing locals. In San Jose, 39 percent of job growth comes from first-year startups, says Jeff Ruster, deputy director of the city’s Office of Economic Development. "We’re not out there poaching companies from other places," he says. Another 60 percent of job growth comes from the expansion of existing companies; only three percent to four percent comes from established companies relocating to San Jose, where real estate and labor costs are expensive. In the past, startup companies that grow exponentially have located satellite facilities out of the state, where costs are lower, Ruster says. "Our value proposition is to keep their headquarters and their highly skilled job here," he says.

Community investment. Both cities make education and infrastructure a high priority, arguing that better living conditions attract ambitious, entrepreneurial residents. Ruster points to a Silicon Valley workforce study released in July that says talented entrepreneurs, workers, and their families are attracted—not suprisingly—to "great schools, world-class infrastructure, and a high quality of life." That means long-term investment, much of it coming from local and state tax revenue, some in the form of school and construction bonds. "The entire community must support the quality of life for everyone so that talented entrepreneurs, workers, and their families will want to live and work in the community," he says.

Creative partnerships. Ruster works not only in the city’s economic development office; he also serves as executive director of Work2Future, a workforce investment board that serves the larger Santa Clara County. The board, one of 640 in the U.S., is funded by about $10 million annually from the U.S. Labor Dept. under a job training program that dates back to the Great Depression. It has 40 full-time employees who focus on helping the roughly 90,000 officially unemployed people and an additional 180,000 discouraged and underemployed workers in the county get jobs, from highly skilled workers who have been downsized in the recent recession to lower-skilled people with poor work histories, Ruster says. Although it is unusual to have one person head both agencies, "our vision was that we shouldn’t look at economic development and the workforce as two separate entities. There has been a bottleneck for corporate growth here because of the problem of finding talent. We felt the workforce investment board could and should play a role in [fixing] that." Because they come from the economic development side, job counselors are often better received by the unemployed: "People don’t see us walking up to their doorstep in a charity role."

Startup outreach. Even before they come looking for help, Lynch wants Irvine startups to get connected with local resources, training, and funding. The chamber co-sponsors several initiatives aimed to do that. The Micropreneur Economic Development Program is something like an online training course, featuring seminars, webinars, and interviews with local business owners. Hands-on events are held regularly in conjunction with the TriTech Small Business Development Center, a Small Business Administration office that provides free consulting and workshops to fast-growth tech companies.

Ruster also wants his staff knocking on the doors at new companies and helping them connect. To that end, San Jose has established a separate website, BusinessOwnerSpace.com, that lays out services from 40 organizations aimed at startups, from help with government procurement opportunities, to commercial leasing, to a database of prescreened job applicants. "We did firsthand research, and we found that there were a lot of resources available for [startup business owners], but the companies weren’t aware of it. BOS [improves] awareness, Ruster says.

Entrepreneurial mindset. In order to help entrepreneurs, cities and business groups must adopt an entrepreneurial mindset themselves. "We partner with companies from startups, to gazelles, to monolithic corporate brands. We help them develop their network, look for co-branding opportunities for them, help find management and employees at every skill level, and offer support from expedited permitting to helping them demonstrate proof of concept. Instead of just helping them with real estate, we take a holistic approach," says Ruster.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.