I’ll start off by stating the obvious…you’re reading this article because you understand the importance of selecting the optimal business location. I believe this to be true across the board, regardless of industry sector, company size, facility type (i.e. headquarters, distribution center, etc.) or other factors. But perhaps it is most important to entrepreneurs and high-growth startup companies (herein referred to collectively as entrepreneurial companies). While companies listed on the Fortune 500 list may initially come to mind when thinking about corporate site selection projects, entrepreneurial companies have increasingly begun to recognize the value of utilizing a systematic evaluation process for selecting the optimal location to expand their businesses.
From the perspective of an economic development organization, entrepreneurial companies are desirable targets for several reasons. While some projects shift existing jobs within a region, entrepreneurial companies result in net new job creation. Entrepreneurial companies are often innovative with a focus on new and emerging technologies. The skilled positions created by entrepreneurial companies are less prone to being displaced by technology or relocated internationally for labor cost reasons. Entrepreneurial companies are also attractive to young, educated job-seekers, who are a sought-after demographic group for many communities.
Entrepreneurial companies look for locations that will be conducive to growth and offer a thriving environment. This will be a key factor for talent attraction and retention. Economic development organizations that understand and highlight these key location factors that entrepreneurial companies seek in a location will compete most effectively for these project opportunities. While there are many key location factors to consider, this article will discuss three “must haves” for entrepreneurial companies: an existing entrepreneurial ecosystem, an affordable cost of doing business, and the “cool factor.” These “must haves” will be discussed using The Hamman Consulting Group’s recently completed “Project Sadie” for some background context.
Project Sadie is a high-growth startup company with its headquarters located in New York City. The company raised significant funds from prominent venture capital firms in order to accelerate its growth, which included selecting a location for its “HQ2.” This facility would include an inbound customer support operation, as well as lab, finance, and insurance functions. Employment at Project Sadie’s HQ2 is expected to reach 300 within three years.
An Entrepreneurial Ecosystem
The Kauffman Foundation defines an entrepreneurial ecosystem as “a network of people supporting entrepreneurs, and the culture of trust and collaboration that allows them to interact successfully.” A critical component of a location’s entrepreneurial ecosystem, as included in the Kauffman Foundation’s “Entrepreneurial Ecosystem Building Playbook,” is being home to other successful entrepreneurial companies. Economic development organizations that understand how to effectively share their success stories with prospective entrepreneurial companies can differentiate themselves from competing locations.
From the company’s and the consultant’s perspective, seeing is believing! This was certainly the case with Project Sadie as the regional economic development organization directly connected the client company with other successful entrepreneurial companies to hear firsthand accounts of how this location has allowed for their continued business growth.
Companies often select locations in which there is a cluster of companies in the same or a related industry sector. A primary reason for this is an existing workforce with skills and experience needed by the prospective company. This is especially true for entrepreneurial companies. Locations that have access to a talented regional labor pool, as well as an established talent pipeline, are given preference. Project Sadie’s final location decision was heavily influenced by both of these factors, as the regional labor market has a high concentration of customer support operations to recruit from, as well as a local university with a specialized degree program to help fulfill future workforce needs.
Locations that feature institutions providing support and resources (i.e., incentives) for entrepreneurial companies often emerge as top contenders for expansion or relocation project opportunities.
Locations that feature institutions providing support and resources (i.e., incentives) for entrepreneurial companies often emerge as top contenders for expansion or relocation project opportunities. Providing support to entrepreneurial companies in the form of introductions to community and business leaders, as well as networking opportunities, can be invaluable. Incentives can include assistance with recruiting new employees and creating customized workforce training programs. These types of incentive programs can be critical to help ensure that fast-growing entrepreneurial companies can meet their employment ramp-up needs.
Affordable Cost of Doing Business
Entrepreneurial companies are commonly associated with large expensive markets on the coasts such as New York City, Boston, Seattle, and Silicon Valley. However, in recent years, entrepreneurial companies have increasingly begun to select locations where operating costs are significantly lower.
In October 2018, Forbes published its Top-10 Rising Cities for Startups list. The list includes several mid-sized cities, in terms of population, that also tend to have lower costs of doing business. Several of the rising cities are located in the Midwest, with Columbus, Ohio, being listed as the top city. Targeting cities in the Midwest or other lower-cost of business locations makes sense for entrepreneurial companies as it can quickly become cost-prohibitive to scale up a new company in larger, more expensive markets.
A location’s cost of living can also have an impact on a company’s ability to attract and retain employees. This is particularly true in terms of housing options. According to data from Sperling’s Best Places, the housing component of the cost of living index — which is calculated as the median cost of a location’s average home (for both buying and renting) — for Columbus, Ohio, is 68.2 versus 294.3 for New York City (the U.S. average is 100.0). The overall cost of living index is 85.5 for Columbus versus 187.2 for NYC. In other words, an employee’s salary would need to be more than double in NYC versus Columbus in order to have the same spending power.
The “Cool Factor”
Although entrepreneurial ecosystems and lower operating costs are critical location factors, the “cool factor” is the rising star among the “must haves” in any community. As this trend continues, lower-cost locations that offer the quality of place amenities that young, educated workers look for will compete more effectively on talent retention and attraction. Economic development organizations should keep an eye out for and, where possible, promote adaptive reuse opportunities with former industrial buildings or other unique properties that could be converted into loft-style office space.
Lower-cost locations that offer the quality of place amenities that young, educated workers look for will compete more effectively on talent retention and attraction.
One property that was considered by Project Sadie was a former elementary school that has been redeveloped into a multi-tenant facility geared toward entrepreneurial companies. The building features a coffee shop, workout facility, bike storage, and audio/video equipment for meetings and events. While this former elementary school was not selected by Project Sadie, it certainly passed the “no cubicles and no ceiling tiles” real estate rule!
Whether it’s a function of development stage, or perhaps based on a need or desire for flexibility, locations with business incubators, accelerators, and co-working spaces will be appealing to entrepreneurial companies. These facilities typically work to create a community vibe among member companies and provide a variety of attractive spaces with amenities that often include access to conference rooms, administrative support services, and kitchen/dining areas.
Entrepreneurial companies, and their employees, tend to prefer locations that allow their employees to easily walk or bike to work and have other amenities such as restaurants and retail shops. When communities are considering what to invest in that will attract and retain entrepreneurial companies, developing vibrant, mixed-use neighborhoods should be among those things considered. These investments function as incentive-style enhancements that add value that stays within the community.
For Project Sadie, a key differentiator between the two finalist locations was the company’s perception of the “coolness” of the neighborhoods. At a high level, one difference between the two finalist locations could be characterized by the restaurant options, with one location being seen as “franchise” and “corporate,” whereas the other location seen as more “local” and “unique.”
Selecting the optimal location for business operations is critical and warrants a thorough investigation of potential locations. Over the expected lifetime of a facility, operating cost differences between two locations, that on the surface may seem similar, can vary significantly — and also significantly impact a company’s long-term profitability and success. For Project Sadie, and other entrepreneurial companies, locations that have an established entrepreneurial ecosystem, a low cost of doing business, and the “cool factor” are much more likely to remain in consideration as one of the finalist locations for the project.
Site selection is a highly competitive process that is both a science and an art. During the initial investigation of potential locations, the evaluation is typically a data-driven process of elimination to filter out those locations that do not meet critical project requirements. Once the set of potential locations is narrowed to a few finalist locations, the evaluation typically shifts toward a more qualitative analysis.
There are many locations across the U.S. and abroad with environments that will be conducive to business growth. For entrepreneurial companies that may be undertaking the site selection process for the first time, it is important not to have a pre-determined location in mind at the beginning of the process. The optimal location for an entrepreneurial company’s growth is best identified by utilizing a systematic process that focuses on those key “must have” location factors.