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The two questions I get asked most frequently when I tell people that I report on tech startups across Middle America are: Which startups outside of Silicon Valley are getting the most traction? And which cities are home to the most interesting tech activity?
I find that it’s typically easier to answer the first question. There are certain metrics I can point to that make it easy for people ingrained in the startup community to understand what makes a company worth watching: They recently raised a large round of venture capital funding. They doubled their revenue. They doubled their headcount.
The latter proves more difficult because it takes much longer to build a tech community than to build a single tech startup. Techstars cofounder Brad Feld says that while companies can be built in 5-10 years, it takes 20 years to build a robust startup community. A city can be home to a company that looks like a promising IPO candidate, only to see that company fizzle out a year later.
With that in mind, the cities that I’ve chosen as ones to watch aren’t necessarily those that are home to the most startup activity. Rather, entrepreneurs, investors, or government leaders in the city have proven nimble in identifying what resources tech entrepreneurs will need to grow in their city. Or they’ve dedicated themselves to becoming leaders in a niche technology sector that they think will revolutionize American life. And finally, many of these cities are also home to a promising number of tech startups.
Among the coastal investors I talk to, the activity that’s taking place in Pittsburgh seems to be generating the most interest. Pittsburgh has a natural advantage in that it’s home to Carnegie Mellon University, which hosts one of the largest and most popular computer science programs in the country. But until recently, that hasn’t always translated into a high concentration of private sector tech activity in Pittsburgh.
In 2016, the number of patents issued to Pittsburgh’s major research universities — Carnegie Mellon, University of Pittsburgh, and Duquesne University — reached a 10-year high, according to a report from Pittsburgh seed-stage investor Innovation Works, while the number of spin-off companies generated by these universities has remained relatively steady.
The city is seeing promising activity in a number of sectors, including robotics, artificial intelligence, automated and connected vehicle technology, and advanced manufacturing. It has also received more interest from some of the most valuable companies in Silicon Valley, particularly as platform companies have expanded into hardware. Within the past three years, Uber opened a robotics research lab in the city, Facebook opened an Oculus research office, and Amazon opened an office to work on machine translation for Alexa.
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Pittsburgh received just $228.6 million million in venture capital funding in 2016. But Pittsburgh, with a population of just over 300,000, is attracting a relatively healthy number of venture capital deals for its size. The Innovation Works report also pointed out that the city secured the fifth highest number of venture rounds per million residents in 2016 at 40.8 — behind only San Francisco, San Jose, Boston, and Austin.
Additionally, Pittsburgh benefits from having a higher concentration of entrepreneurs who have experience working for or doing research for large tech companies. Take Luis von Ahn, the cofounder of Pittsburgh’s most valuable startup, language lesson app Duolingo. Before starting Duolingo, von Ahn helped developed reCaptcha technology at Carnegie Mellon, and is still a consulting professor at the School of Computer Science there.
The college town of Ann Arbor proved that it has the potential to punch above its weight this year as homegrown Duo Security became the city’s first privately held company valued at more than $1 billion. Given that there are currently 112 privately held unicorn companies in the U.S., it’s impressive that Ann Arbor — with a population of just 120,000 — managed to cultivate one.
In addition to Duo Security, the city is also home to promising startups like Y Combinator alum FarmLogs and supply chain software provider Llamasoft. The city has a huge advantage in that it hosts the University of Michigan, which gives startups a place to recruit engineers from. Ann Arbor also contains a significant portion of the state of Michigan’s venture-backed startups — 49 out of 141.
The city’s biggest disadvantage is its small population. Ann Arbor is not large enough to become the next Silicon Valley on its own. However, some of the most interesting activity happening in Ann Arbor comes from the city’s partnerships with nearby Detroit. Ann Arbor and Detroit have partnered to create MCity — a 32-acre test facility for connected and autonomous vehicles. MCity is located in Ann Arbor, but has been funded by Detroit automakers including Ford and General Motors. The city of Detroit’s proposal for Amazon’s HQ2 also cited a plan to build a bus route between Ann Arbor and Detroit. This could make it easier for Ann Arbor startups to stay put in Ann Arbor if they can recruit more employees from Detroit, a city six times its size.
If there are more partnerships like this that help Ann Arbor tap into the private sector resources available in Detroit, the city could become a small but formidable player in the tech sector, particularly in connected-vehicle technology.
Indianapolis is quietly becoming a player in a sector that traditionally hasn’t generated that much excitement in Silicon Valley: B2B software. What’s particularly interesting about Indianapolis is that just within the past few years, it has started to obtain some of the puzzle pieces necessary to build a thriving tech community.
First, the city has seen the big startup exit that many other cities clamor for. In 2013, marketing software company ExactTarget was acquired by Salesforce for $2.5 billion. That’s enabled ExactTarget’s cofounders — Scott Dorsey, Peter McCormick, and Chris Baggott — to reinvest some of the money they made off of the ExactTarget acquisition back into the Indianapolis startup ecosystem. Dorsey now leads High Alpha, a “venture studio” that provides venture capital as well as marketing, design, and other shared services to its portfolio companies. Baggott has gotten back into the startup game with ClusterTruck, a food delivery startup that’s targeting Midwestern states.
Second, the city is or soon will be home to the outposts of two large tech companies that can help increase the number of tech professionals in the city. In May, Salesforce opened a 48-story office in Indianapolis, which the company said can hold 2,200 employees. A week later, India IT giant Infosys announced that it would begin leasing office space in Indianapolis, where it hopes to hire 2,000 employees by 2021.
The expansion of Salesforce and Infosys is a double-edged sword for Indianapolis. In the long term, Salesforce and Infosys will increase the number of experienced tech professionals in Indianapolis, who may eventually take their experience and go start their own tech startup. In the short term, the presence of Salesforce and Infosys may make it more difficult for startups to recruit talent, given that these startups will now be competing with corporations who can offer potential employees higher pay.
But the biggest challenge the city faces is that it still needs to attract a higher density of tech startups in order to stay ahead of other aspiring tech hubs in the Midwest. According to the Kauffman Foundation’s annual index of startup activity, Indianapolis was home to one of the lowest rates of new startup activity in the U.S.
The most promising indication that tech activity will continue to grow in Raleigh is that the city continues to add technology jobs. Raleigh saw a 38 percent increase in the number of tech jobs from 2010-2015, second to only San Francisco. Some of the largest employers in the area include IBM, which employs 10,000 people in Raleigh and the surrounding county, and Lenovo, which employs 4,200 people.
Both companies are located in the famed Raleigh-Durham-Chapel Hill Research Triangle Park, one of the largest research parks in the world. There are also middle-aged tech companies that continue to add jobs, such as open source software provider Red Hat, which as of March 2017 had about 1,400 workers at its downtown Raleigh campus.
Like the other cities mentioned on the list, Raleigh has strong universities that tech companies can recruit from — North Carolina State University in Raleigh, as well as nearby University of North Carolina at Chapel Hill and Duke University in Durham.
While Raleigh’s history as a research center will likely ensure that the city continues to serve as a healthy hub for tech activity in the South, startup activity in the city is not growing as quickly as in some other cities. Unlike some of the other cities on the list, Raleigh does not have a recent billion-dollar startup exit to point to, which could help lead to the creation of more tech startups within the city. Some promising startups in Raleigh that could secure that billion-dollar exit include customer analysis firm Pendo, which has raised $56 million in funding, and industrial drone services shop PrecisionHawk, which has raised $29 million.
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