Baker Institute report: San Francisco is uncontested as America’s startup capital

The nation’s top startup cities for 2016 are, in ranked order, San Francisco; New York City (Manhattan); Boston; Cambridge, Mass.; Palo Alto, Calif.; Austin, Texas; and Seattle, according to a report from Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

“The Top U.S. Startup Cities for 2016” ranks the top 100 cities by venture capital funding. The report was co-authored by Ed Egan, fellow of the Baker Institute and director of the institute’s McNair Center for Entrepreneurship and Innovation; Anne Dayton, research manager at the McNair Center; and Diana Carranza, graduate researcher at the McNair Center.

The authors found 2016 was a slightly down year for venture capital investment. The total amount of seed, early and later-stage (also known as growth investment) venture capital invested in startup companies dropped to $33 billion from $41 billion in the previous year. The number of U.S. startups receiving for the first time growth investment from a venture capital firm also declined — to 1,041 from the 1,347 “new deals” recorded in 2015. The total stock of active venture-backed startups based in the U.S. leveled out at 9,656, having risen just past 9,700 in the previous year.

As in past years, startup activity was concentrated in a select set of American cities. For 2016, the top 50 cities took more than 73 percent of dollars invested, accounted for 70 percent of new deals and housed 69 percent of venture capital-backed startups. The next 50 cities had much lower startup activity. Cities ranked 51 to 100 collectively took just 9 percent of dollars invested, accounted for about 11 percent of new deals and housed around 11 percent of venture-backed startups.

The authors placed the top 50 U.S. cities into three tiers: The first tier is the top seven cities — the only seven U.S. cities to receive more than 20 deals in 2016. “Each city in this tier is an example of a major and highly successful startup ecosystem,” the authors wrote. “The second tier, made up of 29 cities, ranges from would-be top-tier cities that are small and fully saturated (like Menlo Park, Calif.) and giants in the making (like Chicago) all the way down to those that appear to have just reached critical mass. Third-tier cities have some startup activity — they are still top 50 cities — but they haven’t reached the threshold for us to confidently proclaim them as achieving a virtuous and self-sustaining cycle of startup activity.”

San Francisco, ranked highest on each individual measure and the clear winner again on the composite rank, also has the sixth-highest number of startups per capita of any other top 50 city, the authors said. “Palo Alto and Menlo Park, both bordering Stanford University, have the highest per-capita counts overall, and they are bordered by Mountain View and Redwood City, the next-densest startup cities in the U.S.,” the authors wrote. “The Bay Area has seen a viral spread of startup activity, and San Francisco — as the West Bay’s largest city — is uncontested as America’s startup capital.”

Two New York City boroughs — Brooklyn, ranked 24th, and Long Island City (a part of Queens), ranked 83rd — appear in the top 100 ranking along with Manhattan. “Manhattan has held second place for a decade now,” the authors wrote. “With a startup density around one-fifteenth that of San Francisco, Manhattan’s ecosystem has room to grow substantially and could one day take over the top spot in the ranking.”

While a handful of well-known cities continue to dominate the landscape, startup clusters are forming all over the U.S., the authors said. “Policymakers in many cities that historically were not associated with high-growth, high-tech firms are now seeking ways to cultivate startups as a strategy to boost income and employment opportunities,” the authors wrote.

“All stakeholders — entrepreneurs, startup institutions, government, corporations and research universities — must work together to create a city’s unique value proposition. Entrepreneurs need to be better off in their hometowns if officials want to stem the loss of local talent to more established ecosystems.”

For the full list of top 100 cities by venture capital funding, visit www.bakerinstitute.org/research/top-100-us-startup-cities-2016.

The McNair Center was founded in 2015 as the research-oriented cornerstone of a larger, nationwide consortium of Robert and Janice McNair Foundation-funded centers devoted to entrepreneurship education. The center develops and distributes data and conducts policy research to better understand and promote entrepreneurship and innovation. It also provides a forum for stakeholders throughout the entrepreneurial ecosystem to debate ideas, share understanding and effect change.