There’s no doubt that innovation is happening all around us, at every moment — you can now FaceTime with 32 people! — but perhaps equally important to the shape of our economy and the path of progress is where that innovation happens. With the year-long spectacle of Amazon deliberating over where to locate its second headquarters, finally concluding, it’s clearer than ever that Silicon Valley is no longer the only option for startups, and that other cities are making big changes to become the next big innovation hub.
To be an innovation hub, a city or region must provide an environment that supports and stimulates innovation. Ideally, forward-looking firms and investors, universities, incubators, accelerators, and government agencies all come together to foster this innovation, creating a community that attracts — and retains — top startup talent. But the result of creating this environment is so much greater than simply “snagging” a hot startup. As Silicon Valley has shown us, being an innovation hub means great things for an area: it improves the local economy; attracts bright and vibrant new residents; draws in great new restaurants, stores, and attractions; and often revives flagging interest in public or private efforts to rejuvenate the city. One look at the quality of schools and public transit, the abundance of wonderful cafes and restaurants, the gorgeous parks, and the thriving local economy in Silicon Valley cities like San Jose, Cupertino, and Burlingame bears this out. And yet — though the birthplace of Apple, Google, and Facebook still shines most prominently as the place for startups to be, the truth is that Silicon Valley is beginning to lose its luster.
The area just south of San Francisco got the name “Silicon Valley” in the 1970’s, because of the number of companies in the area creating silicon semiconductors to be used in commercial technology (for things like government equipment, home computers, and video game consoles). As public demand for these products increased, so did the number of tech companies in the valley — fueled by investments from the federal government, Stanford University, and other entities. Armed with the brainpower, financial resources, and equipment they needed to thrive, tech companies proliferated in the valley, a trajectory accelerated by the rise of the internet, laptops, and smartphones. In tandem with the growth of these tech companies, the number of venture capitalists and investors in the area also increased, leading to the glut of investors and entrepreneurs we see in Silicon Valley today.
Though many things that led to its ascent as the top innovation hub in the world remain true today, Silicon Valley’s downsides are beginning to make themselves known — and both startups and VC’s are casting about for greener pastures. The numbers point toward an exodus: the number of people moving to the Silicon Valley region dropped by 27% from 2012 to 2015; in 2017, more Americans left San Francisco than arrived; in a 2017 survey, 46% of respondents said they plan to leave the Bay Area within a few years, compared to 34% in 2016. It follows that, as the money-making startups and idea-filled entrepreneurs leave the area, so too are investors looking for the next big thing. In 2013, Silicon Valley investors put half their money in startups outside the Bay Area; the number today has increased to two-thirds. And while overall global venture funding was down 23% in 2017, it fell by an even more drastic 28% in the valley.
It costs four times as much to operate a startup in the Bay Area as it would in another city.
So what’s changed? Why are entrepreneurs fleeing the promise land of innovation and IPOs? There are many answers to this question, but each one points to the underlying unsustainability of a region built entirely on one industry — and, largely, by one type of person. Cost of living is perhaps the biggest factor that people point to when citing their reasons for leaving Silicon Valley. Setting aside rent prices (which are exorbitant), there’s the increased cost of trying to get a fledgling business off the ground; when cost of living is as high as it is in the valley, nascent companies don’t have much of a runway. According to one estimate, it costs four times as much to operate a startup in the Bay Area as it would in another city.
There’s also extreme inequality, an incredibly high-stress and competitive atmosphere, and an almost complete lack of diversity: companies founded by women received just 2% of venture capital funding in 2017, and the numbers are equally grim for people of color. At the same time, likely due to this confluence of factors, the mentality that you have to be in Silicon Valley to make it as an entrepreneur is shifting. As Sarah Tavel of Benchmark Capital said at TechCrunch Disrupt: “I used to believe really strongly if you wanted to build a multi-billion dollar company you had to be based here. I’ve stopped giving that soap speech.”
So if people are leaving (or avoiding altogether) Silicon Valley, where are they going? Cities across the country have popped up as alternatives, each touting their finest qualities and hoping to attract the next Google — still, none seems to offer the perfect confluence of good weather, affordable housing, high quality of life, a culture of innovation, university support, and excellent education that Silicon Valley did back in the 1970’s.
Boston and New York have popped up as the two biggest Silicon Valley alternatives, with a neighborhood in New York earning the nickname “Silicon Alley” and Boston funneling even more venture capital into startups this year than New York. Neither, however, helps with the affordable housing issue, and both have harsh winters. Then there’s the slew of smaller cities doing their best to attract the Silicon Valley run-off. Both Seattle and DC have been attracting entrepreneurs, though the cost of living and weather challenges in these two cities are still considerable. When Realtor.com ranked the best Silicon Valley alternatives, using a variety of “tech-savvy” factors (things like percentage of employment in the tech industry, number of startups per capita, etc.) as well as quality of life factors including affordable housing, Austin, Atlanta, and Minneapolis took the top three slots; and while all these cities have much to offer, the lack of diversity or strong academic partnerships make them less than ideal (plus, for Minneapolis, weather isn’t exactly an attraction). Columbus, Ohio has recently garnered some attention as a tech talent hub, though the weather, distance from the coasts, and lack of a vibrant culture or nightlife are likely to deter entrepreneurs (especially younger ones) from settling there.
When considering the factors that led to Silicon Valley’s golden age, the alternative that has it all — the resources, the institutional investment, the pool of talent and research from top-tier universities, the culture of innovation, the temperate weather and high quality of life — isn’t a city at all, but rather an area: The Triangle. The Triangle, or Research Triangle Park, refers to an area spanning Raleigh, Durham, and Chapel Hill in North Carolina and anchored by three major research universities: Duke, North Carolina State University, and University of North Carolina at Chapel Hill. The Triangle continues to appear on lists of Silicon Valley alternatives, appearing at #4 on that Realtor.com ranking, number two on a list from Forbes, and number one according to Inc magazine. The appeal of the Triangle bears out in real life, too: between 2010 and 2015, the Triangle saw a 38.5% increase in tech jobs, second only to San Francisco, and venture funding in North Carolina startups is up 154% in 2018, according to Crunchbase data.
When you investigate why startups are flocking here, the obvious answer might be the affordability: real estate is up to 70% cheaper than Silicon Valley; business costs are 14% below the national average; and there’s a 3.3% corporate tax rate, compared with 8.84% in California. But then you look a little deeper, and see the other factors, including the support and resources of three top universities, the influx of investment into innovation, the profusion of coworking spaces, the culture of collaboration, and, of course, the temperate climate and beach access.
startups in The Triangle can draw on a 50-plus year institution for research, resources, talent, and support
Though the name “Research Triangle Park” wasn’t coined until the 1950s, the establishment of the three Triangle universities centuries ago created a 7,000-acre hub of collaboration, productive competition, and shared resources that can’t be found in many other places. By complementing each others’ research capabilities, the universities fueled the rise of a critical mass of scientists, researchers, and technicians with highly specialized talent and training in a variety of high-tech fields. This allowed local government, in the late 1950s, to attract key government agencies and multinational corporations, which, in turn, led to more research and high innovation output. The universities’ uncharacteristically close collaboration has also allowed them to win major federal funding and undertake ambitious joint efforts, like the shared nuclear lab at Duke or the Triangle Universities Center for Advanced Studies, that an individual school couldn’t justify. All of this means that startups in The Triangle can draw on a 50-plus year institution for research, resources, talent, and support.
Despite all of this, the triangle has historically struggled to attract and retain startups and entrepreneurs, with many of the schools’ engineering and computer software students leaving North Carolina after graduation. Recent efforts, however, seek to combat this trend: in 1989, the opening of Centennial Campus at NC State, a 1,300-acre space for labs, offices, nonprofits, and government, signaled a new emphasis on forward-thinking collaboration and innovation, facilitating the flow of research and ideas from the university (it also, according to Jeff Barrett of Barrett Digital, “looks and feels like Silicon Valley”). And in 2003, UNC and NC State formed the Joint Department of Biomedical Engineering, which uses the specialized resources of the two respective schools to provide students a top-caliber clinical environment as well as state-of-the-art facilities for engineering and computer science research and technology transfer.
Beyond the universities proper, the Triangle has spawned institutions and organizations aimed at increasing innovative output and fostering entrepreneurial talent. One of these is the Council for Entrepreneurial Development, which “connects entrepreneurial companies with high-value resources to accelerate business growth.” It provides fledgling companies with “venture mentoring,” helps them get the capital they need to thrive and gives them access to an ever-growing network (400 plus so far) of member companies, all innovating in the Triangle area.
startups in The Triangle can draw on a 50-plus year institution for research, resources, talent, and support
These efforts seem to be working, with more and more tech companies — from nascent startups to major companies like Red Hat and Citrix — calling The Triangle home. And along with this, a sort of momentum accrues, as Triangle startups not only innovate themselves, but continue to contribute to more innovation. Take, for instance, the Innovators Program, a four-year accelerator between the two aforementioned startups and HQ Raleigh (a network of collaborative coworking spaces). The Innovators Program helps founders develop the skills and professional network they need to succeed, and has produced dozens of still operational startups, six of which have been acquired by major companies, including Facebook.
Red Hat contributes so much to innovation in The Triangle that the Raleigh mayor recently declared March 26 “Red Hat Day.” In addition to turning the ground floor of their downtown skyscraper into “Open Gallery,” a collaborative space for design-minded employees and community members to showcase their work, Red Hat has also collaborated with the city on events and conferences that help advance innovation, as well as sponsoring SPARKcon, The Triangle’s annual creativity festival.
Red Hat doesn’t carry the innovation torch alone. Far from it: the spirit of forward-thinking progress has permeated The Triangle, with new coworking spaces, incubators, and accelerators emerging to fuel the fire. Take the above mentioned HQ Raleigh, which provides flexible, collaborative, supportive workspaces to more than 200 startups in Raleigh alone, where it has two locations. HQ, which also has a workspace in Greensboro as well as partner spaces, was founded by Chris Gergen, a primary player in The Triangle’s innovation scene. A social entrepreneur and Duke faculty member, Gergen is the CEO of Forward Impact, an organization that seeks to unleash the potential of the next generation of entrepreneurs, as well as Forward Communities, a nonprofit that aims to provides inclusive opportunities for innovation and entrepreneurship.
Then there’s The American Underground, which launched in 2010 in the old American Tobacco Campus (talk about transforming an old, irrelevant industry into a current, thriving one). Dubbed “the Startup Capital of the South” by CNBC, The American Underground supports over 275 startups across its four locations, attracting them not only with its iconic locale, but also the promise of rich resources and talent pools from the nearby universities, as well as a deep-seated spirit of collaboration with and support from the city itself — not to mention additional support and resources to help startups grow, including several incubator programs.
All of these resources and collaboration, and all this enthusiasm, has been leading to some very serious results of late. Last October, Triangle-based Epic Games closed a $1.25 billion funding round at a $15 billion valuation; the creators of the impossibly popular game Fortnite are at the head of the e-sports trend, which appears to be surging with no end in sight. Just two days later, IBM announced that it was buying open-source shop Red Hat for $34 billion, the largest software deal ever. Meanwhile Pendo, another software company based in Raleigh, raised $50 million last September, while just last week Durham-based Archive Social announced a $53 Million growth equity investment to accelerate the expansion of the company’s market-leading platform.
Estimates put the number of startups in the Triangle anywhere between 500, according to Wake County data, and 2,000, according to a search on Crunchbase. Either way, the number is up significantly from 322 in 2014, and increasing rapidly. One of the biggest contributing factors to this proliferation is the concerted effort on the part of Triangle universities to foster innovation and support students and grads in pursuing their business ideas.
All three Triangle universities operate at least one incubator, and some have several. NC State has a specialized entrepreneurship program that provides “an early pipeline for students to grow their ideas,” according to Leah Burton, director of Centennial Campus Partnerships. Along with the program, NC State hosts numerous opportunities for startups to showcase their work, including Entrepalooza, an innovation festival, and the Lulu eGames competition, which gives out more than $100,000 to startups every year. In 2010, NC State opened the Garage (a nod to the favorite Silicon Valley fable of startup founders, notably Steve Jobs and Steve Wozniak, launching their business from a garage), a “learn-by-doing” entrepreneurial space on campus, which has spawned 31 currently operational businesses in North Carolina, three of which are venture-backed and launched in the past three years, with a combined valuation of $75 million. If that wasn’t enough, there’s also Wolfpack Investor Network, an angel network focused solely on early-stage companies founded by NC State faculty, students, staff, and alumni. Once again, the efforts are paying off: the number of startups launched from university research tripled from four in 2012 to 12 in 2016.
As entrepreneurs increasingly make their way to the Triangle to get their ideas off the ground, the Triangle cities are doing their best to make sure they want to stay, offering incredible quality of life that rivals any American city. Compared to most, there’s a complete lack of traffic (thanks, in part, to a smartly designed city that distributes commercial and residential real estate), city-wide bike/scooter share programs, low crime, and — of course — affordable homes mentioned earlier. On top of that, attracting and retaining younger entrepreneurs, there’s a diverse population, vibrant food and drink scene (including one of Bon Appetit’s 10 Best New Restaurants in America), and hip vibe, providing an urban feel to those who fled bigger cities. Not to mention the fact that the seasons are temperate, and both the beach and the mountains are just a quick drive away.
Even with all of these attractive qualities and resources, The Triangle is looking to improve. Kris Larson, who ran the downtown resurgence of Grand Rapids, Michigan, has taken on the same role for Raleigh, and big moves are on the horizon. Perhaps the largest and most exciting development is Park Center, a 100-acre live/work/play space meant to foster innovation by providing an unprecedented, resource-rich collaborative playground. Says Larson, “Items that have been on [Raleigh’s] wish list for years will soon become a reality.” No matter what precise shape the future takes, it’s clear that the startup ecosystem of the Triangle is thriving, producing new ways of thinking, doing, living, and innovating.
Of course, the Triangle isn’t without its challenges, most notably public transit and education. While a high-speed light rail connecting Raleigh to Richmond, Washington, and Charlotte has been on the table for quite some time, it hasn’t received any funding for years. Meanwhile, Triangle Transit’s plans to replace all the private transit companies of The Triangle (currently Raleigh, Durham, Chapel Hill, and Cary all have their own transportation agencies) with a regional rail system were effectively cancelled in 2006 when the agency couldn’t get enough federal funding. As a result, most people in the Triangle drive to work; only an estimated 2% of commuters took the bus to work in 2016. This is an issue, as robust public transit is a top priority for many startups and entrepreneurs. In fact, it’s theorized that the lack of public transportation was a factor in Amazon not choosing The Triangle for its HQ2.
The leaders and innovators of the Triangle, however, realize the seriousness of this blind spot, and are making efforts to fix it. Last summer, the Federal Transit Administration approved the start of engineering work on a light-rail line connecting Chapel Hill and Durham, but that unfortunately hit what became an insurmountable road block when an agreement between the cities and Duke University couldn’t be met, leaving city officials scrambling for a new transit plan and a reallocation of those funds. Meanwhile, voters in Wake County approved a tax increase to support a $2.3 billion transit plan that includes more frequent bus service, four bus rapid transit lines, and a commuter rail. Triangle startups are helping solve the problem, too: Citrix recently sponsored a city-wide bike share program, Citrix Cycle.
In terms of education, North Carolina recently slipped to 40th in the country due to low school funding and student achievement, and according to U.S. News, Raleigh-Durham area schools score a 6.8 for college readiness, which, while higher than similarly-sized metropolitan areas, is significantly lower than New York’s 7.8, Boston’s 8.2, San Francisco’s 8.8, and San Jose’s 10.
Still, within the Triangle itself, there are some stellar education options, with five Triangle schools making the U.S. News list of the top 500 public high schools in the country. As for the rest of the schools, there’s work to be done, but the conversation on how to begin that work is happening, partly spurred by a report released at the beginning of the year. There’s a ways to go, but with the bright minds and powerful resources of the Triangle, there’s reason to hope that education in the area will get where it needs to be.
Indeed, the local government has shown that it is capable of using policy and tax incentives to spur improvement in the arenas of its choosing: the Chamber of Commerce, for instance, has established funds to support startups, including the One North Carolina Small Business Program, which awards funding to North Carolina businesses engaging in capital-intensive, high-risk industries. There’s also the Impact Partner Grant, meant to help innovators, entrepreneurs, and small businesses to start, stay, and grow in Raleigh, as well as the state-sponsored North Carolina Biotechnology Center, which provides biotech industry support to innovative life sciences companies, not to mention tax exemptions for companies engaging in “software publishing activities.”
As the tech exodus (tech-xodus?) continues to flow out of Silicon Valley, new stars are emerging, and it’s clear that The Triangle is poised to shine bright. While you can find VC’s, or coworking spaces, or affordable living, or research universities in other cities around the country, nowhere do all of them come together so organically, and work together so productively, as in The Triangle. Triangle Impact Partners (TIP) is thrilled to be a part of this collaborative network, and ready to do our part to contribute to the innovative energy of the Triangle through our unique approach to infusing strong business plans with solid impact measurement potential. With a focus on social venture entrepreneurs, our clients are benefiting from our partnerships with the important players in the area, from the university system’s social innovation programs, to accelerators such as FHI Ventures, to all the major coworking spaces, and ultimately impact investors.
If you’re an entrepreneur looking for a place from which to launch your startup, all signs point to The Triangle as a smart choice. And if you’re a social entrepreneur, with a dream of helping solve the world’s big problems while creating a thriving business, then TIP should be your home in the Triangle. The startup landscape is changing fast, and it’s easy to get distracted by the next shiny object, but it seems a safe bet that the brightness you see in the Triangle is the real thing.