Dear Startups: You Have Everything You Need Where You Are

June 4, 2015

“Home is where one starts from,” said the poet T.S. Eliot, and civic innovation hubs are increasingly of the same mind. Every region in America has enough resources to grow small, ambitious tech startups from scratch. It’s a message that 1776 and the U.S. Chamber Foundation heard time and again for Innovation That Matters, a tour through what makes eight U.S. startup hubs tick for economic and social good.

Consider one of the most essential ingredients for startup clusters: capital. Connecting a community’s existing wealth with its entrepreneurs can drive tremendous amounts of civic innovation. Cities already have enough capital to support homebrewed startups.

The challenge is hidden capital. The wealth is there in cities—it’s just being poured into, say, restaurants and other traditional markets. Often these investments follow the Peter Lynch maxim to “buy what you know.” That makes connecting and educating a city’s capital stock of primary importance.

Throughout the 40 roundtables we held as part of Innovation That Matters, we heard participants say they lacked sufficient startup capital. The allure of a big exit was always in the background, together with some envy over how much capital was sloshing around Silicon Valley.

Successful startup hubs are good at recycling entrepreneurial wealth back into the community. Silicon Valley entrepreneurs in particular are expected to give back to their startup community if they make it big. Thumbtack’s Jon Lieber confirms: “There’s a self-reinforcing cycle here of money from successful investments being funneled back into the system.”

It takes surprisingly little capital to kick start a virtuous cycle of growth and reinvestment. The Kauffman Foundation found that only a little over 7% of high-growth firms in Kansas City received venture capital. Nearly all of them were bootstrapped from the entrepreneur’s own funds or from friends and family.

Hidden capital stores, when invested into intermediary institutions such as angel networks, bridge the gap between scraping the penny jar and cashing out in an exit. Highly networked communities that are amenable to risk-taking are more likely to boast these types of groups.

There are clear signs of progress in the eight cities we visited. Chicago’s startup leaders say they’re in the early stages of “unlocking its hidden capital,” but as Amy Francetic of Clean Energy Trust said, “We’d love to see more capital come off the sidelines.”

How are they tapping this hidden capital? For one thing, we saw leaders in the startup community and public sector acting like nodes in a network, building pathways to channel their region’s wealth into startup activity. They built personal and institutional connections between industry, investors, philanthropists, and civic and government leaders. They acted as translators between cultures and champions of what that city’s startups work.

We saw this kind of connection and education going on in particular in New Orleans. The NOLA Angel Network is rapidly recruiting a wide range of locals to invest in startups; in fact, it’s one of the fastest-growing such groups in the country. “Dumb money is now becoming smart money, and it’s making a huge difference,” said Richard Babb of The Louisiana Fund.

In the space between businesses and government sit the startup institutions and philanthropic groups that drive civic innovation. MATTER in Chicago is more than a healthcare coworking facility, but engages investors throughout to know the startups and their needs. In Detroit, Jerry Paffendorf of Loveland Technologies attested to his surprise at the strength of the foundation community. “In San Francisco, it was all seed capital,” he said, “but in Detroit it’s a large foundation community that you can think about approaching for social entrepreneurship.”

As Kauffman’s Arnobio Morelix found, “These local strengths might not be easy to spot for outsiders, but as a local entrepreneur you are uniquely positioned to take advantage of them.” And that’s basically right: there are immense resources locally and startups (whether they know it or not) can be best placed to tap into them. It’s the role of community leaders to help make those connections and education happen.

It’s not the size of your city’s wealth that matters, but how you use it.