The Spread of Start-Up America and the Rise of the High-Tech South

Start-up culture is taking root in lots of places -- and not just the usual suspects. Some of the hottest hotbeds are in the South.

The United States has been and continues to be one of the world's great start-up incubators, but with innovation no less than with agriculture, some places are much more fertile than others. What gives some cities and regions such extraordinary creative and entrepreneurial vitality -- and what holds others back?

Paul Graham, who is reinventing venture capital for our time, has perhaps the clearest insights into what makes for a successful Start-Up Hub, the term he uses for places like Silicon Valley. He used to look at the external environment for clues. But in a recent essay, he says that the more he studied and the more he lived the start-up life through his own very successful high-tech accelerator, YCombinator, the more he came to realize that a very powerful force of culture was at work. Most places, he says, might as well be sprayed with "startupicide." Startupicide is what damps down and repels startups and those who would build them. "I could see the average town was like a roach motel for startup ambitions," he writes. "Smart, ambitious people went in, but no startups came out."

Startups are fragile things by their very nature -- few succeed even under the best of circumstances. What makes Silicon Valley and a very few other places different, he noted, was that their culture contained an antidote to Startupicide -- such places embrace an ethos that encourages rather than crushes startups and the broader mentality from which they grow. "The problem is not that most towns kill startups. It's that death is the default for startups, and most towns don't save them," Graham notes. "Instead of thinking of most places as being sprayed with startupicide, it's more accurate to think of startups as all being poisoned, and a few places being sprayed with the antidote."

Jane Jacobs identified almost exactly the same dynamic when I asked her some years ago why only a handful of places pioneer innovations and unleash the creativity of their residents, while most are content to sputter along, stagnate, and even die. "Each and every community," she told me, "is filled with lots and lots of creative and innovative people." The trouble is with a small core of people she dubbed "Squelchers," who are instinctively opposed to doing anything new or different. Unfortunately, these people are often a town's business and political leaders. You've probably seen them in action; maybe you've even bumped up against them yourself.

Only a handful of places are endowed not only with a great research university, but a culture that tolerates and actively encourages risk-taking. Most places prefer to play it safe. But doing more of the same is hardly an option when your prospects are as bleak as they are for so many cities these days. The economic crisis has brought us to a great tipping point, what I have elsewhere termed a Great Reset -- an epoch when creative destruction spreads from technologies and industries to society, culture, and geography at large; when new business models, new institutional systems, and new geographic clusters of innovation and risk-taking come to the fore. A Great Reset is one of those rare occasions when "Squelchers" and their old squelching ways are transcended, when more and more people and places can get access to the antidote to startupicide.

And any halfway-sentient person can tell that this is precisely what is happening today. The old order is dying, and despite governments' best efforts to blow life back into it, it cannot be resuscitated. More and more people, and more and more places, realize that the key to the future no longer lies in waiting for a big company to take you under its wing, in flipping stocks (like Wall Street does), or flipping houses. The limits of a trading economy are there for all to see, manifest in the wreckage of the recent crisis.

Now is a time to build. And the urge and the mechanisms to build are what drives the Start-Up Nation. Not just tech startups a la Silicon Valley, but the start-up ethos writ large -- the builder's ethos, the ethos of creating something altogether new. It is an ethos shared by musicians forming bands, filmmakers financing their movies with credit cards, social innovators and entrepreneurs pursuing new approaches to solving global as well as local problems. It is the ethos of the Creative Class.

Despite what the die-hard Squelchers might want you to believe, the Start-Up Nation is growing. Part of this growth pattern is borne of necessity. With the economy in tatters and government all but broke, there's little choice but to go out and build something for yourself with your colleagues, fellow-travellers, and friends. Startups are much less capital-intensive than they once were. Partly because of the better tools we have at our disposal (the Internet, advanced software, etc.), partly because we live in a more modular economy that allows critical functions, from manufacturing and distribution to design and marketing, to be subcontracted out. Some of it is because others have done it, and we've seen what they can do. And a lot of it is from a cultural revolution: the fading of an old dream that saw a good job, a big house, and a big car as the goals by which success was measured, and the emergence of a new one that sees the challenge of building something novel and unique as the key to true fulfillment.

For all these reasons, the geography of start-up America is spreading, slowly and gradually, but inexorably. It's taking root in lots of places, from Portland, Oregon to Brooklyn, New York, and from Boulder, Colorado to Portland, Maine. And the South is an important part of it as well. Too many of us paint regions with too broad a brush -- North versus South, East versus West, Sunbelt versus Frostbelt. Those once-convenient categories make little sense anymore, if they ever made sense at all.

Many communities in the South have long had the capacities to be part of the Start-Up ethos but perhaps the Squelchers blocked it out. That is changing and has been for some time. Austin, Texas, has a great university and it is an established center for semiconductors, computers, and software. North Carolina's Research Triangle has a similarly long track record in high-tech, being home to the SAS Institute, a spinoff of North Carolina State University and the nation's largest privately held software company. Dallas has been a long-time leader in computing and IT. A study my colleagues and I did several years back found Houston to have one of the nation's greatest concentrations of software engineers, many of them working in the oil industry and related sectors. Chattanooga has its green industries; Huntsville its high-tech electronics. Florida's Space Coast has aerospace, not to mention Orlando, a center for media and entertainment.

There is no single indicator of startups, but perhaps the best is venture-capital investments. And detailed data on such investment is available from PWC's annual Money Tree report. In 2010, Silicon Valley accounted for the lion's share of venture-capital investment by far: $9.1 billion, or about 40 percent of the total. New England, with its high-tech complex running from Cambridge and Boston to the surrounding Route 128 area, was second with $2.6 billion, 11 percent of the total. New York, with its newly ascendant Silicon Alley, was third, with roughly $2 billion, or 8.6 percent. The Southeast states -- mainly North Carolina but also Florida, Georgia, South Carolina, Mississippi, and Alabama -- attracted $1.2 billion (5.1 percent) mainly concentrated in biotech, software, telecom, and media. Texas accounted for close to another billion ($942 million), or 4.1 percent with its investments mainly focussed on energy as well as software, media, and semiconductors. And while the level of venture investment in the South-Central states (including Oklahoma, Arkansas, Kansas, and Louisiana) remains low relatively speaking, the region saw a staggering 540-percent growth between 2005 and 2010, the largest increase across any region of the country by far. Overall, roughly one in ten of the nation's venture investment dollars are spent in the South.

The same pattern can be seen in the latest version of the Milken Institute's Tech-Pole Index. Silicon Valley again tops the list, with Seattle, home to Microsoft and Amazon in second place. Cambridge, Massachusetts ranks third, Greater Washington, DC fourth, and LA fifth. But high-tech has spread quite far into and throughout the South. Greater Dallas ranks sixth, putting it ahead of San Francisco, San Diego, New York and Chicago. And 10 Southern metros number among the top 50 (that's one in five on the Milken list, which includes Canada): Atlanta in 12th, Austin 20th, Houston 21st, Huntsville 22nd, Durham 26th, Tampa-St. Pete 35th, Raleigh 38th, Orlando 43rd, and Palm Bay-Melbourne in 48th place. Plus, a large number of southern metros -- from Charlotte, Nashville, and Richmond to Virginia Beach, Jacksonville, Memphis, and Knoxville -- have above-average concentrations of high-tech industries. Not to mention smaller cities like Savannah, Charleston, and Chattanooga, and college towns like Athens, Gainesville, Lexington, and many others that have been incubating and nurturing innovative high-tech economies.

Long ago, the late great economist Mancur Olson outlined a powerful theory for the rise and decline of nations and city-regions. Leading nations as well as leading regions, he concluded, decline as a result of one overwhelming factor that he dubbed "organizational sclerosis" -- a hardening of institutional, economic, and cultural arteries that leaves them incapable of dealing with a new and rapidly changing economic environment. Sound familiar? Practices, patterns, and norms of organizing and doing business that once worked so well become a constraint, a fetter, an obstacle to further progress. Decline sets in as once-dominant places get locked into the past and are unable to adapt to new circumstances, new technologies, and new conditions. A geographic analog to the process of creative destruction takes hold as new technologies, new business models, new values and norms, new industries and ultimately new institutions, and new ways of organizing economic activity shift to new places.

In Olson's view the United States was fortunate, because it is a big country. While previous epochs of economic and geographic change tended to jump from country to country -- moving, say, from Holland to England and later from England to the United States -- America is so large that this process of rebirth and remaking can occur within its own boundaries. In a 1977 essay entitled "The Causes and Quality of Southern Growth," he speculated that the U.S. might be experiencing such a shift along its North-South axis. The North, he argued, may have suffered from outmoded labor-management practices and too much hardening of its organizational arteries. The South and West, he speculated, were more wide open territories where new kinds of industries and new ways of organizing might be able to take root. In retrospect, it's clear that Olson had painted America's economic geography with too broad a brush. Some Sunbelt cities, especially the ones that bought into sprawling housing development as a substitute for real growth, have fallen victim to the economic crisis. And there are cities in the once-dying Frostbelt -- such as Ann Arbor, Madison, and even Pittsburgh -- that have built new knowledge and creative economies around their great universities.

The Start-Up Nation is spiky and it is also spotty. And some -- perhaps many -- of its hottest spots are emerging in the South.

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