Starting a business in a regional city is not necessarily a disadvantage

2022-10-04 original Startups

One of the rankings published in various places is the “Ranking of Unicorn Companies by City.”

In 2020, Beijing was apparently #1, San Francisco #2, and Shanghai #3.

There’s also a “Ranking of Startup Funding by City” and similar lists, but as you might guess if you look into it, regional city names almost never appear in rankings like these.

Occasionally a region that a nation is strategically developing will show up, but in most cases the ranking is topped by that country’s capital, or its most densely populated area.

So if you’re going to start a company, it has to be a big city, right?

That conclusion is a bit hasty.

I think every choice carries both merits and demerits.

Let me share a few episodes here.

This was more than five years ago, but a friend once came to me for advice. My friend J is Canadian and was attending MIT at the time, so he lived in Boston, but before that he’d had an interesting career as a small-town doctor in a remote area. He had a plan to start a company with a fellow PhD student, and the prospects for their first round of funding were already taking shape, but the investor at the time proposed — more like demanded — that they relocate to Silicon Valley, and he agreed. That’s how he ended up consulting me, since I was living in Silicon Valley at the time, about things like livability, which areas to set up an office in, and the state of talent and salary levels.

Naturally (?), at the time I irresponsibly rattled off all the wonderful things about Silicon Valley and told him something like “It’s a seriously exciting paradise, get here now!”

He went on to set up an office in Silicon Valley, poach talent from companies like Google and Tesla to build his product, and even win a TechCrunch business contest at one point, but he shut the business down about a year ago. We exchanged a few messages recently. Rather than returning to Boston or Canada, he stayed in Silicon Valley and now works at Facebook. “It’s not as intense as running a startup, but I’m having a decent time,” he told me.

Here I’d like to offer a few comments of my own on some of these points.

First, when it comes to securing talent, the advantage of big cities isn’t something that shakes easily. Competition for talent gets fierce, but the inflow to match it never stops, as with J. Honestly, I’ve rarely seen a city-level location where this supply-demand balance has broken down significantly. Supply and demand seem to stay in equilibrium, or supply runs slightly ahead, more or less all the time.

Diversity of options is also, I think, an advantage of big cities. J unfortunately decided to fold his own startup, but on the other hand, his current employer is Facebook. Not bad — in fact it’s the kind of position generally considered enviable. You can take on a challenge, you can work at a big company, and of course you can also work at a small or midsize company.

Now let me introduce another episode.

A Japanese friend of mine, Y, runs a company in a city in the Tohoku region. Needless to say, it’s not Sendai. It’s Aizu.

The name is plenty recognizable, but it’s deep in snow country, far from the shinkansen, and not somewhere you’d visit very often — this is purely my own subjective impression.

Don’t jump too quickly to assuming that must make things hard, though.

There are several things I think he’s done remarkably well, given that his company has been running for over 25 years.

First, its connection to a university. He originally worked at the University of Aizu, and it was there that he started the company together with students. Since then, the company seems to maintain a cycle of student interns to hiring to, in some cases, moving on.

In fact, there’s generally a strong connection between universities and startups. Even where there’s no direct link, any city with a lot of startups always has an excellent university nearby. It’s a chicken-and-egg situation, but new innovation happens where young talent gathers. And that in turn draws in more young talent — it’s a very simple story, I think.

I was also struck by how skillfully he makes use of the advantages of a regional location. For example, he does a good job of picking up local work.

Anyone who has run a company knows that “money coming in every month” and “money coming in every year” are extremely valuable. That might sound like I’m talking purely about playing defense, but having a steady source of income makes it much easier to build a medium-term plan. And it’s only once you have a plan that you can use both offense and defense effectively.

National-level projects may involve large sums, but the competition for them is fierce too. And in practice, that kind of work is usually snapped up by large corporations, again purely my own subjective impression. Startups and small and midsize companies end up as the children, or even grandchildren, picking up whatever scraps trickle down.

Given that, if you instead skillfully pick up projects from the prefecture or municipal government, you can efficiently generate stable and sufficient revenue, and use that as capital to fund all kinds of challenges.

This might not suit someone whose mindset is “raise several hundred million yen and go all in on a make-or-break bet!”, but it was a real education to see that this kind of management, this kind of approach to taking on challenges, exists too.

I also think an interesting feature of regional areas is a “similarity of context.”

Setting aside people who originally lived there, many residents of regional areas are people who ended up settling there either due to work circumstances or their own choice.

I find that such people very often share a context in a few respects — things like “why did I end up here” or “well, whatever the reason, I don’t intend to leave.” I understand this well from my own time in Hamamatsu. I did eventually leave Hamamatsu, but I certainly don’t dislike the place.

An extremely important factor in organizing a company is “culture fit” — whether your way of thinking, values, and preferences match those around you. In a certain sense, regional areas are very uncomfortable for people who don’t fit the culture, so such people leave quickly, which means the probability of a culture fit with the people who remain is very high. I imagine the odds of a hiring mistake are also considerably lower.

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

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Originally published in Japanese at https://clazytech.com/2022/10/1251/. Translated with LLM assistance and reviewed before publication.