Madison comes in No. 1 for growing startups in 2020

The capital city may be leading the way, but as a state Wisconsin is still playing catchup to the rest of the country.

Locally, Madison may be known for a ripe startup culture, but now Wisconsin’s capital city is getting some national love, too.

According to a new report from Fundera, a New York-based online marketplace for small business loans, Madison has been named the top upcoming city for startups in 2020. The rankings were determined using several factors including access to a talented labor pool, average labor cost, office space cost, and the average cost of living.

In order to discover the best untapped cities for startups, Fundera gathered data on 50 mid-sized cities with a population under 500,000 residents, notes Priyanka Prakash, senior staff writer at Fundera.

That’s an important threshold because Silicon Valley accounts for 45 percent of total venture capital investment in the U.S. and added together with other startup hubs such as New York, Boston, and Seattle, nearly three-quarters of the country’s venture capital investment is swallowed up by just a few, large cities. While so-called “second tier” startup cities, such as Portland and Austin, have been hailed in recent years, even those regions are now becoming costly and saturated for would-be entrepreneurs.

The top three cities on the Fundera list — Madison; Plano, Texas; and St. Paul, Minnesota — earned high points for a combination of access to a well-educated local labor pool and a relatively modest cost of doing business, writes Prakash. Cities with excellent feeder universities, like UW–Madison, were also likely to have a well-educated population with an above-average concentration of residents with bachelor’s degrees and thus rank highly.

It’s not just tech startups seeing a boost across the country, the Fundera report found. Madison, for example, has seen significant startup activity around mobile and telecommunications companies.

“The cities did not have a concentration of one particular industry, but rather all have a variety of different types of startups,” Prakash told CNBC. “That goes to show the local governments in these cities are invested in startup funding and are looking to boost the popularity of these cities as startup hubs. They don’t want to get boxed in with one industry, but rather attract a wide variety of small businesses.

“For new college grads, or anyone looking to make a career move or get into the startup world, these cities represent a good opportunity,” continued Prakash. “They show you can have a great quality of life but still work in a city that’s thriving and growing and has a lot of potential.”

Here’s what the report had to say about Madison:

“The beautiful city of Madison, Wisconsin is number one on our list, due to an excellent balance of startup-friendly factors. Madison boasts a well-educated population, with 57 percent having a bachelor’s degree or higher. This city also has the highest concentration of millennials compared to any other city in the country, making it a particularly great option for young startup founders and their teams.

“A young, well-educated talent pool is coupled here with low office rental prices that are falling year-over-year. The cost of living isn’t outrageously high with a $12.44 living wage cost, and the average median income of $64,101 is just a hair above the nationwide average. At just 73 venture capital deals over the last three years, Madison may best represent what it means for a city to be untapped. The startup scene here is small, but there is potential for immense growth.”

Opposite ends of the spectrum

Given Wisconsin’s relatively poor showing in recent years in startup rankings among all 50 states, Madison could be the driver for spreading startup growth outward across the state. But there’s still significant work to be done.

According to the latest Kauffman Indicators of Early-Stage Entrepreneurship data published in September, Wisconsin ranked among the bottom three overall compared to all 50 states and the District of Columbia for 2018 with an index score of -1.73. Rhode Island was lowest with an index score of -3.80 and California was highest with a score of 2.78.

The index is comprised of four evenly weighted measures: the rate of new entrepreneurs, or the average percentage of adults becoming entrepreneurs in a given month, year average (Wisconsin was at 0.24 percent); opportunity share of new entrepreneurs, or the percentage of entrepreneurs driven by opportunity rather than necessity (68.43 percent); startup early job creation, or the jobs created by startups per 1,000 people (3.88); and startup early survival rate, or the percentage of firms surviving one year after founding (79.62 percent).

Wisconsin ranked at or below the national median in both rate of new entrepreneurs and startup early job creation, but a slightly higher-than-median showing in startup early survival rate was offset by a nation’s-worst ranking in opportunity share of new entrepreneurs.

The Kauffman report notes that over the past two decades, the opportunity share of new entrepreneurs appears to have increased when economic conditions were improving and decreased when economic conditions were worsening. The largest opportunity share of new entrepreneurs occurred in the late 1990s, and the smallest share was observed in 2009, at the end of the Great Recession. The opportunity share of new entrepreneurs also decreased in the recession of the early 2000s and increased in the growth period that followed in the mid-2000s. So, while the rest of the country is currently enjoying relative economic prosperity, Wisconsin appears to have still never fully recovered from the Great Recession.