Dr. Edward J. Egan

Small, Dwindling, and Dead Last

Vermont has pockets of prosperous haves in amongst fields of withering have-nots. Overall, though, the state’s economy has foundered for a long time. If you order America’s states on almost any economic measure, including those per capita or relative to the U.S. average, you’ll find Vermont near the bottom.

For Gross Domestic Product (GDP), the foremost of economic measures, data from the U.S. Bureau of Economic Analysis shows Vermont ranked 51st – dead last – for 18 years now. (This will change in 2027 when Wyoming, which has been contracting almost continuously since 2008, will take the trophy as America’s smallest economy.) Vermont’s small and dwindling population barely helps its GDP per capita, which is ranked 36th and falling. A decade ago, Vermont produced more per person than Utah; today, Vermont is being overtaken in per capita production by Missouri.

Bad and Low-Quality Policy

Economists describe a part of Vermont’s woes as “structural.” The Green Mountain state has a small population, is predominantly rural, has no seaport or major commercial transport route, isn’t endowed with oil and gas or mineral wealth, and so on. No policy can change these things, but none of these constraints are fatal in an innovation economy.

A structural disadvantage makes adopting good, high-quality policies to grow Vermont’s economy all the more crucial. Unfortunately, the state’s current policies mostly don’t foster development and are almost always poorly designed and implemented. Bad policy is a crucial part of why Vermont languishes at the bottom of startup rankings.

Solving Vermont’s Declining Economy

Vermont has teetered on the edge of permanent recession for a decade… A data-driven, evidence-based policy process can maximize growth.

Over the last two decades, Vermont grew 2.6% slower than America as a whole and had the 10th worst long-term growth rate among the American states. This crisis long predates the pandemic, which caused a greater contraction in Vermont than in most other states. From 2009 to 2019, the state’s annual growth exceeded inflation by less than one percent: Vermont has teetered on the edge of permanent recession for a decade.

However, there is a solution to Vermont’s declining economy: A data-driven, evidence-based policy process can maximize growth. Simply put, Vermont should use economic science to evaluate policies and choose the best. However, there are big challenges in implementing this kind of policy process in the Green Mountain State.

Taking on Economic Corruption

Vermont has a long history of not doing the math. So, when Vermonters start using economics to analyze policy, they will find glaring past mistakes. Moreover, economic corruption thrives when things aren’t measured and assessed. In 2015, Vermont was ranked 37th and received a D grade for State Integrity; it has made little progress in reform. So, some institutions and individuals have strong incentives to resist changes that bring accountability.

A similar argument applies to Vermont’s policymakers. Some officials have implemented policies that undermine markets, destroy value for Vermonters, or waste taxpayer money. Some legislators have campaigned on or voted to support policies that make Vermont worse off or offer little benefit compared with their cost. And some administrators have ignored or abandoned policies grounded in economic science because their departments cannot understand them. Moreover, policies further from the political middle are less likely to be backed by science, which politicizes science’s application. Vermont would have to rise above the ensuing politics.

Recruiting Economists

Vermont can do the math and grow the pie!

Vermont has limited capabilities to design, implement, and assess policies in a data-driven and evidence-based fashion. None of its legislators or executive officers hold a Ph.D. in economics. Vermont has no Council of Economic Advisors to the Governor nor a Legislative Budget Office ready to analyze data and model solutions. Even the Department of Economic Development and the Vermont Economic Progress Council have no economists.

Fortunately, Vermont doesn’t need to be a policy innovator to improve; it just needs to avoid proven mistakes and embrace well-established best practices. There are enough economists in the state’s colleges and private sector to make a noticeable impact. Many will provide help pro bono, in both main senses of the phrase, and the same changes that reduce economic corruption lower the barriers to their participation. In summary, Vermont can do the math and grow the pie!

The 200 top U.S. startup cities for venture capital (VC) investment for 2020 provide few surprises. The top four startup cities are the same for the third year in a row, and San Francisco holds on to its top spot for its 14th year. However, there are some changes to explore from the industry’s ongoing evolution and the COVID-19 crisis.

Rank	Location	$mil.	Deals	Funded	+/-
1	San Francisco, CA	12,482	216	1,328	0
2	New York, NY	7,056	195	1,178	0
3	Boston, MA	3,651	41	304	0
4	Cambridge, MA	4,565	40	227	0
5	Seattle, WA	1,850	41	230	2
6	San Diego, CA	3,230	38	196	2
7	Palo Alto, CA	1,352	31	259	-2
8	Mountain View, CA	4,645	21	143	4
9	Los Angeles, CA	1,279	29	248	-3
10	Austin, TX	799	27	229	-1
11	Chicago, IL	818	26	189	1
12	San Jose, CA	945	23	127	-1
13	Irvine, CA	3,077	14	59	19
14	South San Francisco, CA	1,781	14	72	4
15	Philadelphia, PA	757	13	131	-5
16	Redwood City, CA	1,609	11	111	1
17	Santa Clara, CA	760	14	90	2
18	Denver, CO	709	16	82	7
19	Menlo Park, CA	624	16	95	-5
19	San Mateo, CA	875	11	103	-5
21	Atlanta, GA	551	17	102	-5
22	Houston, TX	656	13	71	2
23	Santa Monica, CA	452	12	94	-3
24	Berkeley, CA	616	12	54	12
25	Boulder, CO	414	13	73	-2
25	Oakland, CA	429	13	71	-4
27	Columbus, OH	573	9	50	23
27	Sunnyvale, CA	372	9	85	-5
29	Waltham, MA	496	7	41	27
30	Salt Lake City, UT	470	8	35	7
30	Washington, DC	281	10	53	4
32	Bellevue, WA	657	3	45	-5
33	Burlingame, CA	593	5	31	-4
34	Dallas, TX	268	9	43	-6
35	Portland, OR	181	8	53	-9
36	Baltimore, MD	172	6	50	42
37	Fremont, CA	404	4	23	1
38	Emeryville, CA	414	4	21	15
38	Pittsburgh, PA	237	2	135	-7
40	Culver City, CA	682	2	25	-10
41	Somerville, MA	280	4	25	0
42	Durham, NC	167	5	39	-4
43	Campbell, CA	239	5	24	0
44	San Carlos, CA	258	7	20	0
44	Wilmington, DE	141	9	28	14
46	Arlington, VA	113	9	27	20
47	Los Altos, CA	158	3	35	-7
48	Florence-Graham, CA	57	13	48	33
49	Jersey City, NJ	304	4	14	21
50	Nashville-Davidson, TN	128	3	41	-2
51	Miami, FL	120	5	24	18
52	Ann Arbor, MI	109	3	41	-20
52	Tampa, FL	328	2	20	28
54	Indianapolis city, IN	80	6	32	-20
55	Raleigh, NC	73	7	33	-4
56	Milpitas, CA	159	5	14	48
57	Carlsbad, CA	114	3	24	-16
58	New Haven, CT	196	2	18	13
59	Lincoln, NE	177	2	18	35
60	King of Prussia, PA	130	3	16	40
61	Sandy Springs, GA	363	2	12	-1
62	Sacramento, CA	104	3	16	51
63	Walnut, CA	145	2	17	8
64	Charlotte, NC	596	1	21	-20
64	Goleta, CA	282	2	11	58
66	Tysons Corner, VA	77	2	26	-17
67	Newton, MA	96	2	16	84
68	El Segundo, CA	102	2	15	-3
69	Newport Beach, CA	452	1	13	34
69	Phoenix, AZ	58	2	18	-23
71	Rockville, MD	128	2	11	142
72	Cupertino, CA	64	2	17	40
73	St. Louis, MO	37	2	35	-12
74	Hawthorne, CA	2,336	2	5	53
75	Burlington, MA	32	4	21	-21
76	Minneapolis, MN	25	5	23	-17
77	Scottsdale, AZ	103	1	16	21
78	Kirkland, WA	52	2	11	100
79	North Fair Oaks, CA	306	2	5	147
80	Framingham, MA	107	1	15	12
81	Cary, NC	1,793	1	6	358
82	Carmel, IN	32	3	12	29
83	Plano, TX	145	1	10	-16
84	Cleveland, OH	19	3	23	46
85	Eden Prairie, MN	269	1	7	192
86	West Hollywood, CA	29	2	13	-31
87	Pasadena, CA	22	2	18	-31
88	St. Petersburg, FL	57	2	6	263
89	South Plainfield, NJ	160	3	4	539
90	Gaithersburg, MD	138	1	7	-19
91	Newark, CA	97	1	8	95
91	Pleasanton, CA	17	3	16	-28
93	Orlando, FL	31	2	9	121
93	Rochester, NY	50	1	12	-17
95	Wellesley, MA	126	1	7	-24
96	Hillsborough, CA	234	2	4	532
97	University, FL	189	2	4	278
98	Madison, WI	14	2	30	-13
99	Santa Barbara, CA	69	1	8	7
100	Boca Raton, FL	65	1	8	57
101	St. Paul, MN	52	1	9	156
102	Mercer Island, WA	151	2	4	47
103	Mill Valley, CA	19	3	10	28
104	Woburn, MA	32	1	14	-57
105	Albuquerque, NM	11	3	20	-1
106	Alameda, CA	21	2	9	-17
107	Aliso Viejo, CA	30	1	12	1
108	New Orleans, LA	32	1	11	-24
109	Addison, TX	22	2	8	284
110	Marina del Rey, CA	24	3	6	92
111	Dover, DE	23	3	6	429
112	Boise City, ID	20	2	8	3
113	Skokie, IL	16	3	8	103
114	Lake Forest, CA	52	1	6	355
115	Albany, NY	11	4	10	3
116	Richmond, VA	24	1	11	47
117	Nashua, NH	71	1	5	322
118	Beverly Hills, CA	14	2	10	-39
119	Bend, OR	35	1	7	129
120	Providence, RI	18	1	13	-4
121	Irving, TX	26	1	8	307
122	Lewes, DE	20	3	5	169
123	Charleston, SC	51	1	5	15
124	Chapel Hill, NC	23	2	5	416
125	Solana Beach, CA	46	1	5	175
126	Long Beach, CA	23	2	5	414
127	Centennial, CO	23	2	5	204
128	Birmingham, AL	25	1	7	95
129	Reston, VA	7	2	18	-12
130	Fort Collins, CO	42	1	5	165
131	Santa Fe, NM	14	2	7	-17
132	Calabasas, CA	27	1	6	44
133	Coral Gables, FL	36	1	5	137
134	Alpharetta, GA	9	2	10	266
134	Santa Clarita, CA	65	1	4	256
136	Stanford, CA	11	2	7	20
137	Omaha, NE	4	4	23	-41
138	Provo, UT	300	0	14	-86
139	Greenwood Village, CO	12	4	5	489
140	Eagleview, PA	55	1	4	109
140	Hayward, CA	234	0	16	-65
142	Northbrook, IL	24	2	4	253
143	Lexington, MA	220	0	14	-81
144	Burlington, VT	12	1	10	6
145	Gainesville, FL	42	1	4	232
145	Morrisville, NC	19	1	6	62
147	Charlottesville, VA	11	1	11	22
147	Westport, CT	19	1	6	240
149	Missoula, MT	23	1	5	154
150	West Palm Beach, FL	23	1	5	106
151	San Antonio, TX	8	1	13	-63
152	Hoboken, NJ	12	2	5	337
153	Draper, UT	15	3	4	591
154	Foster City, CA	293	0	8	-86
155	Winter Park, FL	63	1	3	473
156	Bedford, MA	15	1	6	-54
157	Redmond, WA	272	0	8	-26
158	Fayetteville, AR	6	2	7	135
158	Union City, CA	17	2	4	382
160	Basking Ridge, NJ	57	1	3	245
160	Creve Coeur, MO	182	0	9	-35
162	San Bruno, CA	250	0	8	-1
163	Daly City, CA	5	2	8	4
163	Tucson, AZ	7	1	11	53
165	Industry, CA	52	1	3	463
166	San Ramon, CA	77	0	13	49
167	Fulton, MD	10	1	8	-33
168	Huntington Beach, CA	45	1	3	321
169	Farmington, CT	4	2	9	249
170	Memphis, TN	2	2	25	68
171	Cottonwood Heights, UT	11	1	6	-72
171	San Juan Capistrano, CA	5	1	14	197
173	Watertown Town, MA	137	0	8	-91
174	Glendale, CA	7	1	9	226
175	Portland, ME	9	1	7	-34
176	Santa Cruz, CA	625	0	5	263
177	Arlington, MA	7	2	5	58
178	Paradise, NV	6	3	5	450
179	Lehi, UT	6	1	9	-102
179	Mesa, AZ	20	1	4	128
179	Portsmouth, NH	20	1	4	361
182	Chandler, AZ	5	2	6	307
183	Newark, DE	6	1	9	-31
183	Trumbull, CT	18	1	4	357
185	San Luis Obispo, CA	10	2	4	443
186	Hoover, AL	30	1	3	222
187	Fort Worth, TX	17	1	4	95
188	Kansas City, MO	2	2	11	17
189	Vista, CA	26	1	3	77
190	White Plains, NY	11	3	3	1034
191	San Leandro, CA	186	0	5	147
192	Reno, NV	5	1	8	208
193	Corte Madera, CA	24	1	3	435
194	Saratoga, CA	79	0	6	-100
195	North Bethesda, MD	59	1	2	549
195	Orem, UT	4	2	5	266
197	Silver Spring, MD	4	2	5	-58
198	Poway, CA	55	1	2	546
199	Bethlehem, PA	2	2	9	51
200	Manhattan Beach, CA	5	1	6	93

Trends for Startup Cities

Breaking Records

Twenty-twenty was a record year in terms of dollars invested, though a small number of very high-value deals enlarged the aggregate amount. A trend of billion-dollar rounds that began with Lyft in 2017 has continued into 2020. (Yes, Facebook had a billion-dollar round in 2011, but there weren’t any others for six years.) Some billion-dollar rounds are, at least notionally, seed or early-stage investments, like those into JUUL Labs, Quibi, and Rivian Automotive. Most are later stage rounds supporting firms like Uber, WeWork, and Epic Games as they try to find their exits.

There were four billion-dollar rounds in 2020. These included investments in Rivian, Waymo, SpaceX, and Epic, who had already taken a billion-dollar round in 2018. Epic Games is the main force behind Cary’s, and North Carolina’s, drive up the rankings.

COVID-19 Bump

Even without the billion-dollar rounds, U.S. venture investment levels are now above the dot-com boom’s heights in both nominal and real terms: Both 2018 and 2019 beat 2000 in nominal investment amounts. Twenty-twenty was the first to boast a higher amount than 2000’s U.S. venture capital investment adjusting for inflation.

There were reasons to think that the COVID-19 pandemic might cause a retrenchment in investment. In particular, the U.S. stock markets collapsed from February 12th to November 16th, 2020. Concern over returns to capital might have led L.P.s to reconsider new investments in alternative assets. There was also speculation that some L.P.s might renege on existing commitments to venture funds. Instead, the market for venture capital seems to have had a COVID-19 bump.

Concentration Among Startup Cities

America has had a long-term trend towards greater concentration of venture capital dollars, deals, and startups within the top 10 startup cities. Over the last decade, the share of venture capital dollars invested in the top ten startup cities rocketed up. It went from about 30% in 2010 to almost 60% in 2018. Other measures of venture activity followed a similar trend. But this seems to have changed in 2020.

Greater concentration could be problematic if some cities are at or past their efficient capacity. For example, Palo Alto has the highest startup density in the U.S. and seems over-crowded with startups. (New York, though, looks like it still has plenty of room for more.) Then greater equality in venture capital across startup cities would enhance growth. So, it’s somewhat enheartening to see the top 10 startup cities’ share back below 50%. Presumably, lockdowns, travel restrictions, and everyone getting used to teleconferencing reduced the benefits to locating in the Bay Area or Route 128 ecosystems.

Is Houston a Startup City?

Houston, Texas, ranked 22nd among U.S. startup cities in 2020. That’s the Space City’s highest ranking since 2002. In 2016, it was ranked 54th, so Houston’s startup ecosystem has had an astronomical recent rise. Moreover, the city’s 2020 ranking components are now fairly evenly balanced: Houston ranked 19th for new deal flow, 24th for dollars invested, and 25th for active startups. (That new deal flow is driving Houston’s ranking suggests good things to come; follow-on rounds should assure more money and active startups in subsequent years.)

Why am I still reluctant to describe Houston as a startup city? Because Houston is the 4th largest metro area by population, the 7th largest by GDP, and boasts that it is home to 4,600 energy-related firms. It contributes just under half a trillion dollars to the U.S. economy each year.

In 2020, H-town added 13 new startups to its venture ecosystem, bringing its total headcount of actively-financed firms to 71. These firms collectively received a little over $650m. So, until someone works out how high-growth-high-tech and oil-and-gas go together, Houston will remain just the Energy Capital of the World. (Also, the space sector moved to California several decades back.)

A Historic Fall

I have written extensively about Houston’s fall in the rankings and the policy initiatives that exacerbated it, as well as the attempts to reform Houston’s startup economy that followed.

The short story is that Houston realized it had a problem with creating and retaining new high-growth, high-tech firms in the late 1990s. The city’s “solution,” announced in 1998 and launched in 1999, was the Houston Technology Center. The HTC then lead Houston to the largest and fastest ranking decline of any former top 20 startup city.

Fortunately, starting around 2011 and picking up pace in 2014, some new initiatives took hold in Houston. These were a mix of private firms and non-profits that were (mostly) unaffiliated with the HTC. Then, in 2016 a group of VCs and serial entrepreneurs with ties to the city started Station Houston, the city’s first startup hub.

Policy Takes Time

It takes a couple of years for a new initiative to take effect: On average, a startup is just under a year and a half old when it receives its first seed round, and over two and a half if its first round is a Series A. So the effects of policy in 2018 are just now starting to be felt. Twenty-eighteen was a big year for bad startup policy in Houston:

The City of Houston Task Force on Technology and Innovation was dissolved.
The HTC was repurposed and rebranded as Houston Exponential, and then took over control of the city’s startup policy process.
Rice University announced that it was (unilaterally) creating an innovation district around one of its properties in Midtown. (I estimated the long-term economic cost as more than $600m.) It later named it the Ion.
Station Houston’s board voted in a high-principal as their new CEO, turned Station into a non-profit, and announced Station was moving into the Ion and outsourcing its operations.

Market Forces

Of course, many other things were going on in Houston’s startup ecosystem in or around 2018, and some of them were positive. So, on balance, it looks like Houston’s prognosis is fair-to-good, despite its abysmal policy history.

First, deal flow surged to record highs in 2018. Houston was getting around six new deals each year from 2010 to 2016. In 2017, Houston got nine first-time venture investments, and in 2018 it got 17, before falling back to 13 new deals each year in 2019 and 2020. The two drivers of this boom were Station’s efforts before its takeover and Houston’s biotech scene, which finally found some legs: Liongard and Arundo Analytics were both Station residents that secured a first-round of VC in 2018 (and went on to raise almost $50m combined), and life science startups Vivante Health, Wellnicity, and Trilliant Surgical all got their first rounds that year. (Data Gumbo, a client of The Cannon, also got its first round in 2018.)

Second, many for-profits, non-profits, academics, and policymakers across the state were working hard to build high-growth, high-tech expertise and capabilities in Houston in 2018. This effort has translated into a wealth of new initiatives, programs, and ecosystem support organizations in 2020. Credit is particularly due to Lori Vetters, who led efforts to reach out to non-Houston accelerators despite being shunned by many Houston startup scene members for her lack of high-growth, high-tech pedigree. (Lori replaced Walter Ulrich and tried to reform the HTC.) Both the Texas Foundation for Innovative Communities in Austin and my team at the McNair Center for Entrepreneurship and Innovation also deserve honorable mentions.

Building Better Biotech

The Texas Medical Center Innovation Institute (TMC-II) got off to a rough start with its various initiatives, which included the TMCx, JLabs@TMC, and the AT&T Foundry. For instance, publicly-traded firms generally don’t attend startup accelerator programs, but Bellicum Pharmaceuticals was an early client of JLabs@TMC. Bellicum was the HTC’s sole IPO and listed on the NASDAQ. (It’s worth noting that JLabs@TMC has removed Bellicum from their publicly-available client lists. And that the TMC-II still appears to report Bellicum’s IPO proceeds in their “raised to date” stat.)

Nevertheless, the TMC-II’s program quality increased materially in late 2016 and reached a decent standard a few years later. Furthermore, John Reale, the former CEO of Station Houston, founded Integr8d Capital and shifted his focus to life science startups in 2018. He later became the entrepreneur-in-residence at the TMC-II as well. J.R. was crucial to Houston’s first market-driven reformation effort and is likely an essential factor in its second one too.

The Green Mountain State

I also keep tabs on things going on in Vermont’s startup scene. Vermont is home to a tiny but growing startup ecosystem. In the 1990’s Vermont got around one new deal a year, and by the 2010s, Vermont averaged two and a half new deals a year. The U.S. doubled its deal flow over the same period, so, proportionately, Vermont is outpacing U.S. national growth. But in absolute terms, Vermont doesn’t have much. Since its first deal almost forty years ago, Vermont has received 125 rounds of VC., totaling just over $400m, into 56 companies. A top 30 city can comfortably achieve those numbers in a few months.

Agglomeration Powers Startup Cities

Historically, Vermont’s startups were mostly spread out down the I-89 east from Burlington. Vermont’s startup success stories include Dealer.com and Seventh Generation in Burlington, SunCommon in Waterbury, Keurig Green Mountain, which was up the road in Stowe, and Northern Power Systems in Barre. The jewel in the Green Mountain crown, though, is Casella Waste Systems in Rutland. (Casella has a surprising number of patents.)

Most of Vermont’s venture capital has gone into companies in Burlington though, which has increasingly dominated the state’s tech scene. This trend towards fewer startups outside of the Queen City is both good and bad. In the long-term, denser agglomeration is a powerful force for startups. But in the short-term, having fewer non-Burlington startups means having fewer startups. Until Burlington ups its game, or non-Burlington startups return, the state looks set to stay in the ebb part of its gentle ebb-and-flow in the bottom end of the U.S. startup state rankings.

Up and Down

Burlington is the only place in Vermont to make the top 200 startup cities list in recent history, and it has done so every year from 2014 to 2020, except 2016. Rutland, Vermont, made the top 200 list in 1994. Twenty-twenty is Burlington’s second-best year ever. (It has lagged well behind Burlington, Massachusetts since the 1980s, but has bested Burlington, North Carolina, handily every year since 1998.) But, with a rank of 144th and just one new deal and two follow-on rounds, it’s hard to describe the People’s Republic of Burlington as a real startup city.

Among the 50 states, the District of Columbia, and Puerto Rico, Vermont has consistently ranked in the mid to late-thirties. In 2020, there were no new deals and no follow-on rounds outside Burlington, and Vermont takes 40th place in the U.S. startup state ranking.

Startup Cities Ranking Methodology

The startup cities ranking uses an open methodology that anyone can use and recreate, and data on the top 200 startup cities from 1985 to 2020 is freely available.

This article’s results are based on data from Thomson Reuter’s VentureXpert, who survey venture capitalists. The rankings consider only data on “growth venture capital. ” Growth venture capital is seed, early, or later-stage investment into privately-held, (predominantly) high-tech high-growth startups. (The main alternative is transactional venture capital, which includes investments into publicly-traded firms and large non-tech incumbents).

The reported rankings are a rank-of-ranks over three measures that capture related but different aspects of a city’s startup ecosystem:

The amount of venture capital dollars invested.
The number of new deals (i.e., startups receiving VC for the first time).
The number of actively-funded startups (i.e., startups receiving stages of VC and working towards an exit).