Macroeconomics Vermont

A Solution to Vermont’s Declining Economy

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

Graph showing Vermont's declining economy with growth relative to the US average rate heading below 50%.

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!

Rankings Startup Ecosystems

The Top 200 U.S. Startup Cities for 2020

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.

1San Francisco, CA12,4822161,3280
2New York, NY7,0561951,1780
3Boston, MA3,651413040
4Cambridge, MA4,565402270
5Seattle, WA1,850412302
6San Diego, CA3,230381962
7Palo Alto, CA1,35231259-2
8Mountain View, CA4,645211434
9Los Angeles, CA1,27929248-3
10Austin, TX79927229-1
11Chicago, IL818261891
12San Jose, CA94523127-1
13Irvine, CA3,077145919
14South San Francisco, CA1,78114724
15Philadelphia, PA75713131-5
16Redwood City, CA1,609111111
17Santa Clara, CA76014902
18Denver, CO70916827
19Menlo Park, CA6241695-5
19San Mateo, CA87511103-5
21Atlanta, GA55117102-5
22Houston, TX65613712
23Santa Monica, CA4521294-3
24Berkeley, CA616125412
25Boulder, CO4141373-2
25Oakland, CA4291371-4
27Columbus, OH57395023
27Sunnyvale, CA372985-5
29Waltham, MA49674127
30Salt Lake City, UT4708357
30Washington, DC28110534
32Bellevue, WA657345-5
33Burlingame, CA593531-4
34Dallas, TX268943-6
35Portland, OR181853-9
36Baltimore, MD17265042
37Fremont, CA4044231
38Emeryville, CA41442115
38Pittsburgh, PA2372135-7
40Culver City, CA682225-10
41Somerville, MA2804250
42Durham, NC167539-4
43Campbell, CA2395240
44San Carlos, CA2587200
44Wilmington, DE14192814
46Arlington, VA11392720
47Los Altos, CA158335-7
48Florence-Graham, CA57134833
49Jersey City, NJ30441421
50Nashville-Davidson, TN128341-2
51Miami, FL12052418
52Ann Arbor, MI109341-20
52Tampa, FL32822028
54Indianapolis city, IN80632-20
55Raleigh, NC73733-4
56Milpitas, CA15951448
57Carlsbad, CA114324-16
58New Haven, CT19621813
59Lincoln, NE17721835
60King of Prussia, PA13031640
61Sandy Springs, GA363212-1
62Sacramento, CA10431651
63Walnut, CA1452178
64Charlotte, NC596121-20
64Goleta, CA28221158
66Tysons Corner, VA77226-17
67Newton, MA9621684
68El Segundo, CA102215-3
69Newport Beach, CA45211334
69Phoenix, AZ58218-23
71Rockville, MD128211142
72Cupertino, CA6421740
73St. Louis, MO37235-12
74Hawthorne, CA2,3362553
75Burlington, MA32421-21
76Minneapolis, MN25523-17
77Scottsdale, AZ10311621
78Kirkland, WA52211100
79North Fair Oaks, CA30625147
80Framingham, MA10711512
81Cary, NC1,79316358
82Carmel, IN3231229
83Plano, TX145110-16
84Cleveland, OH1932346
85Eden Prairie, MN26917192
86West Hollywood, CA29213-31
87Pasadena, CA22218-31
88St. Petersburg, FL5726263
89South Plainfield, NJ16034539
90Gaithersburg, MD13817-19
91Newark, CA971895
91Pleasanton, CA17316-28
93Orlando, FL3129121
93Rochester, NY50112-17
95Wellesley, MA12617-24
96Hillsborough, CA23424532
97University, FL18924278
98Madison, WI14230-13
99Santa Barbara, CA69187
100Boca Raton, FL651857
101St. Paul, MN5219156
102Mercer Island, WA1512447
103Mill Valley, CA1931028
104Woburn, MA32114-57
105Albuquerque, NM11320-1
106Alameda, CA2129-17
107Aliso Viejo, CA301121
108New Orleans, LA32111-24
109Addison, TX2228284
110Marina del Rey, CA243692
111Dover, DE2336429
112Boise City, ID20283
113Skokie, IL1638103
114Lake Forest, CA5216355
115Albany, NY114103
116Richmond, VA2411147
117Nashua, NH7115322
118Beverly Hills, CA14210-39
119Bend, OR3517129
120Providence, RI18113-4
121Irving, TX2618307
122Lewes, DE2035169
123Charleston, SC511515
124Chapel Hill, NC2325416
125Solana Beach, CA4615175
126Long Beach, CA2325414
127Centennial, CO2325204
128Birmingham, AL251795
129Reston, VA7218-12
130Fort Collins, CO4215165
131Santa Fe, NM1427-17
132Calabasas, CA271644
133Coral Gables, FL3615137
134Alpharetta, GA9210266
134Santa Clarita, CA6514256
136Stanford, CA112720
137Omaha, NE4423-41
138Provo, UT300014-86
139Greenwood Village, CO1245489
140Eagleview, PA5514109
140Hayward, CA234016-65
142Northbrook, IL2424253
143Lexington, MA220014-81
144Burlington, VT121106
145Gainesville, FL4214232
145Morrisville, NC191662
147Charlottesville, VA1111122
147Westport, CT1916240
149Missoula, MT2315154
150West Palm Beach, FL2315106
151San Antonio, TX8113-63
152Hoboken, NJ1225337
153Draper, UT1534591
154Foster City, CA29308-86
155Winter Park, FL6313473
156Bedford, MA1516-54
157Redmond, WA27208-26
158Fayetteville, AR627135
158Union City, CA1724382
160Basking Ridge, NJ5713245
160Creve Coeur, MO18209-35
162San Bruno, CA25008-1
163Daly City, CA5284
163Tucson, AZ711153
165Industry, CA5213463
166San Ramon, CA7701349
167Fulton, MD1018-33
168Huntington Beach, CA4513321
169Farmington, CT429249
170Memphis, TN222568
171Cottonwood Heights, UT1116-72
171San Juan Capistrano, CA5114197
173Watertown Town, MA13708-91
174Glendale, CA719226
175Portland, ME917-34
176Santa Cruz, CA62505263
177Arlington, MA72558
178Paradise, NV635450
179Lehi, UT619-102
179Mesa, AZ2014128
179Portsmouth, NH2014361
182Chandler, AZ526307
183Newark, DE619-31
183Trumbull, CT1814357
185San Luis Obispo, CA1024443
186Hoover, AL3013222
187Fort Worth, TX171495
188Kansas City, MO221117
189Vista, CA261377
190White Plains, NY11331034
191San Leandro, CA18605147
192Reno, NV518208
193Corte Madera, CA2413435
194Saratoga, CA7906-100
195North Bethesda, MD5912549
195Orem, UT425266
197Silver Spring, MD425-58
198Poway, CA5512546
199Bethlehem, PA22951
200Manhattan Beach, CA51693

Trends for Startup Cities

US Growth Venture Capital 1985-2020
Percentage of VC in the Top 10 Cities
Houston, TX, Startup City Rank 1985-2020
Vermont Startup U.S. State Rank 1985-2020

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 UberWeWork, 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:

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 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).