The most promising city for new start-ups may be known more for its dairy industry than its small business scene, but its educated workforce, low cost of living and history of recent venture capital deals make it an ideal place for entrepreneurs to strike out on their own.
Madison, Wisconsin, was named the top city with start-up potential, according to a new report from Fundera. The analysis looked at mid-sized cities with fewer than 500,000 residents, with the best combination of a large educated workforce and affordability in order for a small business to thrive.
Plano, Texas, ranked second, while St. Paul, Minnesota, rounded out the top three.
There's reason for founders to look to smaller cities for their latest ventures. While San Francisco and New York receive nearly half of all venture capital investment in the country, a high cost of living makes it hard for entrepreneurs to start businesses there, and workers can be stretched thin even on six-figure salaries. Even smaller start-up scenes that have cropped up in response, like Austin, Texas, have seen real-estate prices skyrocket thanks to an influx of newcomers.
As a result, workers are moving beyond city limits. A 2018 Gallup poll found a greater share of Americans would prefer to live in a small city or a suburb, over a big city. Millennials especially are now fleeing big cities for greener, and more affordable, pastures.
To create its ranking, Fundera gave the most weight to the city's population with a bachelor's degree or higher, according to the U.S. Census Bureau. The analysis also considered the average rent on office space, year-over-year rent growth, median household income and living wage. (A living wage refers to the hourly rate that would allow residents to live comfortably in a city, based on typical expenses.) Finally, the report used PwC data to factor in the number of venture capital deals that took place in a city from 2016 to 2019.
The report found that it's not just tech start-ups seeing a boost across the country.
For example, No. 1-ranked Madison has seen significant start-up activity around mobile and telecommunications companies. Health-care start-ups are big in Durham, North Carolina, thanks to being part of the Research Triangle anchored by North Carolina State University, Duke University and University of North Carolina at Chapel Hill. Meanwhile, industrial and energy start-ups are prominent in Scottsdale and Chandler, Arizona.
"The cities did not have a concentration of one particular industry, but rather all have a variety of different types of start-ups," Priyanka Prakash, senior staff writer at Fundera, told CNBC Make It. "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 start-up hubs.
"They don't want to get boxed in with one industry, but rather attract a wide variety of small businesses," she said.
Local government funding can also encourage a diverse set of business owners to open shop. Cincinnati, Ohio, for example, has found success in its incubators focused on empowering minority small business owners.
This is good news not just for entrepreneurs who may set up shop in these up-and-coming cities, but also for those looking to relocate away from pricey ZIP codes.
"For new college grads, or anyone looking to make a career move or get into the start-up world, these cities represent a good opportunity," Prakash said. "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 are Fundera's top 11 untapped cities with start-up potential, along with what people earn there.
1. Madison, Wisconsin
Median household income: $64,101
Living wage: $12.44
VC deals since 2016: 73
2. Plano, Texas
Median household income: $93,012
Living wage: $11.71
VC deals since 2016: 164
3. St. Paul, Minnesota
Median household income: $59,033
Living wage: $12.34
VC deals since 2016: 146
4. Cincinnati, Ohio
Median household income: $43,585
Living wage: $10.93
VC deals since 2016: 73
5. Durham, North Carolina
Median household income: $54,840
Living wage: $12.15
VC deals since 2016: 159
6. St. Louis, Missouri
Median household income: $43,889
Living wage: $11.55
VC deals since 2016: 28
7. Arlington, Texas
Median household income: $63,091
Living wage: $11.71
VC deals since 2016: 164
8. Chandler, Arizona
Median household income: $85,527
Living wage: $11.90
VC deals since 2016: 122
9. Henderson, Nevada
Median household income: $72,884
Living wage: $11.32
VC deals since 2016: 27
10. Kansas City, Missouri (tie)
Median household income: $54,372
Living wage: $11.29
VC deals since 2016: 56
10. Scottsdale, Arizona (tie)
Median household income: $88,071
Living wage: $11.90
VC deals since 2016: 122
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