Why Small Business Communities Grow In Clusters

I’ve long had an interest in developing a new way of looking at startup communities, based less on the usual government statistics (tax and crime rates, income growth and so forth) than on a cluster effect: that groups of entrepreneurs tend to attract more entrepreneurs. So, several months ago, I turned to Forbes.com contributor Darian Shirazi, founder of Radius, a San Francisco technology company that collects small business data in the U.S. and offers a marketing platform to corporate clients selling to that sector. Radius was the ideal group to generate a list of the best cities to start a business, given its ability to gather scads of information and its novel methodology for sifting the data. The result is a series of guest posts by Lisa Fugere, who manages content strategy and creation at Radius. She has put together the list of best places, along with three other posts on the cluster phenomenon, small businesses shaking up their communities and outlier regions that are mini-hotbeds of entrepreneurship.

Tradition has it that where big businesses are rooted, vibrant small business communities follow. It happened in Harrison, N.Y., when Mastercard and PepsiCo set up shop. It happened in Redmond, Wash. after Microsoft moved in. It’s happening in Greenville, S.C., where BMW built an SUV manufacturing plant.
New Radius research reveals that it isn’t necessarily so. Our ranking of the most hospitable cities to startups isn’t based on their economic growth, but on factors that predict community engagement and access to resources. Turns out that small businesses tend to attract other small businesses, creating their own, distinct ecosystems.

Take the case of Chicago, number 10 on our list of the Best Places To Launch A Startup in 2014. Industrial to its very origins, Chicago isn’t breeding a lot of new businesses that are reinventing heavy manufacturing. Rather, Second small business community is growing because its small businesses support each other. Shiftgig, for instance, is an online hiring and job search engine for local service industries, helping folks on both sides of the interview process save time. It’s a platform that dovetails nicely with another growth sector – restaurants – which are on the upswing.
Most businesses in Dallas exist to serve large corporations. Beyond the drilling and oil refineries, you also find divisions of such large technology companies as SAP and Oracle—and legions of companies that support them, most with fewer than 50 people on the payroll. Within that small business community are pint-size IT support companies, staffing firms, app development companies, Web service consultants and others, all offering services to much larger corporations. That said, there are a growing number of startups that tap into small businesses. Among them: Tech Wildcatters, a mentor-driven technology startup accelerator led by Dallas area entrepreneurs. As companies like Tech Wildcatters bring resources specifically to small businesses, Dallas is becoming an increasingly attractive draw for entrepreneurs.
A similar phenomenon of small businesses attracting other small businesses is taking place in San Francisco – in the shadow of giants like Google, Facebook, Twitter and Square. Example: Zaarly, an online e-commerce marketplace that offers a location-based, buyer-driven platform that connects local craftspeople and consumers. Zaarly also helps makers create online marketplaces, a practice that allows entrepreneurs to launch and expand their business ideas without the hassle of brick-and-mortar stores and expensive Web consulting. That this trend is on the rise is hardly shocking. BIA Kelsey reports that small businesses plan to increase their spending by 3% over the next 12 months.
One last example of the cluster effect comes from Denver, home to some of the most Web-savvy small businesses and consumers in the country. A good proxy for this phenom is Roximity,which offers location-based ad targeting. Brands use Roximity to drive foot traffic, launch surgically precise mobile campaigns and access real-time campaign results. Its success highlights the enthusiasm of Denver’s local businesses to embrace mobile marketing, as well as the positive reception with which its residents greet location-based marketing.
Our view of small businesses is changing as we learn more about them. Never have we had so much access to information about where they cluster–and why. As entrepreneurs build businesses that enable other small businesses, the volume of new business creation will grow, and those new small businesses will cluster around the cities that offer the warmest welcomes: those with like-minded businesses that understand their provide services and products specialized for their needs.