by Steffen Kammerer
A challenging funding environment is making it harder for tech companies to rev their growth engine, especially inside saturated mega-hubs. The number of deals done in Silicon Valley and San Francisco during the first quarter of this year dropped 31 percent from its most recent peak in early 2015.
To strike it big, more tech companies are turning to alternate tech growth centers like Indianapolis and Denver. Denver was one of the few regions that saw an uptick in funding during the first quarter, with examples like cybersecurity firm ProtectWise, which raised $25 million from investors.
Why are more tech companies gaining traction in smaller hubs? For starters, most companies don’t have a Silicon Valley budget. It may be easy for a tech giant to pay the average $102.16 per square foot price tag of office space in Menlo Park, CA, but that’s a much harder pill to swallow for smaller companies. Compare that figure to the national average for office space, which runs around $32.03 per square foot.
Talent is another issue. Nearly every company today is competing for tech workers. The technology skills shortage is at its highest level since the 2008 recession; 83 percent of hiring managers and recruiters report that difficulty finding and hiring tech talent has hurt their business. Some companies argue it’s worth it to pay a premium to be in hot markets that breed the top talent, but others argue you can find equally good people in more affordable locations.
More than seven million tech workers are employed across all US industries; and many of these jobs are surfacing in places you wouldn’t necessarily expect. Among the top 10 states for tech employment: Texas, Florida and Virginia. While California arguably remains the tech mecca, the sector’s aggressive growth in recent years has given rise to a diverse list of hot spots for opportunity.
Since real estate is one of the strongest indicators of growth, we took a look at leasing activity in the tech space to identify where the most action was happening. With most of them in growth mode, only 4.6 percent of tech companies were looking to shrink their needed office space, compared with 6.5 percent of the general U.S. market. The top five growth real estate markets include the usual suspects: Silicon Valley, Seattle-Bellevue, Boston, Chicago and San Francisco. But some of the cities further down the list were unexpected: Dallas, Indianapolis and Washington, D.C., among others.
What’s the attraction?
Markets like Northern Virginia are rising in popularity because growing tech companies can stretch their dollars further and still get access to a highly educated workforce. Northern Virginia has also taken steps to create more of a startup environment, opening more coworking spaces and incubators such as Eastern Foundry, which helps startups work with the federal government.
Indianapolis is perhaps a surprising spot, but a number of big tech brands grew up here including ExactTarget (acquired by Salesforce), Angie’s List and Interactive Intelligence (recently acquired by Genesys). Indianapolis-based Elevate Ventures is among the top five angel and seed investors to close the most deals in the first quarter of the year, providing local tech consulting firm Kinney Group with part of the $6 million it raised in March to help grow its business. A recent Brookings Institute report ranked Indianapolis seventh among only 14 US cities that have managed to increase their share of tech jobs in a statistically meaningful way, adding nearly 5,000 tech jobs in the last two years. Highly respected institutions, like Indiana University and Purdue University, are breeding grounds for the region’s high quality talent.
Denver has a healthy tech scene as well, and it draws tons of mtupillennials to the region. While Boulder historically served as the big tech center, more action has shifted to Denver. The cost of living in the area is has been rising, particularly in areas like LoDo and RiNo, but it’s still more cost efficient than Silicon Valley and San Francisco.
Staying power
The top five markets will remain the primary tech powerhouses and will be more likely to weather economic bumps. But our research found there are other surprisingly resilient markets, like Minneapolis. It ranked among the top 10 most resilient real estate markets for tech, scoring points for its strong pool of talent, highly educated workforce and innovation.
A big fish in a smaller pond
While no one can really replicate Silicon Valley, more cities are trying to create the right elements to support a thriving tech scene. For example, Dallas may not have a huge venture capital environment, but the opening of the Dallas US Patent and Trademark Office in 2015 and the subsequent “Dallas Innovates” push by the regional business chamber has helped to position the city as a center for innovation.
Cost sensitivities may be keeping more startups closer to their home base, but there are growing advantages to putting a stake in the ground in less saturated tech hubs: less noise allows companies to grab a bigger slice of the pie and gives them more room to find people willing to help them get off the ground.
These secondary markets will be essential to the sector’s future as tech becomes a core component of every industry and larger tech companies look to expand their reach through more locations.
Steffen Kammerer is senior vice president and lead of JLL’s Technology Practice Group
[Lead image source: Dallas Regional Chamber]