Entrepreneurs Find Advantages in Locating Together

Silicon Valley and Boston draw new businesses because startups thrive by proximity. Image: Dreamstime View full size image

There's a good reason why entrepreneurs flock to startup meccas like the Silicon Valley or Boston: It's where other entrepreneurs are. But why does that matter so much?

A new study suggests one good reason: thickness.

The thickness of an area, or market, is defined by the concentration of resources, such as skilled workers, that are critical to the success of startup activities , explains Robert Helsley at the University of California, Berkeley’s Haas School of Business. A new study by Helsley found that thicker markets offer a support system that permits more specialized entrepreneurs, those whose prior experiences are concentrated in one industry or activity, to operate more profitably than they would in a smaller entrepreneurial economy .

So while you might be best off starting your plumbing business in your home town, if you plan to be the next Bill Gates, you might want to get out of Dodge.

"There are many benefits to having entrepreneurs cluster in one place,"  Helsley said in a recent statement.

Helsley and his colleague built a model based on a project taking place in one city, with all of the project’s tasks being carried out simultaneously. The model showed that the economies of urban agglomeration — the benefits of extended cities and towns of an urban center — help produce not only higher quality results but also shorter project completion times.

For example, the time that it takes an entrepreneur to receive initial funding from a venture capitalist is shorter for projects initiated in large clusters of related activity.

The researchers also discovered that a natural hierarchy of cities considered desirable by entrepreneurs emerges based on the level and complexity of activities that occur in a given city. There is a natural relationship between the thickness of markets and the complexity of the activities that they can support. The study determined while many types of cities can support basic entrepreneurial activities, the most complex projects are only feasible in large clusters where the benefits of thick markets are most pronounced.

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