Are Smaller Metros Becoming Competitive with Big Metros?

Governor Terry McAuliffe (left) and Steve Case

Governor Terry McAuliffe (left) and Steve Case. Photo credit: Richmond Times-Dispatch

by James A. Bacon

The flight of promising startup companies from smaller cities to big ones “is beginning to change,” AOL co-founder Steve Case said yesterday during an entrepreneurship event in downtown Richmond yesterday. Regions such as Richmond can avoid losing startups to bigger metros, he told the Richmond Times-Dispatch, “if you build up the right infrastructure in terms of capital and talent.”

You can take Case’s words with a heavy helping of salt — he was on a cross-country bus tour to promote entrepreneurship and his new book, “The Third Wave,” in which he argues that the third phase of the digital revolution is integrating the internet “in seamless, pervasive and sometimes even invisible ways” throughout our lives. This third wave, he contends, will revolutionize traditional sectors such as energy, health care, education, transportation, and food.

Currently, about 75% of all venture capital deals are consummated in just three states — California, New York and Massachusetts. “That does not reflect the distribution of great entrepreneurs with great ideas,” Case said. “There are a lot of great entrepreneurs in Virginia.”

The T-D article provided little explanation of why Case thinks why smaller cities will fare better than the past, other than citing the rise of crowd-funding, which allows average investors to find and invest in small startups.

Indeed, Case’s prognostication makes quite a contrast to a post I published earlier this week, “A New Map of Economic Growth,” which suggested new business formation is becoming more concentrated in a few large cities, not less. There is a large body of economic theory to suggest that, all other things being equal, larger metropolitan regions enjoy a big competitive advantage in the Knowledge Economy over smaller ones. Both job seekers and the companies that hire them prefer doing business in larger labor markets where they have more choices.

There wasn’t enough in the T-D article to make Case sound terribly persuasive. However, Case is one shrewd guy. He built AOL into an internet powerhouse and then, seeing that his subscription-driven business model was living on borrowed time, sold out to Time Warner at an extraordinary premium.

I’d like to think that there’s a strong case to be made for a smaller-metro revival in fortune. It just can’t be divined from Case’s remarks yesterday.

However, Governor Terry McAuliffe left no doubt in his remarks what he thought the secret is — a business-friendly environment and workforce training. He said his goal is to revamp high school education to produce graduates better prepared for the 21st century economy. “My goal is when every child gets out of high school that they have a skill to match the jobs that are out there today.”