Where a business is headquartered can make a huge difference in the skill level of your employees, in raising capital and attracting customers — as well as have a significant impact on your bottom line. Depending on the type of business and its target market, some factors should hold more weight than others.
Corporate and personal taxes, for example, can vary greatly by state. As the Tax Foundation notes, for example, some states have no traditional corporate income tax (like Texas, Nevada and Colorado), while others collect hundreds of dollars per capita. New York — home to a thriving VC and financial community — also has one of the highest tax burdens in the country, though the state has made some efforts to address it.
And while taxes are not the only consideration a company should give when deciding where to locate, the significant variance can affect the bottom line. Texas policymakers have exploited this differential in a concerted effort to lure companies from California and New York to startup-friendly Austin and Dallas. Texas Gov. Rick Perry claimed in March that California companies had created more than 14,000 jobs in the state.
Securing investment capital
When most people think of startups, they think Silicon Valley and New York City. It’s true that much of the money and talent are located in these two hubs, but the upside is that our increasingly connected world allows investors and entrepreneurs to connect more and more online.
However, there is some research that suggests that there is location bias by venture capital firms. Venture capital and private equity firms tend to congregate in certain areas — notably Silicon Valley, New England and New York. Young companies located in these hubs are able to attract technical talent and maintain close proximity to their investors and mentors.
Real estate and labor costs
On the other hand, real estate in these hubs has become unaffordable for many, and high state and local taxes and labor costs quickly consume startup capital. These factors have led to other cities taking advantage of their smaller tax bases and educated labor forces to attract cutting-edge companies.
These cities, including Austin, Dallas, Kansas City and Salt Lake City are among the fastest-growing hubs for high-tech startups in the country, according to a 2013 report by the Kauffman Foundation. The report also mentioned that the presence of established companies in the area was among the most important factors in the success rate of startups, even more so than having a major research university.
The top four states cited by the authors for startup success with respect to VC investment are New York, California, Texas and Massachusetts. Texas has made it a priority to attract new and established businesses over the last decade; today, the state ranks second in the number of Fortune 500 headquartered companies and recently passed California as the top exporting state in the U.S.
In short, choosing a headquarters is among the most important decisions a new company can make, but it’s not easy. Entrepreneurs should consider cost of labor, availability of talent, regulatory environment, tax and real estate costs, a supportive startup ecosystem and proximity to investors when deciding which part of the country is the best fit to start and to grow.
Craig Casselberry is the founder and president of Austin-based Quorum Public Affairs Inc., where he has managed more than 100 strategic communications projects for half of the Fortune 50 companies, issue coalitions, and federal, state and local public policy campaigns for corporate clients of all sizes. As a 20-year-veteran of the Texas political and business communities, Casselberry is a sought-after speaker and consultant, advising firms like AT&T, FedEx, Dell and Ford as well as early-stage companies on their growth strategies in Texas.