Friday, July 17, 2009


There is a new kid on the Pittsburgh entrepreneurial block, Nextburgh. New York City innovator Tim Marman is now promoting Pittsburgh. There is an impressive talent circulation between NYC and Pittsburgh. The reason is geographic arbitrage:

For an early-stage startup, talent and office space make up the most significant portion of your burn rate by far. Our hosting and development costs were virtually zero by comparison. I recently worked with a company that had one of the most aggressive (and perhaps unrealistic) growth plans I’ve ever seen. Even with an estimated $6,000/mo in server hosting, $10,000/mo in employee benefits and $10,000/mo in travel, over 90% of their expenses were office space and salaries.

And here’s the thing – you have the ability to control these costs, because location plays a major role. San Francisco and New York City are the two most expensive places to live in the United States which directly translates to a higher burn rate. For example, we raised around $80,000 for Notches last year. Much of this funding was used to hire an engineer at $65,000 – less than market rate in a competitive job market at the time, though perhaps still a little higher than you’d pay in San Francisco. We spent another $1,575 per month for rent on three desks in a shared office space. Without myself or my my co-founder collecting a salary, we were spending nearly $7,000 a month.

If we had started the company in Pittsburgh instead, our monthly costs would have been 30-40% less. Right off the bat, talent is at least 15-20% cheaper. Given the city’s affordability, you’re also more likely to find people willing and able to work for less relative salary and a greater slice of equity. Office space is much cheaper as well – 200-300 sq ft turnkey offices are available for less than we were paying for a single desk.

The main point is that while starting up a company in Silicon Valley is surely easier, doing so in Pittsburgh is much cheaper. And people such as Mike Madison, Mike Woycheck and Audrey Russo are working hard to make entrepreneurial life in Pittsburgh as easy as it is in Silicon Valley. Nextburgh is aiming to do the same thing.

Pittsburgh will have to be more than just cheaper. The Rust Belt is full of urban frontier opportunities and Texas boomtowns still have all that land. And second tier innovation regions such as Boston and Raleigh-Durham offer a viable alternative to pricey New York and San Francisco. Considering what Richard Florida terms as "means migration", the deck would appear stacked against the Burgh:

The consequence is this: the means migration is dividing the world into two kinds of regions with very different economic prospects. A small number of means metros attract the lion’s share of the mobile and the skilled, who see their incomes and real-estate values climb, while the masses witness the exact opposite. Some of today’s means metros could eventually fall back as housing prices and living costs rise. But there are powerful reasons to believe that the economic disparity between some city-regions and others will continue to grow, and perhaps even accelerate, thanks to the snowball effect of talent attraction.

Shrinking Pittsburgh wouldn't seem to be on the good side of the creativity divide. The region is still talking about how to arrest the brain drain:

That sentiment is common today, said Paul-James Cukanna, associate provost for enrollment management at Duquesne University.

"We have about 5,000 applications for graduate and professional schools this year compared with 3,300 at this time last year and most of those are from local applicants."

Mr. Cukanna said the applicants not only are students like Mr. Pugliese and Mr. Russo, who intend to stay in Western Pennsylvania, but students who in past years would have taken jobs out of state.

The bleak national economy has put a temporary halt to the Pittsburgh area brain drain.

What Mr. Cukanna and most other people don't know is that Pittsburgh was experiencing brain gain before the Great Recession started to stifle relocation. Almost like a stealth-mode startup, Pittsburgh has been quietly amassing a greater concentration of talent. Already, Pittsburgh is on the path to joining the elite group of means metros.

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