How much does affordability matter in building successful startup ecosystems? Technical.ly’s Innovation Index includes cost of living as a key factor, but the data presents a complicated picture.
Three-quarters of the country’s startup value resides in just five ecosystems — Silicon Valley, New York City, Los Angeles, Boston and Seattle — according to Startup Genome’s Ecosystem Value metric, which factors in all of a region’s valuations and exits. And those five ecosystems have some of the highest costs of living.
Here lies the innovation cost paradox. Despite the clear financial strain higher prices place on startups and talent, these expensive regions continue to thrive.
So why do expensive ecosystems continue to dominate?
When startups cluster, they create shared pools of specialized talent, attract experienced investors who understand their sectors and develop support services with deep expertise in their specific needs. A biotech startup in Boston, for instance, benefits from specialized lab facilities, regulatory experts who understand FDA pathways and investors who have successfully scaled similar companies before.
These institutional capabilities compound over time: Successful exits create experienced operators who then mentor and invest in new startups. Law firms develop expertise in structuring complex deals. Universities align their research programs with industry needs.
This rich network of resources and relationships often creates more value for startups than cost savings they might find in cheaper markets.
Understanding this paradox is crucial for regions trying to develop their own innovation ecosystems. It suggests that rather than competing solely on cost, boosters need to figure out how to build unique capabilities that create value so they can leverage their lower costs as a strategic advantage.
Two regions — Austin, Texas, and North Carolina’s Research Triangle — offer compelling case studies in this regard. Their approaches, while different, demonstrate how affordability can be a key part of a broader strategy for ecosystem development.
Austin: Building bridges between Silicon Valley and Texan ingenuity
Austin’s evolution since 2010 demonstrates how cost advantages can accelerate ecosystem development when paired with deliberate institution-building.
A decade ago, the city’s cost of living was about 45% lower than San Francisco, plus it had the added benefit of no state income tax. But rather than simply positioning itself as a cheaper alternative, Austin focused on its strengths while maintaining strong connections to coastal networks.
The city’s institutional infrastructure developed in three waves. The first came from technology companies in the 1980s and 1990s, particularly in hardware and semiconductors. The second, in the 2000s, saw more software and internet companies. The third, accelerating after 2010, has been broader, spanning enterprise software, consumer tech and other sectors.
Each wave compounded the ecosystem’s advantages, creating increasingly sophisticated knowledge about company building. The growth followed what local leaders call a “step-ladder” approach.
Consider WP Engine’s journey after its founding in 2010. The website hosting company started with local angel investment and support from Capital Factory, Austin’s primary startup hub. As it grew, founders brought in Austin-based Silverton Partners for their Series A, then added coastal investors while maintaining strong local relationships. This pattern helped them benefit from both Austin’s operational expertise and Silicon Valley’s experience in scaling hosting companies globally.
The success of self-storage rental platform SpareFoot, a Capital Factory accelerator alum also founded in Austin in 2010, demonstrates how the ecosystem expanded beyond its traditional enterprise software strengths to incorporate expertise in consumer-facing marketplaces.
Research Triangle: Specialization as a path to success
The Research Triangle offers a different approach to leveraging cost advantages; it might be called a “deep expertise, broad network” model.
Instead of competing across all sectors, stakeholders in the region built deep expertise in life sciences and biotechnology, which aligns with the strengths of its three major research universities — Duke, UNC, and NC State. With cost of living about 40% below San Francisco’s, the region focused on turning affordability into a competitive advantage for capital-intensive deep tech development.
Materials handling startup Advanced Liquid Logic’s journey from Duke University research to successful commercialization illustrates this approach. Rather than immediately trying to build a complete commercial product after spinning out in 2004, founders worked through careful validation steps, using shared facilities and equipment that would have been prohibitively expensive to build independently. This staged strategy helped them conserve capital while still advancing their technology, ultimately leading to a successful $96 million acquisition in 2013 by Illumina.
Precision BioSciences, meanwhile, demonstrates how the Triangle’s model has evolved to support companies requiring significant capital over longer periods. In its early days, the gene editing company made use of the region’s specialized facilities, conducting sophisticated research using shared equipment while conserving capital. The firm’s financial journey exemplifies the region’s staged approach: founders started in 2006 with university resources and grant funding, moved to early-stage investment from local investors who understood their technology, gradually brought in larger investors as they hit technical milestones, and in 2019 went public with a $145 million IPO.
The region has developed sophisticated approaches to managing risk in deep tech development. Companies receive funding in smaller tranches tied to specific technical and commercial milestones.
For instance, a materials science company might receive its first tranche to prove its core technology works in the lab, the second to demonstrate manufacturing feasibility and the third to begin pilot production. This stage-gated approach helps manage risk while ensuring efficient capital deployment.
The future of affordable innovation hubs
These case studies suggest that while cost advantages can accelerate ecosystem development, success requires several key elements.
Both Austin and the Research Triangle took well over a decade to develop their institutional infrastructure. Rather than trying to replicate Silicon Valley’s broad focus, they developed distinctive models based on local advantages. Both regions maintained strong local roots while building national networks, developing sophisticated approaches to combining local operational expertise with coastal capital and connections.
As debates continue about whether high costs will eventually drive innovation to more affordable regions, these examples suggest a more nuanced strategy. We’re likely to see continued dominance of established hubs alongside the gradual emergence of specialized ecosystems in lower-cost regions.
The key to success isn’t just being cheaper — it’s building the institutional infrastructure that turns cost advantages into lasting competitive strengths through patient, strategic ecosystem development.
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