Updated November 30, 2013

Study: Best Cities to Start a Business

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Starting a business is a tough task no matter where you are, but some cities are more startup friendly than others. Choosing one of the cities below as the location for your business won’t guarantee success, but it will give you better access to the resources that any successful business requires.

Study Methodology

The three metrics evaluated were:

  1. Education (measured by the percentage of people with college degrees)
  2. Financial prospects (measured by venture capital funding)
  3. Cost of living (measured by the U.S. Census Cost of Living Index)

Since you can’t build a great business without talent, we evaluated over 310 metropolitan areas to see which ones have the top supply of people with higher-education degrees (bachelor's degree or higher), a key indicator that they also have a smart labor pool.

We also looked at funding possibilities – another critical aspect for getting a business up and running – by the amount venture capitalists invested in each state in 2012. While new businesses can get financing in other ways, high venture capital interest can signal cities or regions where startups face the best prospects for success and future growth.

Finally, we reviewed the cost of living at cities, a key measure of how cheap (or expensive) it is to live in an area. For the owner of a startup business, cheaper is definitely better.

#1. Austin, TX

Austin, Texas
Austin, Texas

  • Cost of Living Index: 95.5
  • Percentage of Population with Bachelor’s Degree or Higher: 40%
  • State’s Rank in Venture Capital Funding: 5

Austin is first on the list because of its high percentage of college-educated residents and low cost of living. Approximately 40% of adults in the area have a college degree, and the city is home to the main campus of the University of Texas, which means there’s always a rich labor pool of fresh graduates looking for employment. Austin is also the only city on this list to have a cost of living below the national average. Plus, the potential customer base is enormous – Houston and San Antonio, both within driving distance, are the fourth and seventh largest cities in the U.S. Austin itself is 13th.

#2. Boston, MA

Boston, Massachusetts
Boston, Massachusetts

  • Cost of Living Index: 132.5
  • Percentage of Population with Bachelor’s Degree or Higher: 43%
  • State’s Rank in Venture Capital Funding: 2

The Boston area includes some of the most prestigious colleges in the country, so there’s no shortage of potential employee talent in the area. Harvard, MIT, Boston College, and Northeastern are all nearby. Massachusetts trails only California in securing the most venture capital investment as a state, and the dense population centers in the Northeast offer a great supply of customer prospects for your new business.

#3. San Jose, CA

San Jose, California
San Jose, California

  • Cost of Living Index: 156.1
  • Percentage of Population with Bachelor’s Degree or Higher: 45%
  • State’s Rank in Venture Capital Funding: 1

San Jose is right in the middle of Silicon Valley, a hub of venture capital activity. Silicon Valley alone secures more than three times as much venture capital investment as the second largest investment region, which includes all of New England. The area is absolutely rich in tech talent, so if you’re starting a technology company, this is probably the place to be. The cost of living is a bit high though, at more than 50% above the national average.

#4. Chicago, IL

Chicago, Illinois
Chicago, Illinois

  • Cost of Living Index: 116.9
  • Percentage of Population with Bachelor’s Degree or Higher: 34%
  • State’s Rank in Venture Capital Funding: 7

With a cost of living only 17% above the national average, Chicago is the third cheapest city to live in on this list. Illinois is the only state from the Midwest to make the top 10 in venture capital investment by state and one of only three (Texas and Colorado being the others) that isn’t on either the East or West Coast. The city has an impressive array of universities, including Northwestern and the University of Chicago, so the talent pool is rich. And, as the third largest city in the country, the customer base is promising as well.

#5. New York, NY

New York, New York
New York, New York

  • Cost of Living Index: 216.7
  • Percentage of Population with Bachelor’s Degree or Higher: 36%
  • State’s Rank in Venture Capital Funding: 3

Inarguably the most expensive city on the list (and in the country), with a cost of living more than twice the national average, New York makes up for its expensive way-of-life in its opportunities to secure venture capital, the vast potential customer base, and easy access to highly trained professionals in an array of industries. It’s the largest city in the U.S. with more than twice the population of Los Angeles. Both the New York metro area and the state of New York secured the third highest amount of venture capital funding for 2012 in their categories.

#6. Los Angeles, CA

Los Angeles, California
Los Angeles, California

  • Cost of Living Index: 136.4
  • Percentage of Population with Bachelor’s Degree or Higher: 31%
  • State’s Rank in Venture Capital Funding: 1

Silicon Valley isn’t the only venture capital-rich region of California – Los Angeles and Orange County in general ranked fourth on the regional list for venture capital investment. Though the area is home to a number of colleges and universities, including UCLA and USC, this is the only city on the list to rank outside of the top 20 in percentage of college graduates. A low 31% of adults here hold college degrees. However, there’s no lack of a potential customer base – Los Angeles is the second biggest city in the U.S. behind New York.

#7. Seattle, WA

Seattle, Washington
Seattle, Washington

  • Cost of Living Index: 121.4
  • Percentage of Population with Bachelor’s Degree or Higher: 37%
  • State’s Rank in Venture Capital Funding: 4

The state of Washington earned the fourth highest amount of venture capital investment behind entrepreneurial hotspots California, Massachusetts, and New York. At only 21% above the national average, Seattle is one of the cheaper cities to live in on this list. If you’re looking to start a business on the West Coast but would rather stay out of California, Seattle is a good fit.

#8. Washington, DC

Washington, DC
Washington, DC

  • Cost of Living Index: 140.1
  • Percentage of Population with Bachelor’s Degree or Higher: 48%
  • State’s Rank in Venture Capital Funding: 10 (Virginia)

Washington, DC, has the highest percentage of college-educated residents in the country at 48%. As a region, it secured the 10th highest amount of venture capital funding in 2012 – an impressive feat considering some regions on the list (like the Northwest, Southwest, and Southeast) are considerably larger geographically. Between the city, nearby Baltimore, and their sprawling, densely populated suburbs, many potential customers await your business.

#9. Denver, CO

Denver, Colorado
Denver, Colorado

  • Cost of Living Index: 103.2
  • Percentage of Population with Bachelor’s Degree or Higher: 38%
  • State’s Rank in Venture Capital Funding: 6

With a cost of living only 3% above the national average, Denver is the second cheapest city to live in on this list. Like most major cities, it has its share of colleges and universities, including one of the three campuses of the University of Colorado. And Colorado itself is one of only three states that ranked within the top 10 states for venture capital funding not to be located on one of the coasts. So if you’re looking to start a business toward the middle of the country, Denver is a great option.

#10. Hartford, CT

Hartford, Connecticut
Hartford, Connecticut

  • Cost of Living Index: 121.8
  • Percentage of Population with Bachelor’s Degree or Higher: 35%
  • State’s Rank in Venture Capital Funding: N/A

Hartford is the only city on this list not to be located in one of the top 10 states for venture capital funding, but it has quite a few other strengths. It’s nicely situated within driving distance of both New York and Boston, so you could take advantage of both the financial resources and talent pool that each has to offer. As an added bonus, the cost of living here is cheaper than both those cities. While Connecticut isn’t one of the best states for raising venture capital, both New England and the New York metro area are hotbeds of venture capital funding, and Hartford could be grouped with either region.

Best Cities to Start a Business in the U.S.

Best Cities to Start a Business
Best Cities to Start a Business © CreditDonkey

These 10 cities are definitely more startup friendly than your average area, but this list is by no means right for everyone. Many other factors should be considered before you make your move: population statistics, for instance, could give you additional insight into your potential customer base. The number of banks and other financial institutions (and their willingness to lend money to small businesses) could flag areas that make it easy or difficult for new businesses to get financing. Industry-specific research is important as well. A tech company would be very at home in Silicon Valley, for example, while a small retail boutique might do better elsewhere.

No matter what business you’re looking to start, you’ll probably do best in an area you’re already familiar with, so keep that in mind when evaluating your options. For most businesses, knowing the customer base and local culture is an important key to success – arguably just as important as the cost of living, access to educated employees, and opportunities to gain venture capital investment.

Resources used to compile this study:

Entrepreneurs can visit CreditDonkey to compare business credit card offers.

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Follow @CreditDonkey or write to Leah N at leah@creditdonkey.com

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