A year ago, the city of Pittsburgh struck a deal with the ride-sharing company Uber. The city would provide support for Uber’s developing self-driving technology. In turn, Uber would create jobs and share data, helping turn Pittsburgh into a technology hub. Mayor Bill Peduto’s answer to the pressure to compete in a digital age? “You roll out the red carpet.”¹
Experience shows that Peduto’s approach may have been naive. Residents express frustration that locals are overlooked for job opportunities and feel that the city negotiated a bad deal. Many have concerns over the reports of unethical behavior within the company.²
The fates of startups and small cities are becoming entwined. All agree that technology is booming in an otherwise stagnant economy. And while Silicon Valley churns out the hits, small cities like Pittsburgh want in on the action.
Yet those in power often show a lack of appreciation for the nuances of startups and how they affect local economies. Encouraging startups to improve a city’s tax revenue is one thing. Claiming that the revenue will lead to new job opportunities for residents is another.
Tech startups can achieve massive scale with lean operations. One example is WhatsApp, which employed 55 people at the time that it was acquired by Facebook for $16B³. That’s about 3 people per $1B. Compare that with a non-tech company like Baker Hughes, which employs roughly 1,400 people per $1B in market share.
I was in Charlotte recently for three months and had the opportunity to meet with city officials and startup entrepreneurs. What I found was eye-opening.
I met Mike York, founder of a technology solutions consultancy, who explained how his company was tempted to move their operation off-shore several years ago. It was a crossroads for the company, at a time when several competitors were specializing in remote consulting.
Mike and the management team ultimately decided on not pursuing the off-shore option, and instead beefed up their team of local engineers. This strategy ended up paying off, as more firms demanded high-touch consultation. But as I hear more founder stories, I’ve started to see Mike’s example as an outlier.
I listened to another successful founder, whose company had decided to off-shore their entire engineering team to India. At the time, they didn’t have the resources to pay for top engineering talent, which can be scarce in Charlotte. This founder was able to generate millions in revenue with the remote team.
When I hear about small city initiatives to encourage technology startups, I think about these two founders. Will the city have founders like Mike, who helped develop local talent? Or will they have founders who build profitable companies, but without any connection to the city’s residents?
There are concerns other than off-shoring talent. Many technology companies, large and small, depend heavily on near-shore employment. The incentives in these relationships heavily favor the employer, and again, often leave out the local community. H1-B visa holders, who work in the U.S., are often bound to their employee out of fear of deportation. Some employers view such control, along with lower salaries, as preferable to state-side employees. Never mind that in many cases, local talent just isn’t available.
All of these factors can create tension in local communities. When startups are successful, but build their success on off-shore and near-shore techniques, the city residents often don’t partake in the benefits. This can lead to further inequality and social unrest.
This isn’t to say that startups don’t bring benefits to local economies. Even in the case of Uber and Pittsburgh, the city has benefitted from a higher profile and more investment in the city. Yet it is hard to win over residents when technology threatens many of their jobs, and training initiatives come up short.
As a startup founder myself, I believe that cities should encourage innovation and that startups can bring a lot to the table. But they are not a one-stop fix. We need to re-invest in training, education, and create incentives that align all parties.
How do you think cities should encourage startups while addressing some of the new problems they create? Please share your thoughts in the comments.