Startup Centers of Excellence

Just as Houston established dominance in oil and Detroit deemed itself “Motor City”, cities across the Southeast are building reputations of their own and drawing entrepreneurial activity as a result. People are innovating without basing their success on how quickly they can relocate to San Francisco or New York. Instead, our team at ModernCapital sees a new trend emerging that we are referring to as “Startup Centers of Excellence.” These cities and areas possess a unique combination of industry knowledge, talent, and market concentration. The source of this excellence can arise in a number of ways. Perhaps a local corporate presence generates opportunities for new startups to emerge and partner with an established customer base, or possibly the region is home to a uniquely impressive talent pool. Whichever the reason, these areas are making a case for themselves as hotspots of innovation.

What we aim to explore in this series is the investment opportunity presented in the Southeast. A collection of states already known for low costs of living, temperate climates and impressive infrastructure, the region is now positioning itself as a leader in innovation. In addition, the Southeast contains 10 of the 20 fastest growing US cities. However, founders are often lacking access to much-needed capital (the region receives only 7.8% of VC funding). We intend to uncover the potential of the Southeast and specifically the abundance of innovation hubs this region holds. The numerous, diverse cities in this region provide a perfect opportunity to dive into the expertise popping up in each. Let’s start with the following four:

Nashville, TN
Nashville is nationally known for several things; country music, hot chicken, and the $80B healthcare industry, to name a few. Quite an odd combination when you mix the three, but independently they dominate their respective space. While I would love to dive into an industry analysis of hot chicken (see Boltons), it is healthcare that draws my attention as the poster child for Nashville industry expertise.

According to the Nashville Health Care Council, over 500 health care companies call Nashville home including large corporations like HCA, Vanderbilt Health System, CHS, LifePoint, and more. In the United States, there is little debate that healthcare is a hotbed of innovation. In 2017, healthcare investment in the U.S. reached $15 billion, a number that 2018 had already surpassed by end of July (Pitchbook). We are seeing major players all over the map take a chance in the healthcare space (here’s looking at you, Apple & Amazon). So what makes Nashville special? Experience and consequently, expertise. No matter what type of healthcare entity you are aiming to work with, Nashville provides. There are the obvious for-profit hospital chains such as HCA & LifePoint, but there is also an esteemed academic hospital at Vanderbilt and a major not-for-profit, St. Thomas.

As anyone in the space knows, healthcare is an industry that requires extensive knowledge in order to generate change. There are regulations to worry about, longer sales cycles to plan for, and a seemingly infinite amount of industry players to consider. Nashville affords entrepreneurs access to the talent and partnerships necessary to understand this daunting industry.

Companies like Entrada, acquired for $34 million by NextGen in 2017, took advantage of the opportunity Nashville presented. They leveraged talent and resources to position themselves as innovators in medical documentation. Over the past 10 years, more than $1 billion has been invested in healthcare ventures in Nashville. Pair that with the experience of a city that watched HCA revolutionize healthcare many years ago and there’s no doubt that Nashville will be a major player in the ongoing disruption in healthcare.

Raleigh, NC
Raleigh has long been known as a hub of innovation. Over 50 years ago, three top-tier research institutes, NC State, UNC, and Duke, decided to open a first-of-its-kind research campus. This foundation established Raleigh as an innovator in life sciences. More recently though, the city has proved itself as one of the most prominent metropolitan regions for technological innovation.

According to Pitchbook, Raleigh posts some of the most impressive return-on-investment numbers. The tech talent in the area contributes significantly to the region’s success. Being home to three top-ranked universities, it is not surprising that Raleigh has one of the highest concentrations of tech talent in the country.

A local company, Red Hat, has recently become a poster child for success in the Raleigh area. The company, a disruptor in open source technology, was acquired by IBM for a shocking $34 billion earlier this year. The success of this company has brought a lot of well-deserved attention to the Raleigh region as we see surrounding companies like Pendo and Bandwith also experience time in the national spotlight.

Chattanooga, TN
Chattanooga, home to an unprecedented combination of entrepreneurial spirit, a highly central location, and industry expertise has made itself synonymous with trucking and logistics innovation. Silicon Valley may hold the torch for technological innovation, but as Steve Case, the founder of Revolution, puts it, Chattanooga is the “Silicon Valley of trucking”.

According to a report from Cambridge Systematics, Chattanooga ranks #1 among all metropolitan areas for movement of freight. A striking 80% of freight in the U.S. will pass through Chattanooga at some point in its journey. As we move deeper into the digital revolution we are seeing an increasing demand for faster, smarter and more efficient ways to move goods. By 2020, investment in delivery and fulfillment technology is expected to almost triple what it was in 2016 to $21 billion. (Business Insider).

In Chattanooga, entrepreneurs are pouncing on this opportunity and using the niche access Chattanooga provides. Freight Waves, a company that provides data to help navigate freight, has found great success in the Chattanooga area. Their proximity to important market data has helped the company become one of the fastest growing transportation startups in the country. They recently announced making a $3.9 million investment in the Chattanooga area, which will include around 260 new jobs. Cyclical activity like this will continue to produce top talent and industry expertise, two critical factors in becoming a startup center of excellence.

Miami, FL
When one thinks of Miami they probably imagine the picturesque beaches or stunning art deco architecture. Or perhaps, like me, you imagine the unforgettable Cuban meal you had while visiting years ago. Whatever it may be, it’s unlikely that you imagine the booming startup ecosystem.

However, in 2016, Miami received $1.3 billion in venture investment, the 8th highest of any metro region (MUFI). While these numbers and rank are impressive, Miami is unlikely to become Silicon Valley anytime soon, and nor should it try.

Miami’s key to success is in embracing its opportune location and diverse talent pool. Miami has greater access to Latin America, the Caribbean, and even Europe. According to Miami Airport, Miami ranks 1st in international freight and 3rd in international passengers, offering more flights to the Caribbean and Latin America than any other airport. Miami also has a diverse talent pool, which provides a perspective that other cities don’t have. According to FIU and the Creative Class Group, nearly 40% of professionals in business, sciences, tech, education, healthcare, media and the arts in the metropolitan area are foreign-born. No other city can provide this type of diverse talent pool creating bicultural businesses.

Miami welcomed 500 Startups, a widely successful accelerator, earlier this year, a clear sign of confidence in the area’s potential. Miami has also relished in the hype building around VR unicorn, Magic Leap. The company recently announced an academic partnership with the University of Miami to help build a virtual spatial computing world. These partnerships are part of the virtuous cycle that provides returns not only financial but to the talent pool as well.

The Road Ahead: What’s next for the Southeast?
What we are going to witness here in the Southeast is a multi-beneficial cycle. As these startup centers of excellence solidify, success stories will arise and attract capital. The biggest challenge in many of these cities is a lack of access to early-stage capital. In order to bring new capital to the region and draw attention to the unique innovation opportunities emerging in every corner, the Southeast needs to make the pie bigger for everyone in the area. Pool resources, nourish talent, and expand corporate partnerships until these cities simply can’t be ignored. You know what they say: if you build it, they will come. If the Southeast continues on the trajectory that it is on, the capital will come.