Startup Cities: Urbanization as Opportunity

The city is the foundational layer on which institutions and people interact to push innovation forward. They act as clusters of knowledge and networks that enable them to be the centers of economic activity and entrepreneurship. Entrepreneurs have a vast array of sectors to focus their talents, however, the most substantial and least noticed are cities.

If you feel the need to think big, solve hard challenges, and make a huge impact then you should understand “Startup Cities”. It’s a notion that conceptualizes that the creation of cities and the enhancement of existing ones will induce the largest positive impact, in terms of population and economic gains, around the world. These gains will increase average incomes by multitudes, boost green energy adoption, cure rampant disease, and drastically cut down poverty.

These issues could be solved by the rapid urbanization of billions of people over the next 50 to 100 years. The next generation of leaders and innovators has the power to make these achievements possible with startup cities.

Background

The namesake for the subtitle of this post, “Urbanization as Opportunity”, is a reference to a working paper produced by World Bank Chief Economist, Paul Romer, and Marron Institute Deputy Director, Brandon Fuller. Their research discusses the reasons for a heightened focus on urban development problems as well as potential solutions. They suggest that the current urban population of about 3.6 billion (50% of the total population) will increase to about 9.8 billion (85% of the future total population of 11 billion) in the next 100 years.

In other words, there is already a massive demand for urban living and there will be an even larger one in the coming decades of about 6 billion additional people. This market will not be serviced by existing cities alone, as they would be bursting at the seams, and will necessitate the creation of entirely new cities. This could be an exclusive circumstance of the 21st century because “in all the centuries that follow, we may add at most another billion” to cities suggesting that there is a time-sensitive window to build the final additions to the urban landscape.

Those cities will be created by governments, mayors, private real estate developers, global investors, entrepreneurs, large corporations, and especially the ordinary people that make up the local urban community. They could operate as autonomous city-states like Singapore, special territorial jurisdictions as Hong Kong was to the British, or more commonly economic centers, like San Francisco, of the existing countries. Anything from a barren plot of dessert to small shanty town near a bay could be transformed into these 21st century marvels. While existing cities will surely expand to accommodate the population growth, the constraints of space and infrastructure will eventually limit the extent to which new migrants may enter. Imagine New York City’s 8 million grew to 16 million. If you thought squeezing elbow to elbow in the subway during rush hour was crowded, you’ll think again when every street corner is that way. Although an exaggeration, it serves to cement the point that all sorts of dynamics of a given city will oversaturate themselves to diminishing benefits. If there is a population limit to cities, a knee jerk reaction might be to find ways to limit populations, however, wouldn’t expanding the number of outlets for that population be a better remedy?

Romer and Fuller view cities as vitally important because they “are both locations that facilitate local cooperation and nodes that channel the flows of goods and people that facilitate global cooperation.” Richard Florida, University of Toronto’s Martin Prosperity Institute Director & CityLab Editor-at-Large, points out that “across the world, metros with populations of more than one million people account for more than half the world’s economic output, while housing roughly one in five of its people” (further reading at McKinsey). As more of the world urbanizes, it will be able to take advantage of the benefits that it provides. Cities are intrinsically hotbeds for entrepreneurship, as suggested by Harvard economist, Edward Glaeser, using “average firm size and the self-employment rate as…measures of entrepreneurship…[and] both of these measures predict urban success at the metropolitan area level”. In his seminal book, Triumph of the City, he also extensively outlines that “cities are actually the healthiest, greenest, and richest (in both cultural and economic terms) places to live.” University of California, Berkeley economist, Enrico Moretti, described that “urban areas tend to have much more productive labor and higher salaries than rural areas.” Introducing and enhancing more of these engines of prosperity will no doubt positively impact people from all walks of life. Emphasizing Romer’s and Fuller’s research once more, they advocate for cities to “expand as New York did [in the 19th century], or emerge out of nowhere as Shenzhen did [in the 20th century]”. Considering that most of the growth, about 5.2 billion people, in urban population will come from less developed regions of the world these new cities could provide substantial economic gains for the least well off of our global community.

Locations

These new cities will be mostly located in the developing nations of world, mostly in Africa and Asia. According to the United Nations, “half of the world’s population growth is expected to be concentrated in nine countries: India, Nigeria, Pakistan, Democratic Republic of the Congo, Ethiopia, United Republic of Tanzania, United States of America, Indonesia and Uganda.” India already creates new cities through their Special Economic Zone (SEZ) policy. Private developers can apply to the Indian Board of Approval to designate land to be incorporated as a SEZ that works in collaboration with the local and national government. These zones allow for increased foreign direct investment (FDI) as well as tax and regulatory exemptions. India currently has about 200 of these zones and has about 400–500 already approved to move forward.

These areas have a history of leap frogging into new technologies and ideas. Some of them didn’t need to take part in costly efforts to install landlines for telephones, but instead rapidly jumped to mobile phone usage. Subsequently, those mobile phones gave rise to digital currency adoption. This was because there was a lack of efficient and accessible ways to make transactions and mobile phone minutes became a proxy of exchanging monetary value. With these thoughts in mind, it might be possible for these areas to create their new cities while skipping impediments to enable wider acceptance of newer technology and ideas. They wouldn’t need to get bogged down in building outdated tech or working around existing infrastructure built centuries ago because of the consequence of not having those resources in the first place. “Kanju” is an African term that suggests that some of the best innovation comes out of the circumstances where you have the least access to resources.

Problems & Solutions

Opportunities will be abundant in solving these tremendous problems. Perhaps one of the most exciting virtues of constructing totally new cities is that they can be planned all around green tech. Imagine if Tesla didn’t have to compete with a gas station on every corner built in the 1950s, and instead could place a charging station on those corners. Starting from scratch rids people of having to think about sunk costs of the past. When the initial blueprint is drawn up, city planners can decide if it’s better for all vehicles to run on gas or electricity. They can make the key decisions before any shovels touch the ground to support solar, wind, or any other emerging energy sector unlike any existing city can today due to sunk cost constraints. Any entrepreneur wanting to catalyze the next wave of renewable energy should see these new cities as the ultimate platform to experiment.

These underdeveloped areas also have problems with identity. Not having access to proper records or paperwork leaves many people outside the realm of services that rely on identity. For instance, loans can be exceedingly difficult to attain without a proper credit history. This is predicated on having a bank account which is unaccessible due to lack of foreign and domestic financial infrastructure as well as proper records to prove identity. Blockchain has the power to provide everyone of these potential users with a unique identifier that would allow them to open up digital wallets and start making transactions. This allows them to enter into credit markets and secure loans. Many new cities could decide to put their entire record keeping on the blockchain and reap the auxiliary benefits of being apart of the global blockchain community. Blockchain developers should think about partnering with these startup city leaders to implement their ideas on a grand scale rather than fighting large institutional competitors in the developed world.

Entrepreneurs seeking to solve some of the world’s biggest challenges should amplify their concentration on any startup idea that could support this urban revolution.

Startups for Cities: Examples

Most startups that seek to solve city-specific problems are labeled as urbantech, govtech, or civictech. Transportation, air-quality, green energy, and real estate are just some of the sub-categories in this space. Urban.US, a seed-stage urbantech investment firm, created the interactive Urbantech Radar to showcase different types of urbantech companies in a visually intelligible and dynamic format. Discover some unique startups using their filtering options or download the data in an excel spreadsheet. Their data suggests that the current most underserved urbantech areas are in water, waste, and air.

CB Insights produced this graphic to highlight govtech startups making cities smarter as well.

Each of these collections should provide a bird’s eye view of the urbantech ecosystem although some specific companies are:

  • Remix, a Y Combinator- backed startup that provides a planning platform for public transit. It has expanded into 200 transit agencies worldwide since launching in 2014. They have raised about $10 million.
  • Cityworks, a public asset and land management software for local governments that raised over $14 million.
  • Neighborly, the municipal bond marketplace where you can invest in the local projects you care about which raised over $5 million.
  • Architizer, where you search the work of over 40,000 architecture firms — over $4 trillion worth of projects, acting as the largest database of architecture online which raised over $10 million.
  • Bowery Farming, using high-tech approaches such as robotics, LED lightning and data analytics to grow leafy greens indoors. They have raised over $7 million.

That ecosystem has seen over a 300% rise in venture capital funding since 2012, as well as, over 50% increase in deal count. While by no means the largest destination for capital, it’s clear that the number of deals and dollars are growing. Ron Bouganim, Managing Partner of GovTech Fund, said that “in the next five to 10 years, you’re going to see a wave of capital coming to the space…This is a $450 billion global market, and there is a decades-long innovation cycle that needs to happen — not just in the US, but globally.”

Those early stage companies are not alone in their interest to solve urban problems, as established corporations are making attempts as well. Sidewalk Labs is an Alphabet company that imagines, designs, tests, and builds urban innovations to help cities meet their biggest challenges. They work with cities to develop products and tools that can address existing problems and drive toward the city of the future. Microsoft CityNext empowers cities and citizens to unlock their potential by delivering innovative digital services and smart city innovations that can help them lead safer and healthier lives, enriched by high-quality education. CityNext helps cities engage their citizens, empower city employees, optimize city operations, and accelerate innovation and opportunity.

Also worth noting is that city-planners are craving tech enabled solutions to their ever-growing problems. The Smart Cities NYC conference recently brought together thousands of city officials, policymakers, and tech innovators to embrace civic innovation and change. Mayors around the world realize that their cities are impactful centers of progress, economically and culturally, but will need to reimagine how they prepare their cities for the trials of this century.

Cities as Startups: Examples

As previously mentioned, new cities will need to emerge to keep up with the tidal wave of population. This means that some entrepreneurs must not limit themselves to ideas on how just to support urban centers alone, but how to actually start a city. Although it might seem esoteric at first, it really is not that unfathomable. As Romer’s and Fuller’s research accentuates:

“Shenzhen, China, has grown from a tiny fishing village in 1980 to a metropolis of more than 10 million today. If Shenzhen were a city-state, it would show the fastest rate of growth of GDP ever recorded. Because it was a new city that started with new rules, Shenzhen pioneered a model based on exports, market incentives, entry-level jobs in manufacturing, and incoming direct foreign investment”.

Skeptics would suggest that cities and startups are not an apples to apples comparison, however, Romer and Fuller contend that “no one claims that because most start-up firms fail, the only reliable way to raise productivity in industry is to aim only for across-the-board improvement at all incumbent firms”. Shenzhen was part of China’s liberalizing Special Economic Zone (SEZ) strategy that started with four zones in 1980, now there are over one hundred and fifty different types of zones (World Bank). The apprehension to consider cities fair game for innovators is an arbitrary mental handicap. Startup cities will face unique issues concerning their creation and scaling, but are by no means only manifestations of distant history.

Another example would be Songdo, South Korea built from scratch on 600 hectares of reclaimed land in the Incheon Free Economic Zone, 65 kilometers southwest of Seoul. The entire construction cost is estimated to be $40 billion, with $100 million already invested from Stanley Gale of Gale International, the developer. The project is a joint venture between Gale International (61%), POSCO E&C (30%), and Morgan Stanley Real Estate (9%) (NewCities Foundation).

While the finances required to build those cities seem astronomical, some entrepreneurs are innovating with far less. The Seasteading Institute hopes to create startup cities on the ocean frontier. They consider the benefits of decentralization from any one government jurisdiction tremendously positive for entrepreneurs hoping to innovate cleantech, agriculture, and other various industries on the high seas. Early budget estimates suggest that it would cost around $15 million to construct their first seastead. Considering that they already raised over $1 million in funding for research and development, that appears to be a very reasonable price tag especially when compared Songdo’s. Progress was recently made to initiate construction on their first project in French Polynesia by 2018.

Conclusion

These examples illustrate not only how entrepreneurs can become active leaders in urban communities but how they can shape and create ones too. Population trends will dictate the direction of future development, and without a doubt, that will be urbanization due to the increases in various metrics of welfare. There is certainly implicit and explicit demand from urban residents, migrants, and stakeholders. Entrepreneurs should jump at the chance to supply solutions to these issues. In 1980 the government of China created the Shenzhen startup, in 2000 large private investors created the Songdo startup, and now a small team of entrepreneurs are creating the Seastead startup. The costs of creating startup cities has fallen to the point where it is realistic for a handful of innovators to experiment. Any entrepreneur seeking to make substantial impact should focus on creating startups that solve individual urban problems, reimagine existing metros, and build the next generation of cities. Urbanization will be their opportunity.


Pushing the Conversation Forward: Quotes From Future City Thinkers

I first encountered these ideas while studying abroad in London my final semester as an economics student New York University. By chance I signed up for an elective in architecture and discovered all of the “Smart London” initiatives harnessing new technologies. Not too long after, I found a unique intersection between startups and cities. Now I have launched an event series to promote these topics, bring thought leaders together, and connect members of the urbantech community. Partners like Microsoft, Smart Cities, Urban-X, Draper University, Digital.NYC, Venture for America, NYU Entrepreneurial Institute, and many more have joined this effort. Hundreds of passionate leaders in finance, real estate, government, tech, and academia have already shown interest as will thousands more in the coming months as this event series grows into a larger project. The last event hosted an astute panel of experts in distinct fields. Here’s a recap of some of their thoughts on “Startup Cities”:

Sanford Ikeda (SUNY, Purchase College | Economist):

“Cities are an institution that breed innovation.”

“Cities are spaces for failure…You have to able to experiment and have trial and error which is why I have a problem with characterizing cities as efficient or inefficient. Of course they’re inefficient but that’s their virtue. The virtue of cities is that innovation occurs there.”

Brandon Fuller (NYU Marron Institute | Deputy Director):

“There are things that rapidly growing cities can do to set themselves up for success…part of it is coming to terms with the fact that they’re going to grow and they’re going to grow by a lot.”

“There’s where you get into what’s interesting about this startup dynamic with startups and cities. New cities present an opportunity, institutionally, to try new things that we can’t do in existing cities or at least do very easily. That’s everything from having congestion pricing to using only natural gas to having different rules on economic activity. You can have different institutions around labor markets.”

“That’s the idea behind narrow but strong governments. Not trying to do too much and not suffocating the power of individual initiative or spontaneous order.”

Alex Klokus (Futurism | CEO & Co-Founder):

“What does smart city mean to us? Does it mean we actually know when the subway is coming? Whereas if you go to place like Dubai for example, which is a city built on a desert over the past 50 years, they have very few decision makers and very little bottlenecks to go through which allows them to do whatever they want. Dubai is one of the most interesting cities in the world. They commissioned their firefighters with jetpacks. They are putting majority of the city on blockchain.”

“Cities attract great talent and they are hotbeds for startups.”

Oscar Boyson (“The Future of Cities” | Filmmaker):

“In Detroit, there was a guy 23 years old and he was developing an app that would help residents and the city use water more efficiently, which I love. It’s not a silver bullet solution, it’s a perspective solution where we look at water in a different way and really value it…The city has now employed him to develop his app…He’s invested in the city as it is in him.”

“As entrepreneurs, cities might cause a lot of problems, but we solve the problems.”

Amanda Gutterman (ConsenSys | CMO):

“All kinds of different blockchain enabled services are changing what it means to be in a city, and allowing people to self-select into self-governable communities.”

“We have a product called uPort, that allows any person anywhere in the world to have a private-public cryptographic key. It’s basically a number that is your identity and you can access that if you have access to the internet…So you can build up a rich picture of your identity to secure a loan from someone halfway around the world that you never met because that person is able to see your history on the blockchain and is able to trust you as a result. So this means even without access to centrally provided government services, you can become an entrepreneur.”