Entrepreneurship in Filthy, I mean, Philly

January 20th, 2010

I’ve been following the conversation that’s been going on Blake’s blog and on twitter about entrepreneurship in Philly and I wanted to vent because the ’state of Philly’ is something that I think about a great deal, being a Temple University student and all. Let me preface my comments with: I greatly respect my startup buddies here in Philly and it’s a fact that if I weren’t in school still I would be at a startup – with that said, I want to express my current opinion on the situation in Philly and disgree about Philly being a prime place for entrepreneurship.

In a nutshell: What is necessary for economic growth?

Institutions – Law and Order, Protection of private property (basically, a framework for markets to work within)
People – The more talented, more intelligent, more skilled and hardworking the better. They develop the ideas and make them a reality. Additionally, people with incomes are a requirement because they provide the demand for products and services. This is less important for dot-coms, but still matters for those wishing to pursue the ‘Philly as home base, branch out from there’ type strategy.
Capital – Access to savings which can be used for ventures and for entrepreneurs to survive on while not earning income.

Does Philly have these attributes? Of sufficient quality and in sufficient quantities?

Capital: Not a whole lot of it.

It’s no secret that Philadelphia is not the epicenter of Venture Capital. There are firms which fund the area, but relatively speaking this area is not particularly fund-happy compared to NY, CA, etc. No need for me to get into this deeply because I’m writing this for Philly entrepreneurs which means you already know this all. There are angels locally but they tend to be risk-averse and hesitant about seed stage companies.

While recently reading a good article by the SEOMOZ guys (in Seattle) about their funding process I came across this nice graph they made of all the reasons they got rejections from funding sources. Note what I have circled in red. Even coming from Seattle, the biggest complaint they heard was that they weren’t located in the right place to be fundable.

People: Could be better…

If you live in Philly, it’s more likely you are a high school dropout (22%) than a college graduate (21%).

The city has 600,000 less residents then it did in 1950.

There are about 115,000 college students (undergrad & grad) in Philly, but many leave Philly after graduating due to lack of job opportunities. Jobs have decreased by 3.9% over the past 7 years leaving Philly with 631,000 jobs. Those jobs that remain, 30% are comprised of ‘meds and eds’, meaning the Pharmaceutical companies and the colleges.

Arguably, one could say ‘What do these averages have to do with the ability of individual people to ‘make it’? Well, I’m certaily not saying Philly has no smart or talented people; what I am trying to convey is that those hoping to start companies in Philly are dealing, relatively, with less qualified individuals then they would have access to in other major cities.

Institutions: ‘toxic business environment’

Without getting too political, I would just say that Philadelphia specifically and PA generally have not been beacons of pro-market reforms. Philly citizens have to deal with a tax burden above the national big city average. Business taxes are harsh, and though Mayor Nutter ran on the premise of decreasing them – the recessions and subsequent budget problems caused them to remain just as harsh – and actually the sales tax was increased to 8%. There has been efforts to create ‘economic development zones’ but these are restricted to very specific areas (sometimes even as arbitrary as the ‘3rd floor of the so-and-so building’) and tend to apply primarily, if not entirely, to biotech.

Then, there is crime… While its likely not operationally affecting your dot-com startup at first (like getting your servers stolen), it does matter in terms of the willingness of people with the skills you desire to move to and work in the area. The crime factor can affect your access to human capital. That’s all I’ll say on that.

Parting comments:

While I am aware of the several Startup and independent freelancer focused organizations – I don’t think Philly is a good place to start a company, and I certainly wouldn’t advise Californians, Seattle tech rockstars, or any other hotspot of tech activity and entrepreneurship to come here to startup. You will isolate yourself from the majority of funding, and set up HQ in a growingly worse city (if it’s any conciliation, the Pew Study has Philadelphians on average being optimistic about Philly’s future).

There is also this funny argument I want to throw out there: Since Philadelphia has a relative lack of opportunity, entrepreneurial people in Philly have a relatively low opportunity cost for their time (as opposed to, say, New Yorkers or Californians). This low opportunity cost makes it much more appetizing to ‘go it alone’ and try a hand at starting a company.

So what I would advise, don’t come to Philly to start a company. If you are already in Philly, and not really willing to relocate, then starting up may not be a bad option compared to the alternatives but its going to be relatively harder then it would be in other cities. There’s a tight group of entrepreneurs whom do alot to support one another, and from what I’ve gleaned they really love Philly and want to help the city (and state) improve and become more conducive to small business. I would like Philly to be a Silicon Valley in the future as much as the next guy, I’m just trying to diagnose the situation realistically as it stands today.

Of course, I’m glossing over things, a person could spend their entire career trying to find out why Philly is how it is and how to change it, but I think these 3 areas are hurdles for creating a pro-market city which makes it easy, and common, for small businesses to thrive. I look forward to seeing if anyone agrees or disagrees with me – I won’t take it personally.

Source: Here’s the Pew Study that has been posted around lately: http://bit.ly/5ClVFV, the statistics used above are from this study.