Best and worst states to
run a small biz  Philipp Harper Want to know the best place in America to lay down a bet on the future success of your business?
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Appropriately enough, the hands-down winner is Nevada, a state better known for another kind of gambling. Why? A pro-business regulatory environment, affordable housing and, I suspect, a good year-round climate have combined to make the Silver State a mecca for fast-growing startups. I know this because I've parsed and sifted and sorted and compared a whole bunch of data assiduously collected by some very talented researchers. Then I applied my own simple and unscientific spin to come up with Microsoft bCentral's list of the 10 best and 10 worst states in which to be an entrepreneur. In a moment, I'll present the rankings, along with some specific cities within the favored states that you might want to consider calling home because they're affordable as well as dynamic. First, though, let me give credit where it's due. Where the rankings come from The research I've pored through comes from two reports, both released in July 2002: "Small Business Survival Index 2002: Ranking the Policy Environment for Entrepreneurship Across the Nation" and "Entrepreneurial Hot Spots: The Best Places in America to Start and Grow a Company, 2001." The "Survival Index" is a product of the Small Business Survival Committee, http://www.sbsc.org/ an advocacy group based in Washington, D.C. The "Entrepreneurial Hot Spots" were identified by Cognetics, a Waltham, Mass.-based firm whose main research focus is America's fastest-growing small companies. Cognetics founder David Birch introduced the term "gazelles" into the business lexicon a few years ago to describe these entrepreneurial speedsters. Now, a bit about how the two reports were put together. Then I'll tell you how I synthesized them. The Small Business Survival Committee's index identifies 20 different ways in which government imposes costs on business and then measures the performance of the 50 states and the District of Columbia in each area. The factors being analyzed include:
Each state is assigned a numerical score in each category, and then an aggregate score. The lower a state's total score, the friendlier it is to small business. By contrast, the Cognetics measures entrepreneurial activity, as opposed to government interference. To do this, Birch and his company measure two things:
To come up with a hybrid ranking that takes into account both regulatory environment and entrepreneurial activity, I simply added the rankings assigned by the Small Business Survival Committee and Cognetics for each state. The lower the score, the higher the composite ranking. The top 10 and bottom 10 Using that computation, here's the top 10:
And the bottom 10:
For the record, this composite ranking diverges somewhat from those by the Small Business Survival Committee (SBSC) and Cognetics. The top 10 states for conducting small business according to the SBSC survival index: South Dakota, Nevada, Wyoming, Texas, Florida, New Hampshire, Tennessee, Washington, Mississippi, Alabama. The Cognetics top 10: Nevada, Arizona, Utah, Georgia, Maryland, North Carolina, Delaware, Virginia, South Carolina, Alabama. At the bottom of the heap, starting with No. 50, according to the SBSC: West Virginia, Vermont, New York, Iowa, Rhode Island, California, New Mexico, Minnesota, Maine, Hawaii. And Cognetics 10 worst, starting with No. 50: Maine, New York, Wyoming, Pennsylvania, South Dakota, Montana, Nebraska, North Dakota, Iowa, Alaska. Yes, there are notable disparities in the way the two lists treat individual states. For example, while South Dakota is deemed by the SBSC to have the most business-friendly of all state governments, the lack of entrepreneurial activity in that state puts it near the bottom of Cognetics' list. Clearly, regulatory policy is just one of a number of variables entrepreneurs consider when deciding where to locate their businesses. Metro areas are ranked as well So much for the states. It's possible to further refine your selection of a business venue by considering some available city rankings. Cognetics ranks 50 large metro areas and 25 small ones using the same measurements significant starts, young growers it applies to the states. The top 10 large metro areas according to Cognetics, whose rankings are not available online:
And the best of the smaller markets: Las Vegas; Wilmington-Jacksonville, N.C.; Charleston, S.C.; Austin, Texas; Reno, Nev.; Fargo, N.D.; Sioux Falls, S.D.; Green Bay-Appleton, Wis.; Huntsville, Ala.; Lexington, Ky. Why housing costs make a difference Forbes magazine and the Milken Institute recently ranked 200 metro areas, based on growth in jobs, salaries and high-tech GDP. San Diego ranked No. 1 and California cities dominated this list. (The list is available online by going to Forbes.com, http://www.forbes.com/ clicking on "Lists" at the top, and then on "Forbes/Milken Best Places" under "Places.") The Forbes-Milken list is especially valuable because it reminds us that rankings of the best places to do business typically do not take into account affordability. Six of the top 10 cities are in California and boast average housing prices that are way out of line with average income. I'm able to make that calculation and you can, too by using the National Association of Home Builders' http://www.nahb.org/ Home Opportunity Index, which ranks metro areas according to the percentage of homes that are affordable for families at the median income. At 50%, housing costs and income are in balance. If more than 50% is affordable for median income people, then housing in the market can be had at a relative discount. Below 50% and a premium must be paid. Take the case of Las Vegas, for example. It's located in the No. 1-ranked state for business, according to my research, and it ranks high in both the Cognetics and Forbes-Milken lists of business-friendly cities. But is it affordable? Yes, it is. According to the NAHB's opportunity index, more than 70% of the homes in Las Vegas are affordable for people of median income. Conversely, in San Diego, which ranks No. 1 on the Forbes-Milken list, less than 22% of homes are within the grasp of people who earn the median income. Housing prices may not be the key variable in deciding where you want to start a business, but surely it's an important one. And there are others: access to good education, recreation and the arts, to name a few.
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