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Can cities create innovation hubs that work for the entire economy?

As startup districts proliferate, city planners aim to build tech hubs with a community focus

American Underground, a startup hub in Durham, North Carolina
American Underground, a startup hub in Durham, North Carolina
American Underground

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Silicon Valley may still be the center of today’s tech world, but if you want to see the future of American innovation, take a trip to Durham, North Carolina. In a restored factory complex near downtown, entrepreneurs are building companies inside warehouses where generations of workers once manufactured and packaged cigarettes.

The 13-year-old American Tobacco Historic District, a 1 million-square-foot mixed-use hub of apartments, restaurants, and businesses has provided a massive boost to Durham’s rebounding downtown. But much of the action, in terms of new business development, happens in a basement. American Underground, a subterranean startup hub situated underneath one of the turn-of-the-century buildings, has become an anchor in the city’s tech resurgence, attracting more than $50 million in venture funding in the last two years

But far more important to the area’s success are the 1,100 jobs and $1.4 million in spending American Underground has driven towards area businesses. Durham understands that for a city to build a foundation for the technology industry, it needs to think beyond the founders.

According to Nicole Fleming, Director of Communications and Development for Thriving Cities, a market-facing research initiative of the University of Virginia and author of a report about the city’s tech scene, AU and Durham have figured out a formula for equitable, far-reaching economic success—to “nurture a successful city”—being sought by urban planners nationwide.

“This place was founded on the belief that what was good for the community is good for business,” she says. “The director, Adam Klein, told me that, ‘if in 20 years, we’ve only benefited those who already had access to these kind of opportunities, than we’ve been a total flop.’”

In many ways, American Underground and the American Tobacco Historic District represent a type of development and neighborhood that’s becoming more and more central to the economy of U.S. cities. Innovation districts, tech hubs, advanced manufacturing centers: the titles differ, but their common characteristics, such as clusters of startup accelerators, coworking spaces, high-end condos, and sleek coffee shops, make them seem ever-present, even cookie-cutter.

Recast older downtown buildings as innovation hubs, be sure not to remove the authentic, vintage charm, add millennials, and you have the template for urban success, and a magnet for tech-savvy entrepreneurs. But it’s not that simple.

A graphic from the Thriving Cities report showing the impact of American Underground on downtown Durham
A graphic from the Thriving Cities report showing the impact of American Underground on downtown Durham.
Thriving Cities

According to experts who study the formation and economic impact of these developments, creating ones that can change the local and regional economy is anything but formulaic. As more and more cities, from Chattanooga, Tennessee, to San Diego, California, invest part of their economic future in new innovation hubs, researchers are starting to understand how these developments work, as well as their true economic impact and benefit to the community.

“I think we may be at a phase where we know more what doesn’t work than what does work,” says Teresa Lynch, founder and principal of Mass Economics, a Boston-based research firm and consultancy focused on urban economics. “There are some minimum requirements when it comes to density and real estate products, but I think there are really multiple models and pathways to success.”

While the term is vague, innovation hubs often have a few defining characteristics. They’re typically anchored by large institutions or established tech firms (think of how research at Carnegie Mellon and the University of Pittsburgh has helped seed ideas and innovations in the city’s Strip District), offer entrepreneurs inspiring spaces to work and start businesses (startup incubators, coworking spaces, and tech offices, preferably in converted warehouses or old buildings). They also tend to feature the kind of residential architecture and amenities that scream stereotypical, late-20s tech founder (dense, walkable streets, restaurants and nightlife, and brand-new lofts and apartments, also converted from the same aged industrial stock).

Dennis Frenchman, Leventhal Professor of urban design and planning at the Massachusetts Institute of Technology, believes these districts and hubs aren’t just planning buzzwords, but part of the evolution of urban space, representative of fundamental in how cities will continue to adapt to numerous lifestyle and workplace shifts.

“Innovation districts represent fundamental changes in how we’re organizing, and living in, cities equivalent to what happened with the automobile,” he says. “Take the MIT campus. It’s now hard to understand where the campus really ends, because so much activity is happening in the neighborhoods beyond the school’s official boundaries.”

The dogged promotion of tech hubs also represents the shifting fundamentals of the U.S. economy, and its uneven impact on different cities. Manufacturing, a mainstay of the south and Rust Belt, has long been declining, with an average of 350,000 jobs a year in that sector disappearing since 1985.

Durham saw the American Tobacco plant shutter in 1987, the end of an industrial powerhouse that once produced 90 percent of America’s cigarettes (it was so influential at the turn of the century that it was part of the founding class of the Dow Jones Industrial Average). One of the founders of American Underground said the shuttered plant was a “community failure,” a sad monument that “showed where industry died.”

The ascendent tech sector is viewed as the solution. At a time when it’s easier than ever to start a company, with cloud servers and coworking spaces offering month-to-month rents, inspiring entrepreneurs can begin with little more than a laptop and an idea, a huge shift from just a few decades ago.

But despite early optimism that this ease of entrepreneurship would lead to companies flowering everywhere, tech tends to cluster, with certain cities “winning” and “losing” in the tech economy.

According to Berkeley Professor Enrico Moretti, who has done extensive research on urban innovation, including charting development in each of the country’s 320 metro areas, the stratification comes from the fact that success breeds success in tech.

He says the “thickness of the market” is what creates webs of dynamic, forward-thinking companies; bigger and bigger webs of entrepreneurs, where specialized workers can find specialized jobs, creating a win-win situation that “feeds on itself.” That explains why cities that can turn to established research universities normally get ahead, and why local tech growth feeds the rest of the economy, furthering the divide.

His research shows that an average of five jobs are created in a city for every single high-tech job, and the disparity in pay between high-performing cities and underperforming ones is more than double the disparity between workers with different levels of education in a successful city. Manufacturing jobs, which he says get the lion’s share of media attention in this country, only generate one-third of the economic multiplier.

These trends explain why developers often point to these districts as surefire ways to create the type of innovation central to tomorrow’s economy, and seem to bend backward to attract tech companies. Zappos CEO Tony Hsieh famously said his Las Vegas tech district would be a “city as a startup,” where even random encounters between aspiring programmers and designers would birth new companies.

But the data isn’t all rosy for those who aren’t working in the rarified world of high-tech companies. Dr. Neil Lee, an assistant professor at the London School of Economics who studies the tech world, has shown that the gains from the tech economy don’t reach those at the bottom of the economic ladder.

His paper, “Is There Trickle-Down from Tech? Poverty, Employment, and the High-Technology Multiplier in U.S. Cities,” looked at nearly 300 U.S. cities. It argues that as a city’s tech economy grows, income inequality increases. Tech hubs and innovation districts often get criticized as rewarding the winners, giving precedence to the tech economy over the greater good (a sentiment fueling the constant land use battles in the Bay Area).

“In cities with a thriving tech economy, skilled tech workers will see some wage gain, and the working class will see slight wage benefits,” Lee says. “But the real gains will go to the landowners. And, the important fact that isn’t highlighted is that the cost of living may increase. My definition for success in an innovation district is something that benefits existing residents.”

Nobody has devised the formula to create the next Silicon Valley, since assembling a critical mass of tech development goes beyond a few well-placed buildings. Cities need the right framework, says Lee, specifically a skilled workforce and a good, research-intensive university or similar research center. Moretti can’t find one example where deliberate policy by a state or local government in the United States created a successful innovation cluster on its own, and he’s is deeply skeptical that anybody, especially government, can engineer this kind of innovation.

“It’s hard for venture capitalists to know what the next big thing in tech will be,” he says. “It’s even harder for planners and mayors.”

What Moretti does believe in, however, is the power of deliberately cultivating talent long-term and focusing on investments in human capital.

“Public investment in education offers the highest return in the long run,” Moretti says. “The return for infrastructure investment is much less. It’s human capital, at all levels, that generates economic growth.”

That may seem like common sense. But many such developments focus on the top of the economic pyramid—the founders and startup companies—without helping promote diversity and other aspects of economic growth. True diversity isn’t just helping those who have traditionally been overlooked, says Lynch. It’s also filling the full roster of talent that a company needs to succeed. With a focus on coding and ideas, innovation hubs don’t always teach the skills needed for entrepreneurship and scaling a business, or provide enough focus on other sectors of the economy and local community.

“Entrepreneurship and innovation aren’t the same thing, and it’s not good to pretend that one is the other,” Lynch says. ”Innovation districts can get into trouble when they only support a small part of the economy, the innovators, and don’t get more broad-based.”

For many innovation centers and planners, focusing on education and talent development is what they believe will set them apart. New York City started a Tech Talent Pipeline program to help prepare locals for jobs in the tech economy and improve science and tech education at local schools. Oakland tech firms are working together to promote a concept of “techquity,” to help push the city’s tech boom to benefit all.

San Diego’s biotech scene, the third biggest in the world, is a perfect example of community support bolstering a spark of innovation. In the late-’70s, a group of biologists at UC-San Diego with eccentric specialties suddenly became relevant with the advent of early biotech. They became desirable to industry, had incredible commercial potential, and started their own companies. They became a cluster of talent to build around, and local talent nurtured by the city’s military and university ties provided manpower.

Fast forward a few decades, and now the city has a thriving tech scene with tens of thousands of high-paying jobs in the field. San Diego’s rise—unpredictable, but based on fundamentals—supports Lynch’s belief that the utopian version of tech development, a founder-focused, “if you build it, they will come” mentality looks at innovation through a simplistic lens. “I’m anti-bump into people,” she jokes.

These ideas are at the core of American Underground’s success. The center offers mentoring programs designed to appeal to underserved groups in tech, including working moms, and just hosted the first Google For Entrepreneurs Exchange series focused on African-American-led startups. American Underground’s diverse set of founders—48 percent of AU’s startups are female- and/or minority-led—and community focus makes a powerful impact. The conclusions from the Thriving Cities report underline the unique business model:

“AU understands that old-paradigm business models, driven solely by financial return, have actually come at great cost to communities, exacerbating the gap between the rich and the poor and contributing to the wide-ranging erosion of civic, social, and political life.”

A majority-minority city with an entrenched racial history, Durham has always had barriers to creating a more equitable economy. But now it’s finding that a forward-thinking incubator, which makes helping the entire community its business, offers a way forward, according to Fleming and that wider focus is why AU and Durham represent so much potential promise.

“They’re focused on creating a local startup scene that is representative of who’s really in Durham,” says Fleming, “and they’re starting to see the positive feedback loop of a real local focus.”