7 Best States for Startups

Even states with laws and government attitudes hostile to business can be great places to grow a company in spite of them. That’s the case with nearly half of our “7 Best States for Startups.” Blending qualitative and quantitative criteria, Chief Executive selected Alaska, California, Colorado, Florida, Kansas, Massachusetts and Texas as the best places for new and fledgling companies. While Texas and Florida also rate as No. 1 and No. 2 in the magazine’s 2014 Best State/Worst State rankings, three of these states are in the bottom half of the magazine’s overall rankings of business climate.

Four of the seven were rated in the top 10 in the Kauffman Index of Entrepreneurial Activity for 2010 through 2012, a leading gauge of startup fervor and staying power. In these places, robust entrepreneurism persists and even grows despite a climate that may erect barriers to business overall. California, for instance,is “a place where dreamers and innovators are—you get to see things happening long before they ever make it to the rest of the U.S.,” says Chris Reed, founder and CEO of Reed’s, a $40-million brand of all-natural soft drinks based in Los Angeles. “And you simply can’t discount the pleasure of living here, even if the regulatory environment is a little rough.”

Hard criteria also exist to characterize places friendly to starting up and growing companies. These states tend to have reasonable property-tax rates and low or non-existent income taxes, because those types of levies bite all entrepreneurs even before they make a profit, says Yasuyuki Motoyama, senior scholar at the Kansas City-based Kauffman Foundation, which studies and supports entrepreneurship nationwide.

Startup-friendly states also have solid secondary- and higher-education systems—regardless of whether they boast the massive, renowned research universities that are so often incorrectly correlated with a vibrant entrepreneurial culture. They tend to have strong formal and informal networks for mentoring of new entrepreneurs by established ones. And, perhaps tautologically, they often have several urban areas that provide strong environments for startups.

On the other hand, Motoyama says, contrary to conventional wisdom, high levels of government research investment and strong venture-capital communities don’t necessarily correlate with robust entrepreneurial cultures and neither do low corporate-tax rates.

Here are snapshots of the seven states, in alphabetical order:

Alaska: More entrepreneurs are burning the long, midnight oil in the land of the midnight sun. Alaska has no individual income or state-level sales taxes to burden startups. That qualified it for the No. 4 overall ranking in the Tax Foundation’s latest State Business Tax Climate Index. Last year, the state cut taxes for small businesses earning $222,000 or less, and oil-tax simplification will give Alaska a greater economic edge. The state tied for No. 4 in the three-year Kauffman Index.

California: Entrepreneurship is a stubbornly strong feature of the Golden State, as California ranked No. 2 in the Kauffman Index. The self-perpetuating startup cultures of the Silicon Valley—and of lesser renown in Southern California—account for much of California’s reputation despite a blatantly hostile state government and regulators. The state’s unchallenged status as a cultural bellwether also gives new companies an advantage. New laws that cut the pre-startup filing periods and security deposits required for new businesses are glimmers of hopeful change.

Colorado: Pot legalization is stoking many—but not all—of the startups in the Rocky Mountain State lately. Colorado ranked No. 6 in the Kauffman Index with its legacy of technology and new-age food companies. The state also enjoyed four—No. 1, Boulder; No. 2, Fort Collins-Loveland; No. 6, Denver; and No. 9, Colorado Springs—of Kauffman’s top 10 U.S. metro areas for high-tech startup density. A No. 15 ranking for individual income taxes helped Colorado rank No. 19 overall in the Tax Foundation index.

Florida: Retiree heaven has been jolting to life as an unlikely startup haven. It was No. 11 in the Kauffman Index. Lack of an income tax and low unemployment-insurance taxes helped Florida to a No. 5 ranking by the Tax Foundation. Strong population growth tends to yield an inordinate number of new businesses, so that’s a factor as well. Some believe Florida’s renascent housing industry—in a state where it had slumped so badly—is a big contributor as well by creating new contracting companies.

Kansas: The Great Plains leader isn’t a chart-topper for entrepreneurs statistically, ranking only No. 20 in the Tax Foundation index and in the middle of the pack for the Kauffman Index. But small business won hopeful legislative victories last year in areas including individual income taxes, paycheck protection from automatic deduction of union dues and worker’s compensation. Unusually strong entrepreneurial networks, particularly in metro Kansas City, have created ways to propagate success lessons. And Google Fiber’s new high-speed Internet service there is accelerating technology-startup growth.

Massachusetts: This favorite foil of big-company CEOs because of its high labor and utility rates and hyper-regulatory regime remains a hotbed of knowledge-based startups, despite its middling ranking in the Kauffman Index. Cambridge, including Harvard and MIT, ranked as Kauffman’s No. 4 metro area for high-tech-startup density, and entrepreneurs brewed by those institutions love staying around Boston. Also, Massachusetts ranks a surprisingly palatable No. 25 overall by the Tax Foundation. And the hometown Suffolk University index ranks the state business climate No. 1 in the country.

Texas: The business-rich Lone Star State is only getting richer as its entrepreneurial culture spreads from Austin to Texas’s bigger cities, and its unbridled pro-growth stance continues to fuel growth for small businesses as well as large. Texas still specializes in stealing small companies from California. The state tied for No. 5 in the Kauffman Index and ranked No. 11 in the Tax Foundation list, including No. 7 in the crucial individual-income-tax category. Last session, the legislature passed a $1-million tax deduction for Texas businesses.

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