Big Apple lures little companies

It's a tough city - so why do thousands still launch here?

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(FORTUNE Small Business) -- It's crowded, it's noisy, and it's shockingly expensive, with a cost of living 64% higher than the national average: Welcome to New York City.

While more practical types might prefer nearby Lyndhurst (No. 30 on our list), residents here learn to do without ordinary conveniences. Like closet space. Or a lawn. Or a car. Commercial property costs 78% more than the national average, plus there's a 3.9% tax on rent south of 96th Street and in some cases an unincorporated business tax of 4% on revenues greater than $10,000.

Yet the 220,000 small firms here (up from 200,000 in 2002) account for two-thirds of private-sector jobs. Why are so many entrepreneurs willing to put up with so much?

For one thing, New York buzzes and pings with an energy that makes other cities seem sleepy.

"There's always the chance to try something you've never seen, done, or tasted," says John Stage, 48, who moved to New York from Syracuse and opened his restaurant, Dinosaur Bar-B-Que, in 2004. "If you're an action junkie, there's no place on earth like New York."

Much of that vigor comes from the city's extraordinary cultural diversity, and the fact that people of all races, creeds, and classes (including billionaire mayor Michael Bloomberg) rub elbows on the subways.

A mecca for the arts, media, and fashion, the Big Apple draws ancillary entrepreneurs - stage designers, lighting equipment makers, acting coaches, makeup artists, professional art restorers - who would find it hard to scratch out a living elsewhere. There is, after all, just one Broadway, one Metropolitan Opera, and one Garment District. And New Yorkers are willing to pay for services that inhabitants in other towns take care of for themselves, like walking the dog, doing laundry, and picking up groceries.

Then there's the prestige factor. Paco Underhill, 57, a market-research consultant, launched Envirosell in New York a couple of decades ago with one employee. He now has more than 100, including part-timers, and estimates that 96% of his clients are outside the New York area.

"In the beginning, my business - observing and analyzing customer traffic patterns - was a hard sell," Underhill says. "If I had been based anywhere else, I don't know if it would have done as well. There's an interest in companies based here, because New York is seen as a global center of culture and finance."

So important is a New York affiliation to the owner of one public relations firm (who wishes to remain anonymous), he has clients call him on a cell phone with a 212 area code - even though his business is based in Cleveland.

That cachet draws a rich mix of ambitious talent, so business owners get to hire from a top-notch labor pool.

"There are so many people in New York who work in creative professions [outside business hours] that I have access to great part-time help," Underhill says. "A prize-winning illustrator of children's books works for me part-time. I'd rather have 30% of his brain than 100% of someone else's."

The city encourages entrepreneurship through NYC Business Solutions, an agency that not only helps start-ups find affordable real estate and train employees, but also lends them money. Pete O'Neill, age 45, co-owns three dog-grooming salons in Manhattan. The third one was financed with an $85,000 loan from another city agency, Seedco. Before moving to New York, O'Neill ran shops in Los Angeles and Las Vegas.

"Neither offered the money and assistance that's available in New York," says O'Neill.

But the real secret may be a willingness to live a double life. As O'Neill puts it: "We think of it as two different cities- the one that's a nightmare during business hours, and the other one, where we love to live the rest of the time."  To top of page

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