Best Places to Launch

This year we partnered with the Ewing Marion Kauffman Foundation to find the 50 most business-friendly communities in America. With help from Robert Fairlie, an economist and leading scholar of entrepreneurship at the University of California, Santa Cruz, we developed a methodology and sifted through data on factors such as per capita income, hourly wages, workforce quality, crime rates, taxes and foreclosures.

We also looked at population size. While some entrepreneurs prefer to locate near major cities, others opt for the intellectual spark and intimacy of college towns and other small, close-knit communities. One size doesn't fit all, so our list is divided into three tiers: small, midsize and large metro areas.

Then we turned reporters loose on the top places. Over the course of several months, we spoke with hundreds of entrepreneurs and economic development officials about the pros and cons of metro areas throughout the U.S. Using those findings, we adjusted our rankings and picked this year's winning places.

We began our search with the U.S. Census Bureau's 363 Metropolitan Statistical Areas. Each MSA includes at least one urbanized area of 50,000 or more inhabitants.

For each MSA, we gathered the most up-to-date information available from the following sources:

Population: U.S. Census Bureau 2008 population estimates. We measured five-year growth from 2003 to 2008.

Per-capita income: Bureau of Economic Analysis per-capita personal income 2007. We measured five-year growth from 2002-2007.

GDP: Bureau of Economic Analysis Gross Domestic Product by Metropolitan Area for 2006. We measured five-year growth from 2001-2006.

Median monthly rent: Department of Housing and Urban Development 50th Percentile Rent Estimates 2009. Estimates are for 2-bedroom housing units.

Housing price-to-income (HPI) ratio: Moody's Economy.com. Using Fiserv'sCase-Shiller Home Price Indices and its own estimates of household income in each metro area, Moody's Economy.com calculated a ratio comparing typical housing prices with local incomes. We used the ratio for the first quarter of 2009, and compared it against a 20-year average, covering 1984-2004.

In areas where the current HPI is lower than the 20-year average, home prices may have plunged so sharply that local houses are now underpriced. In areas where the recent HPI exceeds the long-term average, homes may still be overpriced.

Average hourly wage: Bureau of Labor Statistics May 2008 Occupational Employment and Wage Estimates.

Business tax climate: The Tax Foundation 2009 State Business Tax Climate Index.

Crime: FBI Crime in the United States 2007. Crime instances are per 100,000 residents.

Not all MSAs report crime data. When 2007 data was unavailable, we used 2006 data in our raking calculations, and if 2006 data was unavailable, we used crime reports for 2005. For MSAs that did not report crime data for 2005, 2006 or 2007, we assigned them a median value and used that in our rankings.

All data displayed in our online package is from 2007 crime reports. For metro areas that did not file those reports, we listed their crime rate as "not available."

College-educated workers: U.S. Census Bureau American Community Survey 2005-2007. We looked at the percentage of residents age 25-34 that hold bachelor's degrees.

For our Web package, we also gathered some statistics that didn't factor into our Best Places rankings. That data includes:

Small business population: U.S. Census Bureau 2007 County Business Patterns. This tally is for the number of businesses in the MSA with 1-49 employees. We measured three-year small business growth from 2004-2007.

Local lenders: Small Business Administration. Our list includes lenders that made SBA 7(a) loans in the first 11 months of the 2009 fiscal year, from 10/1/08-8/31/09.

There's not a single West Coast place on your list. What happened?

Foreclosures. We weighted some factors more heavily in our rankings, and the recent foreclosure rate was a data point we placed a premium on.

The housing bust ripples out through local communities: When construction stalls, companies in many industries find demand for their services dropping, and when consumers are struggling to make mortgage payments, they spend less at local retailers.

Las Vegas, for example, had a booming economy through much of the decade, with great prospects for small business growth. But in the first half of this year, 1 in 13 houses in the area had a foreclosure notice. That's a grim prospect for local entrepreneurs. California and Florida noticeably suffered in our rankings from their high foreclosure rates.

City X has high taxes. How can you call it a good place to do business?

Sales tax, personal income tax, corporate income tax, property tax -- comparing all the ways in which municipalities assess levies on their residents can be a daunting apples-to-oranges challenge. We turned to the Tax Foundation, which each year publishes a comprehensive guide to business tax conditions in every state.

The Tax Foundation also creates an annual State Business Tax Climate Index, which offers a rough comparison between the states' heterogeneous tax structures. But drilling down further, to contrast tax structures in different individual metro areas, is tricky to do consistently, so we stuck with the state-by-state comparison.

For data on how many workers have college degrees, why did you only look at people age 25-34? Older people work too!

People of all ages make great job candidates for local businesses, but we zoomed in on the 25-34 age range for two reasons.

First, it's a telling statistic about the educational environment of the area. Places with lots of young, highly educated residents tend to be college towns, and having a university nearby offers ancillary benefits for local businesses, such as training opportunities, research labs, and a built-in consumer base.

Second, young workers just starting their careers have two big advantages for entrepreneurs: they're newly trained, with up-to-the-minute skills, and they're entry-level -- making them relatively affordable for businesses with limited budgets.

Have questions or feedback on our Best Places to Launch picks? E-mail the editors.

From the November 2009 issue