The Start-Up Paradox: The Coming Red Shift in Innovation

The Economist recently ran an article crowing that London has now qualified as the fourth-largest city in attracting start-up capital, according to the annual Dealroom.com survey. 

The Economist wrote, “In 2025 its start-ups raised $17.7bn, behind only the Bay Area, New York and Los Angeles,” concluding “London is one of the best places in the world to start a company,” certainly better than Berlin, Tokyo, or Paris. 

To which we must answer, we’re not impressed. That’s because The Economist is missing the real story: that the three top start-up capital magnets are all U.S. cities: San Francisco, Los Angeles, and New York City. In fact, San Francisco comes in at $157 billion, more than the rest combined, while London just barely edges out Israel ($15.6 billion). 

Furthermore, seven of the top eleven are American cities: in addition to NYC, LA, and SF, they are Boston, Austin, Seattle, and Denver. As for China, it drags along at number 9 in the Dealroom survey, barely edging out Bangalore.  

All of which suggests the future of innovation is securely in American hands for a long time to come. 

But this prompts another question about this list’s top seven cities, which we’re going to dub the Start-up Mag 7. Why are almost all of them blue, even deep blue cities? After all, these are the same cities that tend to be resolutely anti-business, as well as redolent with high crime, high taxes, and high-cost housing, even, in the case of Seattle, active volcanoes of Antifa radicalism. Yet these same locations continue to draw the best of our entrepreneurs, risk-takers, and innovators, and their benefactors, and the money that chases after them. Why?  

Part of the answer, no doubt, is history. The mystique associated with Silicon Valley has attracted top talent to the Bay Area for decades, and will continue to do so, no matter how leftist local and state governments become. Indeed, some of that reliably progressive political culture may reassure Gen Z and millennial unicorns and billionaires, i.e., “I may be unbelievably rich right now, but I’m still the WOKE leftist I was in college.” 

But as we’ll see, there are more concrete factors that keep some of America’s bluest cities, like SF, Seattle, and LA, in the running to shape the country’s dynamic economic future. 

All the same, this long-standing pattern may be about to change. In fact, it’s already changing. A systematic “red shift” is underway in the start-up and venture capital universe. While established "blue" cities remain powerful magnets for the start-up entrepreneur, new centers are emerging, driven by economic factors such as tax policies and cost of living, changing work patterns, and a conscious strategy at the local and state level to challenge the dominance of traditional tech hubs while celebrating the culture of entrepreneurship and capitalism. 

In short, the Start Up Paradox may not be a paradox much longer, as a new entrepreneurial landscape takes shape in the pro-business states of America’s heartland.   

Meanwhile, the secret of success for blue start-up centers isn’t all that mysterious, after all. 

First, they have built up an impressive stockpile of talent over decades of research, development, and deployment for commercial ventures. Many have world-class universities accustomed to conducting leading-edge research and attracting global talent. One thinks of UC Berkeley and Stanford as part of the San Francisco start-up ecosystem of Silicon Valley, reaching back to World War II.  One can also point to Boston’s MIT and Harvard, Los Angeles and Cal Tech, and Austin and the University of Texas, to help to explain the presence of at least three others on our Start-up Mag 7 list.  

While New York City can’t boast university talent on that scale, it does provide huge amounts of another essential ingredient: capital and the business networks to build and provide access to that capital, including venture capital. The same applies to Seattle, where two mega-corporations, Amazon and Microsoft, act as talent magnets that inevitably spill over into the surrounding business and start-up landscape, driving the coveted flywheel effect.  And no one should leave out Boeing’s impact as a talent magnet for manufacturing and electronics start-ups from the Seattle success equation, either. 

Large cities also offer strong physical and digital infrastructures that start-ups need to grow, whether in manufacturing or services. They also provide the right demographics for a diverse yet densely proximate customer base, as well as a labor force that can meet virtually every requirement a start-up needs, from expert engineers and research scientists to people who can feed the workers, clean the floors, and take out the trash.  

Finally, cities like New York, Boston, and Los Angeles offer a range of cultural amenities that attract top-flight talent and their families: no mean advantage compared to joining a start-up in central Arizona or central Wisconsin.  Would you prefer to give your kids the opportunity to go to Lincoln Center after a school day at the Brearley School or St. Mark's, or to an ice sculpture contest behind Stevens Point Area High School, of which I am a proud alumnus? 

But the traditional pattern that’s dominated the start-up landscape is already changing.  

One indication of that change has registered in what a Business Insider article in 2023 described as the presence of “blue islands in red states.” The article also noted the paradox of how cities run by progressive mayors and city councils become attractive, innovative, and tech centers, in the middle of states that vote or lean Republican. It cited Bank of America's internal data showing that the five fastest-growing cities in the US were Austin and San Antonio, TX, Jacksonville and Tampa, FL, Las Vegas, and Philadelphia, PA. “All six are blue cities,” it noted, “and four of them — the Texas and Florida cities — are in red states,” although last year’s presidential election indicates Pennsylvania may be undergoing its own red shift. Business Insider also pointed to Nashville, Phoenix, Atlanta, and Salt Lake City as further examples of the same blue island phenomenon.  

Nonetheless, the seemingly paradoxical phrase overlooks the fact that, while these cities may be progressive or even WOKE standard-bearers, business newcomers often choose to live outside the city limits in suburban areas, where traditional conservative values and a quiet, safe lifestyle still prevail as part of a broader red-state culture. Increasingly, they are also setting up their businesses there, where there is more space to grow and less taxation and regulation to contend with.  

In addition, residing in a state with no income tax, such as Tennessee, Florida, or Texas, can offset many other costs associated with being embedded in a blue urban ecosystem.    

Even more important, we must draw a clear distinction between fast demographic growth per se and the kind of founder energy and innovation that draws start-up capital, and spawns viable new businesses. Here, we see a larger trend: red states themselves become nurseries of innovation and productivity, and homes to what I’ve described in an earlier article as the “hidden champions” of America’s reindustrialized landscape.¹ 

The factors driving the change are many. Not a few are matters of common sense.  

There’s what is known in the start-up world as “Innovation arbitrage,” i.e., the strategic transfer of proven business models, technologies, or operational practices from one market (e.g., Silicon Valley) to another industry or business niche, or another geographic region. Then those same models and technologies are adjusted to lower costs, lower taxes, or a better physical or more congenial cultural setting — a setting that might simply offer less competition for customers or resources. 

Then there’s the shift to remote work, especially after COVID, which has given entrepreneurs the freedom to access talent and capital from anywhere, further reducing their dependence on expensive or overworked traditional hubs. 

Entrepreneurs are also discovering that smaller cities like Greenville, SC, and Lafayette, IN, offer lower overhead, a better overall quality of life, and easier local connections, all of which make them increasingly attractive alternatives to the big traditional hubs. 

For example, in August 2025, Crowdspring drew up its list of 15 best U.S. cities to build your start-up in 2026. They included nine outside our Mag 7: Boulder, Miami, Las Vegas, Chicago, Salt Lake City, St Louis, Detroit, Nashville, and Atlanta. 

Chicago might seem surprising given its high taxes, high crime, and deep-blue political climate. But the Windy City area has emerged as the fourth hottest tech hub in the country, according to Site Selection magazine, beating out San Francisco. The key is the action in places like Elgin, IL, a growing manufacturing and logistics hub 35 miles outside the city, and Naperville, which includes in its manufacturing mix the largest single-site, lead battery manufacturing facility in the world, East Penn Manufacturing.  

Otherwise, the reindustrializing/reshoring movement sweeping across the country is definitely moving in a red-state direction. As the Phoenix Industrial Redevelopment website notes, “The Southeast has emerged as perhaps the most dynamic region for manufacturing growth in the United States. States like South Carolina, Tennessee, Georgia, and Alabama have attracted massive investments in advanced manufacturing, particularly in the automotive and aerospace sectors.” 

The key factors driving this coming red shift for manufacturers include:   

• Business-friendly regulatory environments in red states, with lower tax burdens 

• Lower cost of living and competitive wages in red states  

• Abundant and relatively affordable energy, especially away from dense urban areas, where the competition for energy access will become more intense, especially with the advance of AI, with corresponding higher costs  

• Strong transportation infrastructure, including access to major ports and rail networks.  

Greenville, SC, for example, is becoming a major hub for advanced manufacturing in the Southeast, with a strong focus on automotive, aerospace, machinery, and energy technologies. Key players, including BMW, GE Vernova, Michelin, and Lockheed Martin, who have created over 7,800 manufacturing jobs in the immediate area, with a $280 million Isuzu plant on the way. Greenville’s other advantage is its easy access to the port of Wilmington, NC, with a straight drive of approximately 4.5-5.5 hours and 250–300 miles, along major highways.  

Until now, we’ve left out one more key factor that will inevitably accelerate the overall redshift. That is the impact of Trump’s tax and deregulation policies in 2026, from a lower corporate tax burden to one-hundred percent expensing for new facilities and equipment. All these will fuel the rapid expansion of America’s youngest, most dynamic, and innovative firms, as well as traditional players. 

As one industry website noted, “While 2025 capital expenditures exceeded earlier expectations, rising 3.5 per cent on average, manufacturers anticipate a further 3 per cent increase in 2026. Apparel, transportation equipment, and machinery are among the industries forecasting higher capital outlays next year.”  In fact, Capex rates are widely expected to achieve record levels in 2026, driven largely by the AI infrastructure race. Most of that money will certainly come from major “hyperscale” tech firms like Google, Amazon, and Nvidia. But much of it will be SME”s taking advantage of the new tax laws, to grow their plant, property, and equipment.  

In the final analysis, what makes a great entrepreneurial ecosystem, and a great place to raise your start-up as well as your family and children? Looking at the surveys and the available data, it’s possible to isolate four factors.  

First, a key factor is access to capital, as entrepreneurs require diverse sources of funding to bring their ideas to life.  

The second is supportive infrastructure, including co-working spaces, incubators, and accelerators, which provide entrepreneurs with the resources and guidance they want to gain a foothold in their industry. With that infrastructure comes opportunities to connect with customers and suppliers, both physically (roads, highways, rails) and digitally, which allow business operations to flow more seamlessly and predictably.  

Third, there is a reliable and skilled labor pool. This is crucial for start-ups, and cities with strong educational institutions and vocational training centers will always manage to attract and retain the best talent. Military bases can help, as well, since they draw companies and engineering talent into their orbit.  

Finally, it requires a culture that celebrates innovation and risk-taking. States and cities that celebrate their founders and builders will always offer an incentive for other entrepreneurs to follow in their footsteps and build their own fortunes — and to contribute to regional economic growth.  Silicon Valley is the classic example of this trend.  A growing number of red states are deliberately following its example.  

Don’t misunderstand. Traditional leaders like California, Texas, Michigan, and Illinois will continue to dominate the manufacturing landscape, and attract the heavy hitters in venture capital — the mother’s milk of successful start-ups.  Meanwhile, the Start-up Mag 7, which dominates start-up capital today, won’t have to worry about being knocked off the list any time soon. 

But the fastest growth in manufacturing now lies elsewhere. Besides Texas, Georgia and Florida are expected to add the most jobs in terms of raw numbers, while Utah, Arizona, and Idaho will lead in relative growth. This westward shift reflects the rise of newer manufacturing hubs tied to high-tech sectors like semiconductors, electric vehicles, and aerospace. 

The same is true for startups overall. According to business.booking.com, the fastest-growing startup states are Florida, Nevada, Utah, Wyoming, Idaho, and Texas, with the Big Sky State, Montana, leading the overall pack. The reasons are the ones we’ve come to expect: low taxes, strong pro-business ecosystems, and high start-up survival rates. 

The truth is that big skies aren’t just opening for Montana-based entrepreneurs. They’re opening for entrepreneurs across America’s heartland. While the Start-Up Paradox won’t pass into the business history books just yet, a new and very exciting chapter in that history is being written right now.  

Arthur Herman is a Civitas Institute senior research fellow and author of Freedom’s Forge: How American Business Produced Victory in World War II. His newest work, Founder’s Fire: From 1776 to the Age of Trump, will be published in April.