Ag Tech and Flood Response is shaping Cedar Rapids Entrepreneurial Ecosystem

There’s little doubt that when the Kauffman Foundation’s Mayor’s Summit in Cedar Rapids, Iowa, kicks off this week, the topic of entrepreneurship won’t be discussed without the mention of how agriculture technology and the flood of 2008 has affected startup growth in the Cedar Rapids area.

At a first glance, using the National Establishment Time-Series data, a comparison of new headquarters and standalone firms hiring at least two employees suggests not much has changed between 2007 and 2011, apart from firms clustering slightly toward the center of the metropolitan area (figures 1 and 2, above). The total number of such firms has also just risen slightly by about 2.5 percent (from 720 to 738), while the population has increased by about 3 percent.

However, we see a different story if we dig in a bit deeper. Consider the rate of startup growth, one of the components of the Kauffman Index of Growth Entrepreneurship. During a five-year period, Cedar Rapids-area startups that have employees usually grow, but the growth rate has not been consistent and tends to fluctuate.

Interestingly, between 1999 and 2006, the rate of startup growth in Cedar Rapids and Iowa City, Iowa, (one of Cedar Rapids’ nearest peer communities) moves in opposite directions. This could be the result of direct competition for limited resources available to the firms in each metropolitan area. However, this trend seems to have weakened over the years, possibly due to an increase in the inflow of venture capital investments (see figure 4, right) into both Cedar Rapids and Iowa City, creating opportunities for startups to grow independently in each metropolitan area, without having to compete for previously limited resources.

For instance, Cedar Rapid’s Iowa Startup Accelerator, an accelerator focused on tech companies, which only began its operations in the fall of 2013, has invested in about 26 startups so far, with investments ranging from $20,000 to about $50,000. In fact, at least 14 out of these startups are located in Cedar Rapids itself, three in Iowa City, and a few others in other parts of Iowa. Additionally, ag-tech is also booming in the region, with various accelerators specializing in it. Central Iowa’s largest business group, The Partnership, is developing an accelerator focusing on ag-tech companies. Hence, there has been lots of new opportunities for startups to develop in the region during the past few years including more and more venture capital investments in ag tech from other parts of the U.S. (see figure 5, below). This financial support for local Cedar Rapids firms is a very positive sign for its entrepreneurs.

Although the rate of startup growth was significantly negatively affected by the Great Recession of 2009, the effects were much less severe in Cedar Rapids compared to Iowa City. This could be because of the outpouring of entrepreneurial activities in Cedar Rapids right after the 2008 flood spurred by the Business Rental Assistance Program, which was funded with federal money through the Iowa Department of Economic Development.

The program’s offer of free rent and up to $50,000 for six months must have been an attractive opportunity for entrepreneurs who could otherwise not have been able to afford living and starting a business in Cedar Rapids. So new bars, clothing stores, restaurants, fitness centers, etc., opened up. In fact, in 2014, The Gazette reported most of the 327 Cedar Rapids businesses that obtained $900 to $50,000 in free rent, and found that 87.5 percent of them are still active.

On a different note, share of scaleups, another component of the Growth Entrepreneurship Kauffman Index, suggests that startups in Cedar Rapids have been more successful in scaling up compared to those in Iowa City (see figure 6, below). However, this gap has been narrowing considerably since the Great Recession of 2009, with fewer startups becoming medium sized. So although startups in Cedar Rapids and Iowa City are scaling up on average over five years, the vast majority of them are still staying relatively small and employing less than 50 employees. This phenomenon is consistent with national trends—most entrepreneurs grow to a size they are comfortable managing and then remain at that size.

Nonetheless, with the success of local startups scaling up and attracting investments from various parts of the country, as well as the development of accelerators such as the Iowa Startup Accelerator, it seems that Cedar Rapids is heading in the right direction with supporting its entrepreneurs.

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Inara Sunan Tareque

Inara Sunan Tareque is a research assistant in Research & Policy for the Ewing Marion Kauffman Foundation, where her work involves research pertaining to entrepreneurship, identifying and awarding grants, writing literature reviews, and performing charting and data analysis. Tareque holds a Bachelor of Arts from Grinnell College with majors in mathematics and economics, with a concentration in global development studies.