The Small City Segment

A big market with unique problems

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I’ve lived my entire life in small cities – places most people drive through, but hardly ever drive to. If they stop, it’s for gas or a stretch of the legs. If they take a photo, it’s because the name reminds them of someplace else.

Columbus….Georgia

Charleston…West Virginia

Jacksonville…North Carolina

London…Kentucky

Cleveland….Tennessee

These cities are a bit odd. They don’t fit neatly into the rural or urban buckets. You can’t call them all “flyover country” - they aren’t located in just the middle of the country - 49 states have at least one city like this (Rhode Island being the only exception). They have weird niches of industry, long and winding economic histories, and residents that talk about how long they’ve lived there in increments of generations, not years.

They are misunderstood because they are in a messy middle of how a lot of people think about the US. Movies like Sweet Home Alabama contrast the bustle of NYC with a one-stoplight town in Alabama. But small cities exist on a spectrum between those two extremes.

This confusion featured prominently in the 2020 Democratic primary as Pete Buttigieg, former mayor of South Bend, ran for president. Many didn’t know how to digest his experience as a mayor of a city of 100k people. Was it a “proper city”? Was it “rural”? Emily Badger wrote at the time in the NYT:

“This city, according to Americans with only a vague notion of it, is a down-home, run-down, industrial, beautiful, Catholic kind of place. It is progressive and conservative, country and urban, dangerous and quaint. A college town, really, but with high poverty. And corn.”

What does it actually mean to be from the fourth largest city in the 17th most populous state?

It’s a question worth answering. Collectively, cities¹ just like South Bend are home to 60M people and 15% of US GDP ($3.2T). They house critical industries, and increasingly, critical topographies in the fight against climate change. They have an average income per capita of $54,000 and a GDP per capita of about the same (all data available here).

The 277 cities with populations between 100k and 500k in the lower 48 ( (not pictured are Anchorage, AK and Hilo and Kahului, HI; map link here)

To quickly call these places urban or rural, big or small makes it hard to see the consequences of them being neither. These communities experience large, pressing problems from housing to climate change. But they manifest differently than in big cities because of differences in population density and economic structure.

There is a big opportunity to bring new solutions to these problems in small cities, but too few entrepreneurs are building companies with these customers in mind. Problems that show up in small cities are illegible to founders in traditional startup and tech ecosystems. And a local default toward policy, non-profit, and private-public partnership solutions limits home-grown entrepreneurial activity. All of this will be discussed at length in posts to come, but one thing is for sure; to solve these issues at any meaningful scale, entrepreneurship needs to start pulling its weight.

Small Cities, Different Markets

Small cities are large enough to have big city problems, but lack the total population size, density, geography, and economies that enable conventional solutions. You can find these anomalies in:

• Housing

• Transportation

• Climate Change

• Supply Chains

• Manufacturing

• Logistics

• Environmental degradation from the legacy of industrial or agricultural eras

Problems here can be counterintuitive – for example, a major barrier to affordable housing is that housing values are too low, not too high. If a home doesn’t clear a bank’s cost to underwrite, lower income borrowers can’t qualify for a mortgage. Cash buyers distort rental market and appraisal pricing and the cycle continues. Manufacturing automation offers another paradox, as robots are not used to replace people and cut costs, but to perform jobs that would otherwise go unfilled.

Much of these issues sit at the crux of the physical world and technology. How things get built, how things get moved -- how we invest in places over time. These are not small problems, and they’re relevant to places and people beyond the 277 cities we’ve noted here. In short, these are big markets with important problems and little competition currently solving them.

Illegible Problems

Despite the push for entrepreneurship over the last decade, relatively few companies have built products that address these issues. Steve Case wrote an op-ed in 2021 about what happens if the aftermath of the pandemic pushes startup talent and capital toward the middle of the country. As he says (emphasis mine):

“Many have noted that talent and capital are starting to move out of the nation’s three major tech hubs and into various more affordable cities like Phoenix, Salt Lake City and Tulsa, Okla. But most are missing the more important point: The nation’s tech workers likely won’t work on the same kinds of projects that dominated their time when they were ensconced in their hubs. Entrepreneurs who previously worked in tech bubbles—places that have produced far too many photo-sharing apps—will suddenly be exposed to a wider range of real-world challenges that they likely would never have encountered without the pandemic.

Entrepreneurs are innately curious, looking to bump into ideas and people that can unearth problems to solve and opportunities to seize. But founders are unlikely to stumble into problems in sectors to which they have no exposure. And that is why the geographic diffusion of tech will change the industry at its very core. It is much harder to understand what bedevils the lives of people living in, say, Fayetteville, Ark., if your life rarely exposes you to people living outside the social and commercial networks of places like San Francisco or Cambridge, Mass.”

This migration pattern may be playing out to the metros he mentions, but founders, funders, and early-stage employees seeking out cities like Indianapolis, Phoenix, Salt Lake City, and Tulsa is still different than finding their way to South Bend, Tuscaloosa, Topeka, or Billings.

But even so, it doesn’t seem necessary to move to these places to think about tackling the issues in them. So then why aren’t entrepreneurs from other places seeking out these places and their problems? Wouldn’t solving big, valuable problems in markets that have little competition be a draw? Yes, but founders have to know these issues exist. Many conversations with emerging founders and investors over the past five years of running INVANTI show that despite the pervasion of the internet, these problem perspectives aren’t making it past city limits. I have three theories on why:

1. These cities collectively are not an organized political entity (city, county, state, country): there is little-to-no public discourse about the size of these problems in the aggregate. There is nothing that ties them together to advocate or make public the shared problems they face.

2. Decline of local news: as local news has decreased out over past few decades, there are less 3rd party entities diving deep into how these problems work, who they affect, and sharing those findings publicly. There are some non-profits and foundations that take up some of this work, but they are mostly catering to a public policy audience, not current or potential startup founders.

3. Problems look “local”: Because of (1) and (2), the problems often feel really local and limited in their opportunity for a business to solve. They are written off (including locally!) as problems for local government or non-profits to deal with and it’s hard to see that there is a network of similar cities that also have them. This makes markets look “small” at first glance and less appealing for a certain persona of founder talent.

As you’ll see, missing from this list is blaming the coastal tech ecosystem. The fact is that these coastal networks and ecosystems have extended farther in the last 5 years than they ever have in the past. They tend to have moved past small cities because they are looking not for problems, but for a density of founders and capital. The absence of dense startup ecosystems in small cities means that these places are all but invisible.

Policy & Non-Profits First, Entrepreneurship Second

The data show that entrepreneurship rates are more likely to be lower in these cities. 71% of them are in states with opportunity entrepreneurship rates (percent of new entrepreneurs who created a business by choice instead of necessity) below the national average. There just aren’t as many people starting things, partly because entrepreneurship isn’t the default way to attack problems.

When founders aren’t here or aren’t from here, it’s hard to know what opportunity exists here. So they don’t build for it. But the inverse is true too. The people who do know what’s here, don’t necessarily recognize them as opportunities fit for a startup, and even if they do, don’t know what it looks like to start a tech company. I’m still exploring this, but here are a few early takes on why:

1. Problem buckets: For some reason, when you mention the issue areas named above, people default to seeing them as the purview of non-profits, policy, and programs, not businesses. I’m not sure why - and will be continuing to try to understand this dynamic - but I can tell you that the outcome is less people exploring these problems as potential markets than is warranted.

2. Localized networks of trust: It takes time to become a member of the business community, which is largely at odds with the speed required of the venture financing ecosystem. Further, membership in one business community does not necessarily grant membership in another, and innovation on go-to-market strategy is required to make customer acquisition costs sustainable.

3. Underestimation of market size: We continue to hammer on the fact that the misunderstanding of these places leads to a failure to combine their market sizes. Problem severity locally can be an invitation to ask if it’s applicable more widely, leading to potential solutions only possible at scale.

The Bet We’re Making

Small cities might not need tech startups to survive. They are resilient and independent. They have their own ways of operating that have seen them through centuries.

But we're betting there are opportunities to build big companies that serve markets in these cities. We believe founders and funders are missing out by overlooking these small cities.  We intend to continue to use INVANTI to enable more founders to build for these places by doing more of the following:

Framing for Founders

We are going to start writing more about how the problems mentioned above (and more like them) show up differently. You’ll see “Problem Profiles” published on our website and on this Substack. We are going to do this differently than how it’s done elsewhere though - we are going to write with founder talent as the target audience. We are going to frame these in terms of stakeholders, needs, current solutions, economics, and threads of where businesses may be built. We hope to inspire founders to look more in depth at these problems as they decide what to build.

Investing Really Early

We are going to continue to invest in founders that are obsessed with finding solutions to these problems as early as we can. Whether you are pre-idea and want to use our Founder Studio process to better define the opportunity or you’re in the MVP stage and looking for funding to build initial traction, we are interested in talking to you. We are mindful of the size of these markets and invest in a way that leaves a lot of paths to success open for everyone involved.

Piloting with Networks of Trust

A strength of places this size is that they run on networks of trust. Knowing someone often means an ability to get to anyone. We want to use our networks in South Bend, and other cities like it, to introduce founders to people who want to partner or pilot their solutions, giving them the relationships that will inform designing products, services, and business models that can work and scale.

If you…

• are interested in building for the small city segment…

• are already building for the small city segment…

• know someone who might be/should be building for the small city segment…

• want to contribute expertise to problem profiles…

• or want to help us expand our networks of trust in small cities…

please reach out at dustin@invanti.co.

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Written in Lex

Thanks to Maria and John Garry for their contributions and edits.

Works cited in this essay:

• Is South Bend a Prosperous College Town or a Struggling Rust Belt City?, Emily Badger

• Small Cities Map, Dustin Mix

• Small City Data Spreadsheet, Dustin Mix

  • All figures taken or calculated from 2021 data and estimates

• Innovation Moves to Middle America, Steve Case

1. I say “cities” but I really mean what’s termed as “metropolitan” and “micropolitan” areas. This is more accurate because it removes small “cities” that are really just extensions of large metro areas, i.e., Anaheim to Los Angeles.