Omaha, NE – Brain drain may be a concern for Nebraskans, but Populus Coworking has seen an influx of exciting companies from outside of the state.
Launched officially in August of 2019, Populus is a 9,500 SF shared office space at 26th and Farnam streets. The coworking space provides a home for small businesses, startups, and remote workers. It currently has about 70 members.
In February, VidaNyx moved its headquarters to Populus from Seattle. Invest Nebraska and NelNet Inc led a record series A of $5M to move operations to Omaha, NE, and bring on CEO Sara Boyd, previously CEO of the Omaha Community Foundation. VidaNyx is making several full time hires here in Omaha to fill out its local team.
Populus Coworking is also excited to welcome Techtonic out of Boulder, Colorado. The company recently opened an Omaha location after closing a $6 million Series B led by Camden Partners. “Techtonic is a transformative company addressing the overwhelming demand for tech developers,” commented Jason Tagler, Partner at Camden Partners.
John Bunting co-founded a startup studio in Las Vegas but recently relocated to Omaha. He recognized a need for this model in the Midwest and launched Beeso Studio with an HQ at Populus Coworking. Beeso Studio partners with startups to ensure their long term success by providing low-cost services for software development, project management, marketing, business development, operations, and advisement.
Additionally, Populus has welcomed remote workers from exciting companies like Redhat, which was purchased last year by IBM for $33 billion. The public company Altaba (AABA), formerly part of Yahoo, has executives at the space. Companies from Iowa and South Dakota are currently negotiating opportunities to land at Populus.
Nearly twenty new full-time jobs have been created in Omaha by Populus Coworking members and over $16 million in venture capital attracted since opening in August of 2019
Incredible businesses are building in the Midwest. Populus Coworking creates spaces to attract and support these organizations in Omaha.
The Midwest drives top startup returns. That’s the argument in a recent piece on Forbes of the same title by Venture Capital pro Pete Wilkins. He recently directed a study titled the 2019 Midwest Startup and Venture Capital Market Analysis. “After evaluating the data in the analysis,” Wilkins writes, “I argue that one of the best places for venture capitalists to smartly invest their cash is here in the Midwest.”
M25, a Midwest venture capital fund, recently released a study on the state of the Midwest tech ecosystem. This study is likely one of the more comprehensive data sets available for others to study on the Midwest startup scene. This year Omaha moved down two spots in the overall rankings, placing it amongst cities such as Bloomington, Indiana, and Champaign, Illinois.
So, how does Omaha rank amongst its startup peers? Specifically, how does Nebraska’s largest city rank amongst similar sized locations or cities nearby? The primary source of information for this piece is data from M25 on the top 50 startup cities. We will also consider the Silicon Prairie News State of the Prairie 2018 document and the Midwest Startup and Venture Capital Analysis from Hyde Park Angels. While the raw data is not available for this Silicon Prairie piece or the HPA Market analysis, the commentary and context are helpful. According to M25 data, amongst major Midwest startup cities, Omaha ranks 18th.
Similar Startup Cities to Omaha
Grand Rapids, Michigan
In the M25 data set, the above cities are most similar in size, and we will use them as our benchmark for comparison. The interest of this piece is how Omaha compares with other communities of the same size in the Midwest. That is, of course, not a perfect benchmark. It is an interesting way to consider the data, though. The idea here is not to explore where Omaha may want to be in the future, but benchmark where Omaha might be right now.
Even with a smaller population, Omaha (pop. 8.95) leads in multiple categories, beating out Akron, Ohio (pop. 10.67) and Grand Rapids, Michigan (pop. 10.30), Dayton, Ohio (pop. 7.52) and even tying with Louisville, Kentucky (pop. 12.72) in multiple categories. Controlling for population +/- 4 points, Omaha comes in second in total ranking score, following Louisville, Kentucky, the largest of the group. The data breaks down into three primary categories: startup environment, access to resources, and business climate. We’ll consider each of these categories in the following article.
The Omaha Startup Environment
Positive: Top in exits and high startup density Negative: Lagging in startup momentum
Omaha performs well when it comes to many areas of entrepreneurial activity for 2019. It outperforms all the comparable cities in startup exits. In 2019, significant startup exits in Omaha have included D3 Technology, who sold to NCR Corp, and Flywheel, who sold to WP Engine. Omaha also does quite well at the overall number and density of startups for its size. Concerning, though, and perhaps more important than the other numbers, is startup momentum. This is the percent change in the number of startups over the past five years. In this area, Omaha is second to last in its comparable group of Midwest locations. It falls behind Louisville, Akron, Grand Rapids, and Wichita. In fact, 37 of the 50 cities scored higher on startup momentum, placing Omaha near the very bottom of the Midwest cities when it comes to launching young companies.
For innovation to thrive, momentum is vital. Though Omaha may have a head start on other cities, these numbers reflect some reason for concern around startup growth. Though cities like Wichita, Akron, and Grand Rapids have fewer startups and a lower density, they are growing fast. For Omaha to keep its place amongst Midwest peers, it will likely need to step up the momentum in forming new young companies. The rate of new entrepreneurship is one of the Kaufman Foundations keys to a healthy startup community. This need is echoed in the recent State of the Prairie report, which says, “Omaha’s most fundamental issue right now is that more new technology-based, scaling companies must be started.”
Omaha Access to Resources
Positive: A leader in the number of resources Negative: These resources may not be fully utilized
When it comes to accessing resources, Omaha is an outlier in a few key areas. No other city in the comparable group has an educated workforce or Fortune 500 presence quite like Omaha. These outlier areas may skew the numbers a bit. An argument could be made that these put Omaha in a more favorable light than it deserves. While the city has a significant density of Fortune 500 companies, these companies have little engagement in the entrepreneurial community. There are few discernable ties between large organizations like Berkshire Hathaway, Union Pacific, or Conagra Foods, and the entrepreneurial ecosystem in Omaha. This is a significant resource but doesn’t appear to be one that is well utilized at the moment. The State of Silicon Prairie report wrote, “Large companies in Omaha are not participating at the level that they should regarding spin-outs and translational research.”
Still, the chart above from the HPA Midwest Market Analysis shows that the gap Nebraska has between Fortune 500 and the amount of venture funding is better than many. Texas, even with significant funding in cities like Austin and Dallas, still has the largest gap. Even Minnesota, with great startup momentum in the Twin Cities, falls short. Omaha can do more to connect with its corporate partners, but many successful startup cities are situated in states with larger gaps.
Considering the number of venture capital investors and the number of Angel investors, Omaha ties for the top spot with Louisville. Interestingly, though, Akron and Grand Rapids have the same amount of reported capital deployed with far fewer investors. Again, it would seem that Omaha’s resources are a bit underutilized here as it compares to Midwest peer cities. A higher number of investors with a lower amount of capital deployed probably communicates a lack of opportunity, interest, or education. The Nebraska Angel group is well organized and quite active. It may be the gap between the number of investors and the capital deployed is due to a deal flow issue around Omaha. Or, put another way, lower production of new and young companies is creating a void of investment opportunities for Angels in Omaha.
By the numbers, Omaha has a robust set of resources. These resources help place its aggregate ranking high amongst its peers, which should be encouraging for local startups. Still, closer analysis shows these resources may be underutilized or not fully engaged.
The Omaha Business Climate
Positive: Low cost of living with an inexpensive and well educated workforce Negative: Isolated with low population reach
Omaha is in the middle of the pack when it comes to population size in this group, ranking bellow Louisville, Akron, and Grand Rapids, while ranking above Dayton and Wichita. Despite its size, Omaha has the highest GDP amongst the group. This is likely anchored by its high density of Fortune 500 companies. Omaha has the lowest labor costs in the group and one of the lowest costs of living, presenting a favorable climate for founders. Often the city of Omaha is pitched as an inexpensive place to live and work with a great workforce. The numbers seem to back this up, placing Omaha tops amongst its peers.
A note should be made that Omaha’s low cost of doing business, which includes low wages, may hurt talent retention. While there are cost savings opportunities for business owners, it can be difficult to attract and retain the best when similar markets provide higher pay. A recent Omaha World-Herald study states, “across an array of skilled, high-demand job fields from software app developer to auto mechanic, average wages for workers in the Omaha metro area generally lag what’s paid in other major metro areas in the region…”
Omaha has a low population reach, which may make it feel isolated. Cities like Akron have access to other large hubs within their state like Cincinnati, Columbus, Cleveland, and Dayton. Cities such as Omaha and Wichita may struggle to make meaningful connections outside of the metro areas.
Despite all of these notes, the business climate may be where Omaha shines brightest in this data. A great airport contributes to the many benefits it offers founders.
Omaha, Positioned Well but Lacking Momentum
This data is only one snapshot of what’s happening in the Omaha entrepreneurial community. It likely has flaws and is far from perfect. Still, it presents a somewhat concrete picture of what’s happening. Some amount of measurement, like this data, brings more clarity to the state of the Midwest startup scene. It’s apparent Omaha is positioned to thrive. It is well resourced and inexpensive. It’s a healthy city. Sometimes, though, the resources aren’t the whole picture. The question might be: is Omaha maximizing the potential of its resources?
This analysis would suggest Omaha is not fully utilizing its advantages. Lower startup momentum shows fewer companies coming online. This may contribute to the healthy Angel Investor community that isn’t performing as many deals. Omaha likely needs a way to increase its momentum if it wants to keep a position as top amongst its peers. The metro area could punch above its weight class, potentially competing with even larger cities in the Midwest. Forming more young companies and engaging corporate America in the community are likely keys to even greater success. This should be paired with increases in pre-seed capital for young companies.
Considering the Lincoln, NE, Startup Scene
Any conversation about the Omaha, NE, startup scene should likely include Lincoln. Some may consider these two cities one statistical area as they are only a 40-minute drive apart. They are quite different in many ways, though. Lincoln has a population just shy of 300,000, while the Omaha Metro area has a population just shy of 1,000,000.
Lincoln is home to the University of Nebraska-Lincoln, which is the largest university in the state. This campus is nestled right up against downtown, the growing Haymarket district, and the new Railyard. There is a significant geographical density in the capital city for startups and innovation.
Overall, in the M25 data, Lincoln ranks 19th and Omaha just ahead at 18th. Omaha’s weighted score was 11.23, which is hardly over Lincoln’s 11.06 weighted score. In the State of the Prairie study, Omaha also ranked just one spot above Lincoln at numbers 11 and 12. A closer look at the data presents an interesting comparison between the two.
The Lincoln Startup Environment
When it comes to startup exits and large capital raises, Omaha appears to excel. There could be an argument made that these are trailing indicators of previous momentum. Lincoln has double the startup density that Omaha has and triple the startup momentum. These could be considered more leading indicators of future success. According to this data, Lincoln would appear to have more forward motion than Omaha. From one perspective, Lincoln, NE, appears to have a more vibrant and growing startup scene.
Lincoln Access to Startup Resources
There are large swings, again, when comparing Omaha to Lincoln in this category. The weight an interested party might place on each of the metrics makes a large difference in how one might asses the two cities. Additionally, local knowledge would suggest that the assessment here of metrics like the university ecosystem or the number of angel groups is skewed. For example, Nebraska Angels is the largest and most active angel group in Nebraska. It is technically based in Lincoln. This group invests across both cities, though, and it should likely be assigned to both locations.
Omaha does have a significant presence of Fortune 500 corporations. As previously discussed, these companies are not meaningfully invested in the local startup ecosystem. While this corporate presence is counted as an advantage to Omaha in this data, it remains to be seen if that will become a reality. On the other hand, this data shows a large advantage to Lincoln in the university ecosystem. While Omaha’s score of zero is too low, Lincoln does have a very active and supportive university that has invested heavily in the ecosystem. The University of Nebraska-Lincoln is a huge advantage to the capital city. Omaha would do well to build more meaningful engagements and partnerships between entrepreneurs and its great universities.
The Lincoln Business Climate
The business climate is an essential part of any thriving startup scene. Cost of living, labor costs, and tax climate are essentially the same in both cities. Omaha does have a larger and more convenient airport, which increases connectivity and the spread of talent and ideas. Overall, this data set shows Lincoln comparing favorably to the Omaha metro, even with a smaller population size.
Lincoln has the startup momentum Omaha needs
As with many assessments, this one is likely not comprehensive and far from perfect. But this doesn’t mean the insights lack actionable value. Pulling together three studies provides one of the most complete reviews of the Midwest startup community. It’s apparent from this data that Lincoln is coming on strong with great momentum and high startup density. If we consider these as leading indicators of future success, then the Lincoln startup scene has a bright future. Perhaps brighter than Omaha’s current trajectory.
This isn’t to say Omaha is poorly positioned, but it may lack the momentum and density of its sister city. Perhaps Omaha could look to indicators like the university system and engagement with corporate America to increase these pieces of the community. Omaha may also consider initiatives to launch and support more young startups, which would help build overall density.
Omaha is vibrant and, based on these assessments, a startup leader in Nebraska and amongst its Midwest peers. To build on this success, the community must launch more companies and maximize the potential of its local resources.
As previously mentioned, the “2019 Best of the Midwest: Startup Cities Rankings” article and associate data from M25 VC is a significant piece of this article. Please take a moment to get to know M25 if you’re not familiar with their work. https://m25vc.com/
“This round of regulations removes some of the most significant impediments keeping capital on the sidelines, especially as it relates to operating businesses.”
John Lettieri, president of the Economic Innovation Group
Locating funding as a startup or small business can be a challenge. Investment capital for startups is at a premium, specifically venture capital in Nebraska. Small businesses of all kinds struggle in Nebraska to locate money that is active and ready for a risk. There is an exciting new opportunity, though, for organizations of all types seeking investment capital in Nebraska, or anywhere else in the United States. In April of 2017, the IRS released information on a new tax advantage for investors called Opportunity Zones. And in April of 2019, the IRS released new guidance, which makes it more attractive for investors to consider small businesses and startups in these opportunity zones.
What is an Opportunity Zone?
An Opportunity Zone is an economically-distressed community where investments may be eligible for preferential tax treatment. Opportunity Zones (often called OZ’s) are nominated by the state and approved by the federal government. They were added to the tax code in 2017 as a part of the Tax Cuts and Jobs Act.
It’s relatively easy to find out where Nebraska Opportunity Zones are located by visiting the Opportunity Nebraska website. They have a straight forward map showing the location of all zones. Nebraska was eligible to nominate 44 areas. To be nominated, an area poverty rate needed to be at least 20%, or:
If located in a metropolitan area, the median family income can not exceed 80% of the greater of (i) the median family income in the metropolitan area or (ii) the statewide median family income, or;
If located in a non-metropolitan area, the median family income can not exceed 80% of the statewide median family income.
How Do Startups Benefit From Opportunity Zones?
The new guidance as of April of 2019 from the IRS makes Opportunity Zones a lot more exciting for businesses of all types seeking funding in Nebraska. The short version of things: investors can place money into a qualified startup or small business and avoid some, or potentially all, capital gains taxes. But, to fully understand the opportunity for small businesses in Nebraska, we have to dig just a little deeper in the specifics.
According to the Tax Policy Center, the benefits to investors more specifically look like this:
Deferral of taxes on previously earned capital gains Investors place existing assets with capital gains into Opportunity Funds. Those capital gains are not taxed until the end of 2026 or when the asset is disposed of.
Basis increase of previously earned capital gains For gains placed for at least 5 years, investors’ basis increases by 10 percent. If invested for at least 7 years, the basis on the original investment increases by 15 percent.
Permanent exclusion of taxable income on new gains For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).
Capital gains taxes are paid on the difference between the sale price of an asset and its original price. There are, of course, all kinds of nuances that may be applied to reducing a tax burden, but let’s keep our math simple for a moment. If an investor places $100,000 into a startup and then exits that startup with a solid return of $750,000 after a few years, again, keeping things simple, that investor may be looking at a capital gains tax of 20% on the $650,000 gain. That’s a healthy $130,000 in taxes! Ouch.
But there is good news for our investor called an Opportunity Zone. If that investor was to move all of that realized gain into a new startup located within an OZ, they may reduce the taxable amount of that gain by 15%. Further, all of the gains on the new investment in the OZ could be free of capital gains tax. To do this, they would need to stay invested for ten years. There are pro-rated tax incentives for shorter investments. This accomplishes two important things: it reduces the immediate tax burden and creates more attractive returns on Qualified Opportunity Zone Businesses. Our example investor could save hundreds of thousands in taxes by using an Opportunity Zone Fund.
How do I qualify for Opportunity Zone investments?
The recent tax guidance from the IRS helps. Over the past two years, most Opportunity Zone funding was heading straight into commercial real estate. This was because investors were unclear on the rules around investing in companies. What if that startup sells products outside of an OZ? What if that small business has employees located outside of an OZ? These issues could cost investors significant dollars. Most of these questions have now been addressed, thankfully, so Nebraska Investors can move with more confidence.
According to the Wall Street Journal, “Under Wednesday’s rules, Treasury says a business can qualify if 50% of its employees’ hours or wages are in the zone.” Further, a business may qualify if its property and/or managers needed to produce 50% of its revenue are in an Opportunity Zone or if it can otherwise show that 50% of the revenue is generated in the zone. We call these companies Qualified Opportunity Zone Businesses (QZOB). So, if your company headquarters in a Nebraska Opportunity Zone, you are likely to be a prime candidate for these attractive investment funds.
Any Accredited Investor may benefit from these Opportunity Zone tax incentives. We’ve written an extensive guide on how to find Angel Investors that you may want to check out. Many funds are forming with a focus on Opportunity Zones, and these Opportunity Zone Funds are the primary vehicle for investment in these areas. The new guidance gave these funds a grace period of about a year to invest in businesses, which has made them more attractive. This guidance is relatively new, though, and founders may find themselves having to explain the opportunity to potential investors. Sharing this article with them may be a great start.
Populus is located in an Opportunity Zone
And here’s a fun fact for you, Populus Coworking is situated within a Nebraska Opportunity Zone. This means that any business which moves at least 50% of its operations to Populus can be a Qualified Opportunity Zone Business and take advantage of these incentives. We will be encouraging Angel Investors in Omaha to take a look at Populus members for their next investment as it could save them thousands upon thousands of dollars.
Investing In Opportunity Zones Makes Nebraska Stronger
The tax incentives that Opportunity Zones provide investors are exciting for both founders and Angels. There is something deeper here, though, for Nebraska. Since the last recession around 2008, small businesses have been responsible for 100% of the net job growth in the United States. Put more simply; it is small businesses and startups that create jobs. Investing in companies within an Opportunity Zone will create significant job growth in those distressed areas. This is where the magic of this new plan could really drive meaningful impact beyond wealthy investors avoiding substantial tax burdens. This plan has the potential to create more meaningful returns for investors who help founders create jobs in distressed areas. According to CNN, the $2 trillion of unrealized gains that currently exist could benefit the rich and poor in a time when income inequality is rising. This is a new program and there will surely be much debate about its effectiveness in solving these income inequalities, but there is potential. That could be a massive win for Nebraska.
Disclaimer: This article is intended to help business owners make more informed decisions in regards to the topic; however, please contact an attorney for legal advice and an accountant for tax advice. Populus makes no representation as a legal advisor or tax advisor.