Starting a business is never easy. According to U.S. Bureau of Labor Statistics data, about a fifth of all startups typically don’t survive past year one of operation, and nearly half never make it to their fifth anniversary. That’s without considering the economic damage done by the COVID-19 pandemic, which resulted in 200,000 more permanent business closures than usual within a year of the pandemic’s start.
Outside of the pandemic, there are plenty of other reasons that startups fail, with a “bad location” among the most common. Choosing the right state for a business is therefore crucial to its success. A state that provides the ideal conditions for business creation — access to cash, skilled workers and affordable office space, for instance — can help new ventures not only take off but also thrive.
In this study, WalletHub compared the 50 states across 28 key indicators of startup success to determine the most fertile grounds in which to launch and grow an enterprise.
Best States to Start a Business
Access to Resources
Note: With the exception of “Total Score,” all of the columns in the table above depict the relative rank of that city, where a rank of 1 represents the best conditions for that metric category.
National and state economic policies can greatly affect business creation and the direction they take after launching. For insight into the ways in which different measures impact business, we asked a panel of experts to address the following key questions:
- Do you believe that the economic policies being enacted thus far by the Biden administration will promote new-business development?
- To what extent do state policies, such as corporate tax rates, influence decisions about whether and where to start a new business?
- Are tax breaks and other incentives to encourage new businesses on net a good or bad investment for states?
- Which, in your opinion, are the best industries for starting a business in 2021 and what states are most likely to see a start-ups activity increase?
- What measures can state authorities undertake in order to encourage entrepreneurs to start new businesses in their state?
Ask the Experts
In order to determine the best and worst states to start a business, WalletHub compared the 50 states across three key dimensions: 1) Business Environment, 2) Access to Resources and 3) Business Costs.
We evaluated those dimensions using 28 relevant metrics, which are listed below with their corresponding weights. Each metric was graded on a 100-point scale, with a score of 100 representing the most favorable conditions for new-business creation.
Finally, we determined each state’s weighted average across all metrics to calculate its overall score and used the resulting scores to rank-order our sample.
Business Environment – Total Points: 50
- Average Length of Work Week (in Hours): Double Weight (~4.76 Points)
- Share of Engaged Workers: Double Weight (~4.76 Points)
Note: This metric is based on Gallup’s “State of the American Workplace” report. Gallup defines engaged employees as those who are involved in, enthusiastic about and committed to their work and workplace.
- Growth in Number of Small Businesses: Full Weight (~2.38 Points)
- Startups per Capita: Full Weight (~2.38 Points)
- Growth of Average Business Revenues: Double Weight (~4.76 Points)
- Five-Year Business Survival Rate: Full Weight (~2.38 Points)
- Industry Variety: Full Weight (~2.38 Points)
- Industry-Cluster Strength: Full Weight (~2.38 Points)
Note: This metric is based on data from the U.S. Cluster Mapping Project. “Industry-Cluster Strength” refers to the level of high employment specialization of a cluster, which is defined by the U.S. Cluster Mapping Project as a “regional concentration of related industries in a particular location.”
- Entrepreneurship Index: Double Weight (~4.76 Points)
- Share of Fast-Growing Firms: Full Weight (~2.38 Points)
Note: This metric measures the number of firms in each state that are included on the “Technology Fast 500” list (Deloitte report) as a share of total firms in each state.
- “Digital States” Survey Grade: Full Weight (~2.38 Points)
- Job Growth (2021 vs. 2017): Full Weight (~2.38 Points)
- GDP Growth (2020 vs. 2019): Full Weight (~2.38 Points)
- COVID-19 Positive Tests in the Past Week per Capita: Double Weight (~4.76 Points)
- COVID-19 Death Rate in the Past Week per Capita: Double Weight (~4.76 Points)
Access to Resources – Total Points: 25
- Financing Accessibility: Full Weight (~3.57 Points)
Note: This metric was calculated as follows: Total Annual Value of Small-Business Loans / Total Number of Small Businesses
- Venture Investment Amount per Capita: Full Weight (~3.57 Points)
- Human-Capital Availability: Double Weight (~7.14 Points)
Note: This metric was calculated as follows: Number of Job Openings per Number of Civilians in Labor Force – Unemployment Rate.
- Higher-Education Assets: Full Weight (~3.57 Points)
Note: This is based on WalletHub’s “Best Universities Ranking” report.
- Share of College-Educated Population: Full Weight (~3.57 Points)
Note: This metric measures the share of the population aged 25 and older with a bachelor’s degree or higher.
- Working-Age Population Growth: Full Weight (~3.57 Points)
Note: “Working-Age Population” includes individuals aged 16 to 64.
Business Costs – Total Points: 25
- Office-Space Affordability: Double Weight (~5.56 Points)
Note: This metric measures the per-square-foot cost of commercial office space.
- Labor Costs: Double Weight (~5.56 Points)
Note: This metric measures the median annual income of the state.
- Average Annual Single Insurance Premium per Enrolled Employee: Full Weight (~2.78 Points)
Note: This metric refers to employer-based health insurance.
- Corporate Taxes: Full Weight (~2.78 Points)
- Total Effective State & Local Tax Rates on Mature Corporate Headquarters: Full Weight (~2.78 Points)
- Total Spending on Incentives as Share of GDP: Full Weight (~2.78 Points)
- Cost of Living: Full Weight (~2.78 Points)
Sources: Data used to create this ranking were collected from the U.S. Census Bureau, Bureau of Labor Statistics, Ewing Marion Kauffman Foundation, Center for Digital Government, National Venture Capital Association, Indeed.com, Tax Foundation, U.S. Cluster Mapping Project, Deloitte, The New York Times, Gallup, U.S. Bureau of Economic Analysis, Council for Community and Economic Research, LoopNet, Federal Deposit Insurance Corporation, Kaiser Family Foundation, Centers for Disease Control and Prevention and WalletHub research.