Aspiring entrepreneurs emerging from a top university or an accelerator such as Y Combinator frequently find themselves faced with a tough logistical question: where to set up shop?

Large hubs like Boston, Toronto or San Francisco offer access to dense entrepreneur networks, but the cost of space and employees may be out of reach for a new venture. Other choices also loom large: do they locate close to customers or investors?

As Bjoern Lasse Herrmann points out, “It’s very difficult to understand, especially as a young founder, where to invest the time to start a company.”

Since 2012, Herrmann’s firm, Compass (formerly Startup Genome) has produced two indices of the top 20 global startup-friendly cities, crunching a wide range of metrics to develop indicators that offer insights on location choices.

The 2012 ranking included three Canadian cities, with Waterloo Region placing 16th overall. Herrmann will release the 2015 ranking in August, and present a “deep dive” evaluation of Waterloo’s ecosystem during the Waterloo Innovation Summit in September. The region, he says, “stands out globally for its tech talent.”

According to Compass, successful startup ecosystems have both “developmental” features – ready access to a full range of funders, from angels to ventures – as well as “evolutionary” traits, such as the expanding presence of firms that will entice talented expats to return after working elsewhere.

While the Compass rankings don’t directly measure the impact of local learning institutions or enabling networks such as Communitech, such venues are  crucial to the long-term viability of an innovation community.

“At the core of every startup ecosystem is a network of people who trust each other, build teams, raise money and find customers,” says Herrmann. “In that sense, institutions [like Stanford or the University of Waterloo] play a vital role.”

There’s a growing body of data-driven research on the characteristics of startup ecosystems. Radius, another San Francisco analytics firm, has scrutinized location metrics on 27 million small businesses in the United States. The firm’s findings reveal that SMEs “flock to cities not because of growing job rates and income levels but because of community engagement and access to resources.”

Factors that correlate to successful startup ecosystems include a high proportion of small businesses relative to the total number of establishments and large numbers of firms that accept credit card payments.

In a 2013 interview with Forbes, Boulder, Colo., venture capitalist and TechStars founder Brad Feld also pointed out that innovation communities tend to have a full range of entrepreneurial activities and events – meetups, awards, incubators/accelerators – as well as approaches to building networks that “bubble up” from the community rather than emerge from government agencies.

Cities that attract venture capital and startup activity also tend to be more socially accepting to a broad range of diverse groups, including visible minorities, newcomers and the LGBT community, according to research conducted by the creative class geographer Richard Florida, of the Martin Prosperity Institute.

“These kinds of locations have the underlying openness to innovation and risk that attract entrepreneurs,” Florida wrote recently in CityLab.

With the new ranking due out, Herrmann adds one other layer that has emerged in recent years: second offices. With engineers and other talent in cities like San Francisco becoming increasingly unaffordable to both large and small firms, global tech giants such as Google and Facebook have looked to other innovation centres, such as Seattle, Austin and Waterloo, to establish satellite offices.

Such outposts, Herrmann says, serve to retain talented younger people as well as more experienced professionals who go on to become the next generation of founders. “At the end of the day,” he observes, “it’s about how many companies are being created.”

Five key elements of a successful startup community

Local leaders. According to Hermann, startup communities usually coalesce around a small but expanding group of founders or funders who are willing to invest time and energy in building the ecosystem.

Institutions that attract talent. Universities, incubators and research institutes draw talented young people with entrepreneurial aspirations. The networks of graduates, Herrmann says, become “essential in creating startup ecosystems.”

Distinctiveness. TechStars founder Brad Feld, who helped drive the startup ecosystem in Boulder, Colo., says communities shouldn’t try to become Silicon Valley me-toos. The “magical stuff” in each community, he says, is what attracts talent.

Lots of SMEs. After analyzing 27 million U.S. businesses, Radius, a San Francisco analytics firm, found that startups tend to thrive in communities with lots of startups, especially those in high-growth sectors.

“Returners.” While founders are globally mobile, successful startup communities develop strategies for enticing homegrown entrepreneurs to return later in their careers, says Herrmann.

Photo: Bjoern Lasse Herrmann by JD Lasica is licensed under CC BY-NC 2.0.