I grew up here in the Bay Area during the dot com boom. I went to college during the bust. And when I graduated, it was booming again. From that perspective, things have been mostly rosy in the Silicon Valley for startups! (except for 2008-2009, which is another story).
Now, I think we’re in trouble, Silicon Valley. I think we are on our way down as an early stage startup hub unless we start to fix some of the problems around here.
These days, although my VC fund Hustle Fund is based in the San Francisco Bay Area, I actively seek to invest in startups outside the Bay Area (to be clear, we do invest in companies here opportunistically, but we do not actively scout here).
1. Silicon Valley and San Francisco are too expensive
With the high cost of living in the San Francisco Bay Area these days, a lot startup capital must now go towards founders’ rent. In fact, people here qualify for low income housing if they have a household income of $117k! This is absolutely insane. This takes capital away from investing in companies themselves.
At this cost-of-living level, the Bay Area is no longer affordable to many founders who are not already rich. As much as people love the $8 avocado toast and the sunny weather around here, these are all less attractive when you’re crammed into a small room with 9 other people on bunk beds in a small apartment.
Given the choice – based purely on economics – of whether to start a company in the Bay Area vs say Austin, Austin makes a lot more sense. This is a no brainer.
2. Other startup hubs are on their way up
Other places like Austin have always been cheaper than the SF Bay Area, but previously, the cost-of-living delta was not as great as it is today. In addition, not only is the Bay Area becoming prohibitively expensive, other cities are becoming more attractive as startup ecosystem. This makes the decision to start a company in the Bay Area even less compelling when there are equally attractive options elsewhere.
In fact, my favorite place to scout for startups is in Toronto and Waterloo. Not only are the people there nice as all hell (and the dollar exchange rate works in my favor), but there is incredible talent. This is because large tech companies have established serious offices there, including Google and Facebook. Additionally, startups in this ecosystem have now grown large (Shopify is TO’s poster child unicorn), and the experience that tech workers get at a growth startup is good fodder for the next generation of startups (Note: I know everyone in Ottawa is going to be mad at me for calling Shopify a TO startup, but to be fair, there are massive numbers of Shopify employees and former employees in TO). Other cities that I like are LA (basically my backyard), Boston (oldie but goodie), and Atlanta. I need to spend more time in Denver, Boulder, Salt Lake City, and Austin. I also look at the “pan-midwest”: Chicago, Cincy, Indy, etc.
The rise of “other startup hubs” will only continue to trend upwards as today’s startups become large and talent from those companies eventually find their way to new startups. This will make it harder for SF to compete for startup founder talent.
I would say, though, the SF Bay Area is still on top for growing a company at the late stages today. It still has the most experienced talent for this stage because there have been a lot of high-growth companies successfully built here. Those people all learn from each other. In addition, a lot of the multi-stage tech VCs are also still here. It might be doable to raise an angel or micro-seed round locally outside the Bay Area, but for the late stages, there’s still much more capital being invested in companies here. Lastly, M&A is also still big here. The tech companies who are doing big acquisitions are in the Bay Area (though this is changing too).
3. So, where should you start a company today?
At this point in 2018, I think what makes the most sense is for a startup to start where he/she wants to be. Personally, where do you want to live? Use free content from the internet to learn new skills and focus on growing your business. If your company ends up getting to a certain growth stage, then it makes sense to open an office in the SF Bay Area. This is probably true only after the series A, in my opinion, where you’re doing perhaps $300k-$1m per month in revenue.
Many startups these days are successfully using a distributed model. This can work depending on the type of culture you want to set for your company. Do your employees like to socialize with each other? Or do they like to just focus on their work and socialize outside the office? Are your employees good at written communications? Documentation? Companies like Automattic, for example, have established a truly distributed work model, but this works because that is part of the culture and is important to the people who work there. In some sense, this is also tied to your business model. If you have a heavy sales model, for example, having a whole team of remote sales folks probably doesn’t make sense. You need camaraderie and in-person energy.
A hub and spoke model might also work, where there are small offices in a few places so that people can still socialize with their co-workers but then are tied back to the mothership in San Francisco. Intercom and Talkdesk, which both have European founders, have HQs in San Francisco but also significant offices in Ireland and Portugal. I think models like these are the wave of the future regardless of whether there’s an international tie or not.
4. But VCs don’t get it
Unfortunately, many VCs, ironically, are the greatest laggards of new trends. Many VCs will still only invest in their backyard because they believe they have to meet people in person even though video conferencing solutions like Zoom are really good these days! Many VCs are also averse to new ways of working (e..g, remote working) even though the costs at the early stages work out way better for companies like these. This is a risk; you might not be able to raise money from some VCs if you have an “unusual” work model.
5. What the future holds
I think that an increasing global trend is that a number of cities will (and already are) emerging as startup hubs. I think that the good news is that entrepreneurs can now start a company from almost anywhere. In the long run (20+ years from now), even at the late stages, we will see new funds that will invest outside the Valley as well as new multi-stage funds popping up outside the Valley to invest in growth stages outside the Bay Area. If the SF Bay Area cannot get its act together on lowering or maintaining the current cost-of-living, my prediction is that the SF Bay Area will RIP as a startup ecosystem (except for rich entrepreneurs) altogether.
I hope that doesn’t happen. But that trajectory is on its way. That is why I invest outside the SF Bay Area.
Cover photo courtesy of HBO