We hear a lot about technology and globalization these days, especially how they are hollowing out the American middle class. But there has been an immense positive impact from the globalization of entrepreneurship, making Silicon Valley’s formula of technology-based start-ups an international instrument for economic development.
I live amid this trend, living and breathing it daily. As someone who mentors entrepreneurs, I constantly hear the question from founders located across the United States or around the world: Should we move to Silicon Valley?
This is no idle question. Steve Case, for one, argues that it’s possible to build world-class tech companies outside the Valley. In a recent post on HBR.org, Maxwell Wessel draws on data to argue that companies raise money more quickly, have better prospects to be acquired, and face better long-term survival rates if they locate in Northern California.
My take on the subject is that if you’re going to move to Silicon Valley, be prepared. It’s horribly expensive, which impacts your burn rate. The talent war for start-ups that lack major VC backing can be brutal, and too many entrepreneurs underestimate this factor. And it’s not easy to survive the early stages of such a move.
Let’s imagine these conceptual arguments in more concrete terms. You’re the founder of a start-up that’s too nascent to allow you to draw a salary–but to live in the Valley, you’re now paying $3,000 a month to rent an apartment. You have no funding, but you have to convince some engineer who’s already juggling 15 job offers (including offers from Facebook, LinkedIn, and Google) to join you to help finish your product. Rehearse the pitch in your head, and please come share it with me at one of my Thursday morning free mentoring sessions. I’d like to see how it sounds. I’d like to see if you could convince me.
Remember, you have no funding, so you have limited ability to pay this person. Beyond equity, you have two things to rely on: vision and personal charisma. Since the company has not much to show for it yet, the equity probably isn’t much of a draw, either.
Is this engineer going to accept your job offer? The answer, in most cases, is no.
Companies that move to Silicon Valley after gaining traction end up having a better success rate. Traction means running experiments to suggest you’ve found a validated business model, some actual revenue, some early wins. If you’re going to move to Silicon Valley, waiting until you’re beyond the very early days can make sense.
For one thing, having achieved traction may allow you to raise funds. There’s a misconception that VCs and angel investors fund ideas, but generally speaking, that’s not true. That may happen if you are a serial entrepreneur on your third venture and have made money for investors before–but even in that case, you would be able to invest in your own bootstrapping stage. In any case, you don’t need outside investors till your experiments are somewhat mature.
If you really can’t start your company where you are, consider moving to a U.S. city that’s less competitive than Silicon Valley. Here are a couple of interesting case studies:
The Israeli company Perfecto Mobile is thriving in Boston. They moved to America, but not to the Valley. Among the advantages: less competition for talent.
The Indian cloud-backup company Druva did move to the Valley, but it waited until it had achieve traction enough to receive funding from Sequoia.
Now, when they hire, the first question–who is your backer?–meets with a satisfactory answer.
We also have examples of companies thriving in Arizona and Chennai … and many other places. Arizona-based InfusionSoft raised funding from Silicon Valley’s Mohr-Davidow Ventures, but by the time they did so, they already had millions of dollars in revenues.
Freshdesk, based in Chennai, India, raised money from Accel Partners in India, and even though they are selling to a global customer base, they have stayed in Chennai, keeping cost-structures down. Not only do they enjoy less competition for talent, they also enjoy less competition for funding. The company has 10,000 customers for their helpdesk software-as-a-service product, and thus far, $6 million in financing.
Greg Gianforte, the founder of RightNow, told me years ago that one of the best decisions he made was to build his engineering operation in Montana. Costs are low. Quality of life is high. Attrition is non-existent. Greg did raise money in Silicon Valley, but by then, his company had significant revenue. He eventually took the company public, and later sold RightNow to Oracle for $1.3 billion. I have called him the Montana Mogul.
More recently, Utah is seeing significant startup activity, and is able to draw capital as well, including from the Valley. Companies like Omniture, Pluralsight, Steals.com, and others are making excellent progress. Omniture has been acquired by Adobe, and was venture-funded by Silicon Valley firms such as Hummer Winblad.
Finally, if you do come to the Valley with the right ammunition – a solid investment thesis, proven model, traction, and execution track record–no matter where you come from, investors will shower you with financing.
In fact, if you have a solid operation elsewhere that costs less, faces less competition for talent, and offers a sustainable competitive advantage, the investors here like it very much. Large operations in Arizona, Utah, or India would work in your favor, not against. A small Silicon Valley operation with a large off-Valley base may be the ideal model for many entrepreneurs.
Of course, people come to Silicon Valley from all over the world, and many of them become successful. That is the myth of our golden Valley. That is what draws global talent to us.
But do not do not make a blind decision based on media hype or a cursory understanding of what’s involved.
If you come to the Valley, come prepared.
And know this, that, you can ALSO succeed elsewhere just fine.