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Why Silicon Valley firms are not leaving...Part Two

My last blog post on January 30 introduced the topic of Why Silicon Valley firms are not leaving the pricey center of the tech universe for less costly areas…as your community may be pitching.  I pointed out the first reason, that being “Cost reduction doesn’t matter”.  Today I conclude with two more reasons that pitching a lower cost environment is of little to no draw to the startup community.

VC funding is Abundant.  There is a ever increasing flow of VC funding out there. In its Q3 Venture Monitor report, Pitchbook and the National Venture Capital Association stated that 2017 was on pace to be the highest year of VC dollars invested in the last ten years. And this was just for US VC funds.  The report goes on to state that the number of deals done was on track to be the lowest since 2012 as VC funds look to invest more dollars but into fewer companies. The reason is called the Unicorn effect as funds are seeking to lock up the next $1B startup valuation before its acquired/goes public.  

At a Keiretsu Forum event in Mountain View last spring, VC fund representatives grilled startups about potential competitors, status of prototype development, customer adoption scenarios but not one mention of locational cost structure impacts on operations.  This has been the case in every VC/pitch event I have attended in Silicon Valley over the past 2+ years.  VC money does not appear to care about locational costs, thus there is little incentive to look at cutting costs in this area.

Startup Exit Strategy. This may be most telling when it comes to no interest in relocating. The exit strategy of most startups is acquisition. In January 2017, CNBC stated that 80% of startups go the acquisition route versus IPO. If you are being purchased, your product is more important that your locational cost structure. Period.  Why concern ourselves with where we are if we are looking to be bought out? Let the buyer worry about that issue!

Well that leaves 20% of startups going IPO you say.  Isn’t that a market opportunity?  Yes and no.  Just getting to IPO is no assurance of a “viable” locational prospect.  Just check out Blue Apron and its post IPO travails.  And if an IPO happens, you bring in a whole other group of investors seeking to maximize shareholder value.  But that is another blog post for another day!

I know some of you are saying “hey I have seen stories of startups moving to lower their cost!”  Yes, there are isolated examples of startups leaving SV/San Francisco for cost reasons. SupportPay moved to Sacramento in 2016;  Business Apps moved to La Jolla in 2016 (which is somewhat less costly than the Bay Area). But on the whole, mass company exodus due to cost factors is simply not happening and there are no signs of this changing anytime soon.

The simple message I have is this: Stop trying to recruit startups out of the Silicon Valley…that energy would be better served working with the startups already in your community, working out of the co-working or innovation hubs in your area.  Even if their exit is a buy out, at least they are already in your community and retaining that talent and expertise keeps that buy out reward at work in your local economy!  Especially if they become a serial entrepreneur.


Randy Starbuck