Sunday, December 20, 2009

Is there a Silicon Valley advantage?

One of the advantages of being in the "job market" is the opportunity to gain some distance and reflect on some fundamental assumptions we take for granted. One such assumption for me was that "You have to start an Internet startup in Silicon Valley!" I have now come to realize that this assumption not only is false, but can be quite an impediment to success in building and growing your company.  Here are some data points that have helped me reach this conclusion:

1. There are plenty of very impressive, financially successful Internet startups that are headquartered outside of Silicon Valley, even outside of the US. Examples abound, but some companies off the top of my head are (Seattle, WA), Club Penguin (Vencouver, Canada), Metro Lyrics (Vancouver, Canada), Cymax (Vancouver, Canada), and (Silver Spring, MD). You may not have heard of some of these companies, but that may say more about the media coverage bias rather than actual financial success or user adoption.

2. Many successful Bay Area startups are recruiting heavily from outside of the Bay Area rather than locally, and have found the candidates from outside of the Bay Area to be as technically competent, with very strong work ethics coupled with a dose of humility to boot. As an example, social dating site Zoosk, which recently closed on a $30 million financing round, has recruited most of their employees from outside of the Bay Area.

3. Many Silicon Valley venture capitalists are looking outside of the Bay Area for investment opportunities. The math is as follows:

Lower valuations + lower labor/infrastructure cost + more available resources = higher likelihood of survival and success.

4. Most of the founders of successful Bay Area startups are not "locals", but first generation "immigrants" from other parts of the US/world.

Certainly, the above does not mean that in order to succeed one should sever all ties to Silicon Valley. The ecosystem of entrepreneurship that exists in Silicon Valley does not have a close second in the world and every successful startup should have a strategy about how to plug into the Valley ecosystem. But doing so does not necessarily mean you should headquarter the company from inception in Silicon Valley.

Indeed, for some startups, the right time to establish a presence in Silicon Valley may be many years after founding the company, reaching millions of users, and obtaining that elusive positive cash flow. As a matter of fact, as of December 1, I myself have joined one such startup ( in order to help them plug into the Silicon Valley ecosystem through partnerships and collaborations now that the company has reached the scale, user base, product and platform stability that can credibly support such efforts.

So, next time you are thinking about where to start your company, don't automatically assume it has to be in Silicon Valley.

P.S. This will likely be my last post of 2009, so I wish everyone Happy Holidays and an auspicious start to 2010!


  1. I agree. Silicon Valley is very expensive and difficult for small, underfunded ventures. But it's never too early to network via email and social media with valley folks. As for VC funding, they will find a venture if it's hot and has user buzz.

  2. Good post, Touraj. Club Penguin isn't actually a Vancouver company, but it is a Kelowna, BC company. Kelowna is a town of ~ 125,000 people in BC's wine country. Even more impressive and proof positive that a huge success can come from anywhere.

  3. However, it's important to recognize that Club Penguin consisted of ex-Disney people, i.e. talent that had been honed to a razor-sharp edge in the forge of a big company.

    I think that's the part that everyone forgets in these startup debates: the real differentiator is talent (it's missing from the equation in the post, for example). Not only do you need talented founders (whose main talent may simply be a new, fresh perspective not available to those already entrenched in the market - c.f. Clayton Christensen), but also access to talent that will carry the company through its entire cycle of development. That's where a connection to the valley really helps: access to people who have "been there, done that".

  4. Hi Touraj, the point about cost is very true. You're right, no one needs to be in the Valley to do an "internet startup." This is especially true today when web sites can be mashed up quickly by a few high school students using off-the-shelf components and then call their companies "internet startups." In fact, I would guess that the number of startups outside of the Valley [with a web presence] will only explode. You don't need to be in the Valley to do a web site that sells shoes, or lyrics, or wine, or advertisements, music video, blog sites, so on and so forth.

    The Valley has and will always create and sell core technologies, be it infrastructural components, algorithms, cloud computing platforms, new programming paradigms, etc. Everywhere else can consume technology; they use technology to sell shoes, lyrics, wine, things, objects, and anything else low-tech you can think of.

    Regardless of the type of internet business (selling shoes or selling core technology), if you aggregate and average up the numbers, location matters, statistically. Out of boredom last year, I wrote a script that culled up info on startup companies from Crunchbase. I divided the number of startups by the area, and I find that the Valley is a whopping 20X denser than LA. While Crunchbase is not by any means a definitive database of companies, it does give some sense of scale. Having been in LA for a few years now, I am not at all surprised with what I found. Entrepreneurial spirit is waaaaay low in LA, and the quality of techies is just not the same. Many of the so called "internet startups" that do exists in LA, aren't very technology driven in the first place-- you'll find lots of media, advertising, and marketing based internet startups where the site can be slapped on and mashed up by a few high school kids. Many of their infrastructures are primitive, still living in the 90s. In their defense though, one can argue that these companies don't really need high tech; they're not selling high tech. These companies only need the most basic technical competence to get the job done.

    In the end, it's about statistics. Being in a happening place does not guarantee success, but it does make it more likely for things to happen. One can pick and choose examples of success outside of the happening place, but statistically what are the odds of bumping into other techies, VCs, talents, and things that when collided, make succeed more likely to occur? On the other hand, my point is completely meaningless if you happen to be the rare case of success outside the Valley :)

    Some references:

  5. Thanks for the insightful comments everyone. Looks like the debate will continue for some time to come...

  6. Touraj, I think you are pointing to the anomolies rather than reality. As you know the Valley is chock full of startups at all levels. If you are looking for any technical, business, financial or legal skill, all you have to do is throw a rock to find it. This is much harder in other areas. As a person who has worked in the Northeast, the culture is completely different. So yes, you can go elsewhere, but it's a lot easier here.

  7. Thanks @Rajiv. True that lots of resources exist in the Valley, but to locate good, competent ones, you have to jump through hoops or pay an arm-and-a-leg and put up with a lot of attitude. I hear that's not the case in other places.