Why You Need to be in Silicon Valley

For years I didn’t believe this. I thought that you could take advantage of the benefits of Boston, Seattle, NY, Austin – cheaper talent, no echo chamber, local Universities, etc.. But I give up. I found myself telling an entrepreneur why he had to be in Silicon Valley if he wanted to succeed. Most of my points are about Consumer Internet businesses…

I won’t belabor the obvious reasons – the Investors are here, the best engineers and entrepreneurs self-select and come here, Stanford and Berkeley, yadda yadda.

Instead, here are some points that you may not have considered:

- Especially on the Consumer Internet, modern businesses are becoming winner-take-all (thanks to leverage and network effects). Therefore, if you’re 10% better than the competition, you win, likely the whole market. You need every possible edge…

- All of the companies that you need to partner with are out here. Business development doesn’t happen in formal meetings. It happens in informal coffees, parties, and relationships.

- If you are here, your network will be using all of the latest tools – Twitter, Foursquare, Quora, Nexus One, etc., before other networks in other cities will. These networks hit critical mass here earlier and are thus more valuable to the early adopters here. You’ll have a 3-month+ head start on people outside to see what’s coming next. Imagine trying to design next year’s clothing without firsthand immersion in this year’s fashion, in Milan or Paris.

Sure, it’s possible to build a great Consumer Internet business starting out somewhere else, but given that these are winner-take-all businesses, do you want to start out that far behind the curve?

64 thoughts on “Why You Need to be in Silicon Valley

  1. Those are all good points, but there are downsides too. It’s a lot more expensive to start a company in the Valley than other places. There is more competition for talent and resources. Not all businesses are based on bizdev deals.

    Hey, I’m not saying the Valley is bad. Obviously its great. But its not the only option. As open source and cloud computing continue to drive down the capital requirements of tech startups, investors become less important too.

    • Joshua, you can’t compare SV costs to those of NY (I lived in NY for 12 yrs, and have been living in SF for less than 2). Everything is more expensive in NY!

    • joshua, i think naval’s point is that in a winner-takes-all environment, the upside outweighs any and all of those downsides. yes, you have to spend more, and you have to deal with the competition for talent and resources, but those costs are inconsequential if it means you win.

    • Joshua is right on the money here.

      Certainly there are places that are more expensive, however, SV is indeed extremely expensive. Competitors hunt-down your best talent shamelessly. I worked for a company based in Mountain View, right across from Google, and saw a number of employees leaving for other firms withing a fairly short amount of time.

      Attrition for your business is what the the cost of living to you… Two negatives do not make a positive.

      There’s a reason why you see so many CA license plates in Austin TX these days.

  2. Naval, you are right on. I have to learn this costly lesson by experience. Though ours is not a consumer internet service, our small business targeted service demands as much leverage. We are just moving to the valley, even though over development base is in mid-west. Of course, you have left out the fact that most of the angels and investors operate out of the Silicon valley, for obvious reasons I guess.

  3. Naval – thanks for your precious article, and please, keep writing stuff about the Valley. It’s really important for who is not so lucky to be there, find passionate people like you that want to spend time in telling us how things really work in your ecosystem. Very often I heard of what you pointed out, especially the part related to the “business deals made outside the meeting rooms”.
    Can you tell me something more? I’m really curious. How does it happen actually? Can you give me some practical sample?

    Massimo

  4. I wonder how good the Valley is for startups related to the Finance industry because of the time zone difference with Wall Street.

    What do you think?

  5. Yes, there is an established community, and there are advantages to enjoying close contact with the competition.

    However, you don’t have to move to a big pond to become a well-fed fish… and the skills can also be caught, before they flock to the valley.

    This is a young industry, and the clients do not live in the valley. Client understanding is the oil that greases an average software company’s productivity, with exception to the minority of businesses that supply direct-to-consumer services.

  6. One other factor to consider is California’s right to work provisions. Because engineers and other employees can freely leave companies to start up their own or to join others (often without having to worry about non-competes), the velocity of ideas is much quicker.

    Also, from a legal perspective, California lawyers are much more familiar with the rules of start-ups. This is a big deal as it cuts transaction costs.

    I’m not all that familiar with the Valley, but I can see New York someday growing enough to compete. New York will likely need a few lucky breaks along the way to truly establish itself as a competitor to the Valley, but it has a shot because of its ability to attract intellectual capital. However, overall, I think that you’re spot on in your analysis.

    • I think NY has a major problem which it shares with London. Top talent is syphoned off into high paying golden handcuff jobs in the finance industry. It is very hard for startups to compete with the salaries that financial institutions will pay for top talent. It is seriously corrupting.

  7. An entrepreneur who is focused to success and do not give himself any other option and do not accept any reason to give up can do it from North pole if needed.

  8. Conversely, imagine trying to design the next year’s worth of clothing to be sold at target from Dior’s offices in Paris or Italy.

    I agree with you as far as companies like foursqure and twitter are concerned, but that is, let’s be honest, a tiny market. While facebook does have serious market share, consider companies like salesforce or survemonkey or naviance or 37 signals. These are multimillion, or multibillion dollar companies that are reaching non-technical consumers.

    If you want to design haute couture like websites, for the technorati, by all means be in silicon valley. If you want to reach the mass consumer market, nobody cares if you use foursqure or nexus one, and nobody has heard of quora.

    • You are bang on with that. Mainstream market products can be run from anywhere. And exactly, no-one outside of the tech bubble has ever heard of Quora.

    • I think Mischa and Zoran miss Navals point which was exactly that people outside of the Valley who are not in tech do not know what quora is, but everybody in the valley does. So if your company was the next quora, you really have a more nurturing environment of early-adopters and harsh competition that are going to strengthen and polish your consumer Internet product/service before the general mass market even knows it exists. Another reason you should probably not be afraid to fail, because if it can’t stand on its own in the valley, it will probably get killed quicker and save the entrepreneur and its investors some time tinkering around with it.

  9. I think this is nonsense, for two reasons:

    1. Anyone who needs ‘local access’ to a partner to make a BD relationship work is making their partnership decisions for the wrong reasons. Further, the idea that BD happens only in informal settings is a misinformed approach that goes against having firm criteria and a strong sense of merit-based reasons. Web-based talent lives everywhere and while local is nice, making it a prevailing criteria is insecure and flawed.

    2. Good BD is by no means ‘informal’ and should be the result of careful thought and rigorous vetting — getting along is great but far from a requisite criteria.

    I have lived and done BD in Chicago, SF and NYC and think this view is myopic, poorly-informed and lacking in any basis. Consumer web stuff is founded, built and wins from non Silly Valley places all the time.

  10. I couldn’t agree more with your third point-business doesn’t happen in formal meetings, it happens in the “real” world. Not having a presence in a focus city should be seen as an opportunity cost to your business.

    Some of the most crucially important meetings for your startup could be those random meetings on the street- running into Jack Dorsey at Sightglass coffee, your next investor at a Commonwealth Club meeting or your next potential developer at a bar on a friday night out. Silicon Valley is small, and San Francisco is even smaller- by leveraging its built in network you’re able to accomplish things much easier than just pounding twitter/FB/email.

    Silicon Valley is by no means the only place this happens, but for tech-focused startups, there doesn’t seem to be a better place to be. If you’re a financial based startup- New York may be better. Biotech- Boston, but find where that center is and be there in some way shape or form. Rent may cost a bit more, but the better question is- can your startup afford the opportunity cost of not being in the valley?

  11. There are many compelling reasons to set up shop in Silicon Valley. But Twitter, Foursquare, and Nexus One aren’t on the list and are widely used amongst my peers in various other locales.

  12. There’s a big difference between being in Silicon Valley and being from Silicon Valley.

    I think having a presence in Silicon Valley, especially if that’s where the ecosystem for your products is, can be valuable, but your article is making a case for having a sales rep or biz dev person in the valley, not a company.

    The internet has made it meaningless to be in the valley. You start your company where you can find the best cheapest talent taht you can afford.

    I wrote at length about this subject in this post about where to locate your startup

  13. Wait up for me :) i hope to make the long way from israel soon…

    i think that its also a very small community where traction is measured by just being there..

  14. how many winner take all business successes will there be? will they mostly be in silicon valley? or will it simply be a weighted distribution, according to population for example. at core there are a lot of factors, for example you may start in austin and then move to the valley or vice versa for a tremendous number of reasons. it somewhat reminds me of the thinking re ivy league schools, and the value and odds for success related to going there. obviously there are a lot of exceptions. bottom line entreps are opportunistic and will do what it takes to succeed. obviously there will be plenty of successes outside of the valley, and austin as a lot to offer, for example. and of course, there is nothing like being in silicon valley, it is indeed the capital for startups. then again, may be folks should consider china or india for the future. that makes my point about complexity.

  15. Good point!

    I hear a lot of people say that it is less and less important to be in Silicon Valley, but my team isn’t buying it for the reasons you described and are moving to Mountain View soon.

    I look forward to getting more insights from you!

  16. I run a mobile services startup for Indian market. Do you still recommend I should be in SV instead of India?

    The assumption you are making is that consumer internet markets outside US and Western Europe can be dominated by being in SV. There are many business models for which you need local knowledge and need to start locally.

  17. Bit of tough luck for us Europeans, heh?

    Most start-up entrepreneurs need a good dose of reality, I’m afraid. It’s quite likely that 99% of us will NEVER create a ‘winner takes most of it’ let alone a ‘winner takes all’ business.

    For most people, moving to SV or it’s environs simply makes you think you’re doing something of value to the startup – the money spent and disruption experienced could be better spent on achievemnt within the business.

    In the film industry there’s what are called ‘Cappucino Producers’ – people in Hollywood or London who are in the right place, at teh right time, with the right ideas, meeting lots of people, but who never actually manage to get a project off the ground because they’re distracted with the lifestyle.

    Don’t become an Espresso Entrepreneur.

  18. I am sorry but this article opinion is a decade out of date. If the year were 1997 I would say it’s spot-on, but dear the bubble burst and many of the dot.coms went away – the world changed. It’s not as though you don’t have good points, but the same points exist here in NYC, and in Boston.

    • I agree. Technology has evolved to the point where business can be conducted and business relationships established from anywhere. Virtual business can be conducted anywhere without sacrificing necessary resources to do it. Look at TreeHugger.com—no office, no permanent staff or anything. It sold to Discovery Communications for millions.

  19. Try some of those tricks in the real world and you won’t get very far… “Invest in my restaurant! No-one wants to pay for our ice-cream enchiladas, but they’re made by some of the best trained chefs in the world and everyone’s talking about them time down the local coffee shop!”

    Actually… ice-cream enchildas sound quite good…

  20. Quite true, though some companies set up offices in 2 destinations, slideshare, clicable, pubmatic etc. have one in the valley for business and a development center in India, China, or another asian destintation. They also have access to VC’s that have a mandate to invest in the US / EU and VCs who mandate to invest in Asia.

  21. You forgot to mention one aspect of silicon valley that is the envy Boston, Austin, NY … and any other foreign cities around the world – WEATHER!

    I spent 7 years in the east coast before I relocated to SV. I don’t think I can ever survive another winter or the humid summer of the east coast ever again. And the one summer I spent in Austin was definition of hell. Sorry guys… even without the start up advantages of silicon valley, it’s just a lot more pleasant place to live and is well worth the extra cost to live here.

  22. Great piece although I’m still skeptical. I believe you want to be part of a community of like minded people and be closer to talent and money. However there is talent and money in many places. Meeting people and communicating with them can be done in so many ways now, that it seems almost unnecessary to move to a certain spot unless you just like living there (which I can see because SV and SF are great)

  23. I think it depends on what kind of startup you have. If you’re trying to introduce a disruptive technology, then yes, the valley is probably the best place to be due to an abundance of talent.

    Increasingly, we see wildly successful startups emerging outside of the valley. These startups may be considered “technology companies” because they use the Internet as their platform but their disruption is not technology but rather business models eg. Groupon, Gilt, RueLaLa, The Ladders.

    Jeremy Liew has a good post on this: http://lsvp.wordpress.com/2010/04/19/business-model-innovation-is-making-silicon-valley-less-important-as-a-startup-center/

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s