Is the Valley too Expensive for Normal People to Launch Startups?
Posted by Bob Warfield on March 15, 2009
Interesting discussion by Louis Gray as he reports on an SXSW panel discussion. Seems there is some thinking that the cost of living in Silicon Valley is so high that you can’t do startups unless you either made a pile on a prior startup or have a trust fund.
The Valley has certainly seen an incredible amount of innovation. Mike Maples of Hyper9 quotes a study that says 90% of successful startups were founded within 30 miles of Stanford or MIT. GigaOm passes on this McKinsey heat map showing where in the world innovation occurs:
Can it really be that cost of living will change all that and make Silicon Valley an also ran for innovation? In the Louis Gray post, Penelope Trunk says the process isn’t doable for people that can’t accept risk to their foundation, and concludes this mostly limits startups to single 20-something men.
I don’t agree.
Let me start by saying I founded my first startup in Houston, Texas, where the cost of living is radically lower than Silicon Valley. This was helpful in enabling me to get further with less capital, but it did nothing to solve the problem Penelope Trunk talks about. There was still risk to the foundation. Salaries were commensurately less in Houston. And yes, most of the people willing to join up were young single males.
The Valley has important advantages that ultimately caused me to undertake the expense of moving my startup to Northern California. Despite higher costs (it was years before I could bring myself to buy a house), the stigma of failing in a small company was much lower. Plus, there were so many more opportunities immediately available if the one you were on fails that it becomes a sort of safety net. It’s hard for those outside the culture to understand the value of being totally immersed in a culture of start ups. The risk of doing one or being involved in one in Silicon Valley is less than anywhere else in the world. Yes, we have more venture capital. Yes, there are great universities. Yes, there is a pool of people with startup experience. But the cultural value, the total gestalt of startup immersion, is even more valuable.
Some years ago a friend of mine decided to leave the Valley primarily for cost of living reasons. He believed the housing market had peaked at ridiculous levels and that we were headed for an economic dip. He was stunningly right in his timing, BTW. He did a ton of research on where to move, and narrowed it down to Austin or Seattle. His research was primarily on the trade off between number of startups in those reasons versus cost of living. His research indicated about 1/6 as many startups, and much lower cost of living. He reasoned that with his excellent startup track record, he could get on with one of the “good” startups in the new region and come out way ahead.
So far, I think he would agree with my story. Now let me add some interpretation that he may or may not agree with–we’ve never discussed it. His financial timing was excellent. So good, he has been able to retire and I believe he is doing well. But he never did get on with another startup. While the other regions did have 1/6 as many startups, and his track record was excellent, something was missing. He never was able to find a startup that resonated. The ones he talked to just didn’t seem as good to him, and none were good enough to sign up for. Whether the startups in the other region were truly not as good, or whether it was just that his network was not as good almost doesn’t matter. Both are aspects of the startup ecosystem. And this is my point: Ecosystem is the most important thing for startups. They can certainly succeed without one, it’s just a lot harder. I would argue that means you’re risking your foundation more outside the Valley than those of living inside do.