Is Silicon Valley Worth the Cost for Tech Startups and Bootstrappers?
Posted by Bob Warfield on January 9, 2013
There’s always some article or other in the blogosphere rambling on about why XYZ will be the next Silicon Valley–they’re quite popular. I just read an interesting piece that has some clues about the true costs of living here (yes, I live at least near SV and have worked most of my career in SV). The article is really about how much top paying companies pay in the Valley, but it strays into the realm of cost of living.
While we can quibble with the accuracy of the numbers and ancillary factors like quality of life (undeniably good in the Valley or in NYC as some on Hacker News opine), let’s assume for the sake of discussion that while salaries are higher, they are not high enough to offset the much greater cost of living relative to other parts of the world. Looking a the way our great state operates and as well as the Economy, it’s going to get worse too.
What does that mean for Tech Startups and Bootstrappers?
This is a poignant question for me because I moved my first startup to Silicon Valley from Houston, Texas in the late 80’s. At the time it made total sense and I have no regrets, although even then it took us years to make enough money and then to screw up our courage to buy expensive California real estate and own a house again. The reason I moved was not access to technologists or building product. I was hiring great software developers out of Rice University (one of the best CS schools in the country) and University of Houston. They were cheap and cheerful and we built software good enough to receive acquisition offers from both Borland and Microsoft (we wound up being bought by Borland and the product became their Quattro Pro spreadsheet). Heck Silicon Valley itself hires tons of developers all over the world. Building software in Houston was very cheap back then. We took our company all the way to profitability for about $600K in capital over 4 years.
What got me to move was the marketing side. Even back then I wanted a less advertising-driven and more content-driven marketing strategy, and the way to do that was through PR. So I was doing media tours. I was on planes to either the East or the West Coast to talk to the people I needed to talk to–there was no leverage to being in Houston. I was also desperately in need of marketing advice, and there was nobody to talk to in Houston, Texas about how to do marketing for a high tech software company. We worked with Ogilvy and Mather’s Compaq team for a while and they did great creative, but it just isn’t the same in terms of getting the right strategic sense. So, after much deliberation, we moved. It was absolutely the best thing for us and there’s nothing at all I regret about it.
Flash forward to today. Are there still compelling reasons to endure the higher costs?
My central thesis for moving–the need to network in order to learn and influence–still exists, but it is weaker. There are still plenty of great developers available elsewhere, and I would not come to SV just to gain access to them. I might do so if I was a non-technical founder who wanted a technical co-founder who had “Been there and done that.” I don’t know how else other than track record the non-techie could tell whether the co-founder was any good. But not to put together a team. You can build any product there is with a maximum of 10 developers, and you can find 10 good developers in any major city that has a school with a good Computer Science program. Been there and done that. While that leaves out a lot of territory, it also opens up a lot of territory. If you are yourself a seasoned developer who hires well, you can probably even skip the need for a “Good Computer Science Program” and you’ll still wind up finding enough developers.
Let’s also talk about hiring non-developers. I have less feel for that, but my sense is this is also available much more broadly than just Silicon Valley. For one thing, I’ve worked with some fantastic people on content marketing who happened to be in Silicon Valley, but there wasn’t any reason to believe you couldn’t meet people like this elsewhere. They weren’t so steeped in SV Startups that they’d be impossible to find. If I were a Techie Founder desperately in need of my non-Techie Soul Mate Co-Founder, I would go on the hunt for the most successful blogger I could find in my area who I could get interested in my audience and in learning whatever they didn’t already know about how to turn their blog into a marketing tool. You can do a lot with a blog. Having worked with lots of Marketers in Silicon Valley, I think it is harder to find great content creation people than it is to find the Marketers, and I mean no disrespect to the Marketers. It’s just that what has to be done on the Marketing side is pretty easy to discover:
– SEO for your content
– The idea of a funnel and Conversion Rate Optimization with A/B testing
– The usual need to know how to ask for the sale
A little bit of that and a whole lot of super valuable content will get you off the ground surprisingly well. That’s why so many Techies seem to actually get somewhere bootstrapping.
But getting back to this issue of networking to learn and influence, I believe those advantages are still possible, but they are far weaker today, and particularly weak for Startups and Bootstrappers. We can learn so much more from the Internet and freely available content there than I could from buying books in the 80’s when I moved my company. Endless people are making a living telling you exactly what to do. I keep a clippings blog called Firehose Press for every article I read about marketing and sales that was a good one. There’s tons of data there culled by daily reading. More stuff than you can possibly act on. While it would be handy to just hire or co-found with someone that already knows all that stuff, I don’t personally think that would be very easy even sitting in Silicon Valley. For one thing, I have met a lot of Marketing people and very few understand SEO and the rest of it very well–they hire agencies to do that work. As for Content Marketing experts, they are scarcer than Hen’s Teeth. My own blog outperforms the metrics for the blogs of most of the companies I have worked for.
I can only really see three strong reasons for Venture Startups and Bootstrappers to be in Silicon Valley:
Energy, Fashion, and Bubble Riding
These are all somewhat intangible, but related. There is undeniably Energy to be had by going to visit your startup buddies and talking about ideas, techniques, hopes, dreams, gossip, and what everybody is doing. If you are getting energy from that experience, you’ll find it hard to get outside the community. Sure there are places that claim to be the “Next Silicon Valley”, but I’ve talked to a number of folks who went from here to there and they say it is disappointing once you’ve experienced the real thing. So I won’t deny that energy, but I will say there are also some negatives there.
Building a business is a lonely job, and despite the number of get rich by following my advice businesses there are, you are only going to get rich by keeping your own counsel. It won’t happen because you and your young drinking buddies figured it out together. Advice is good, but the best quality of real leaders is they make the right decisions absent enough data to have it handed to them. That’s why CEO’s can be so tough to deal with sometimes.
Let’s also keep in mind that there are also monoculture risks in being too steeped in a community. Yes, you can keep a finger on the pulse and understand the prevailing fashion trend (gee, are we doing photo sharing today, coupons, or some goofy check-in and review Consumer Internet play today?). If you’re a dedicated Bubble Rider, you need to sense of what’s happening. That’s what you do is jump on or ideally create the Fashion Trends.
But, it is not clear to me and never has been that this is a particularly low risk play. I think it is much higher risk than simply solving real problems that real customers have.
If you’re determined to raise Venture Capital you will have to be where the Venture Capitalists are. You need to do that both to Influence them and to learn who they are and how to approach them in a way that is successful. You can’t do that remotely and I am skeptical you can just get on a plane and visit Sand Hill Road when you need money. Relationships have to be cultivated over time. This is a serious Network Effect that isn’t going to change any time soon, and I think it is by far the strongest reason to come to the Mecca.
Pilot Accounts for Enterprise Software
If are so fashion challenged, as I am, to seriously contemplate Enterprise Software, you will need to find your initial Pilot Accounts. If you handle everything right, they become your Reference Accounts. You need about 10 of these carefully nurtured Kobe Beef Customers (hey, if they want a daily neck message, get your little hiney over to their offices and lay one on them) so that when the poor schmucks you actually plan to charge retail come through the door they have someone to talk to who will say nice things about you. Trust me, you’re going nowhere without the Reference Accounts. You can get started making real money with fewer than 10, but once you get 10, you can quit worrying about the Kobe Beef process and hopefully you’ve treated your other customers so well they are automatically Reference Accounts too.
To get your first Reference Accounts is going to be a function of networking. It will be rare that you can just walk in the door cold and get someone at a Big Company to make a bet on your sorry startup self. No, it’s only going to happen with someone you or someone you know already knows because they’re the only people that’ll trust you. Either your sales guy will crack open his Rolodex (sorry, probably starting to be peeps who don’t know what that is!) or you’ll talk to someone you golf with, or something similar will happen. While that can happen outside Silicon Valley (or insert other Tech Mecca Here), it is more likely to happen in SV. The reason is because the Big Cos with offices in SV have done this before. If you go cruising into some Oil Business cum Frac company in Houston, Texas, maybe they haven’t ever taken a flyer on a fly by night like your startup. Maybe your pal knows he can lose his job if it blows up, whereas in SV they know it is all part of being on the Bleeding Edge. Heck they have offices there partially because they want to talk to people like you so some can rub off and become a balm for their Innovator’s Dilemma.
Thing is, if you’re going to need a bunch of Reference Accounts, consider that you might need to do that in Silicon Valley.
Conclusion (aka When Am I Leaving Silicon Valley?)
On balance, if I was a young guy living outside SV looking to Bootstrap a new company into being, I wouldn’t start by moving to SV. I’d just go for it and I expect I would be successful sooner, making more money sooner, yada, yada. I would care about VC because I want to Bootstrap and I don’t care about Enterprise Software because it’s too hard to Bootstrap. I would make sure I was reading all the right blogs and I would figure out how to do some remote networking in case I needed a service or some advice from someone not in my burg. It can be done and works pretty well.
If, OTOH, it was going to be critical to raise VC, perhaps because I want to do Enterprise Software or because I’m a Bubble-Riding-Fashion-Seeking-Consumer-Internet-Kinda-Guy, I’d quit fooling around and get myself moved to SV. There’s no substitute for it.
If I was a young SV guy who’d had some success and was thinking of starting my first Bootstrap company, I would seriously consider moving out. I’m talking about a someone who is either single or at least doesn’t have kids. Getting off the salary crack pipe is hard, but if you’re at the stage where the equity in your house will practically eliminate the mortgage in another town and you need to get your overhead to be cheap, cheap, cheap, it makes sense. Ideal would be if you can go as a Techie/Non-Technie founding team. Move to Austin or some place together. Think of the adventure. You’d be successful and self-sufficient that much sooner.
Now I’m an older guy already living in SV and Bootstrapping a company. When am I leaving SV?
I probably won’t ever leave SV. Too many friends here and the kids are teenagers at that time when moving them is really tough. I do think about it largely from an economic point of view from time to time, usually when I visit some place like Houston that is much cheaper. Summers there are pretty nasty though. If I keep having thoughts of moving there, I’m going to have to change my visits to happen during the summer.
Hey, what about those VC Incubators? How can I possibly be successful with an Incubator?
Sorry, but I’m not a big believer in Incubators. They’re giving you very little in exchange for what seems to me to be a lot. Largely they’re giving you confidence because they’re selling the age old self help value proposition: “We know the formula for wealth and we’re willing to teach it to you for a price.” Here’s a little secret: everything they are going to teach you is readily available for free or at very low cost on the Internet. The only thing they have is their reputation which is the magic pixie dust that’s going to tell you that THIS is finally the one true formula. Guess what? There is no one true formula.
Go read the books by the 37Signals guys. They have a great reputation too and it is a lot cheaper.
BTW, VC intros are part of that One True Formula. Incubators can get them for you, but you can also get them for yourself. It’s not really that hard but it is also not really that important. I was getting them in frickin’ Houston, Texas at the tender age of 22 right out of school.
The VC’s won’t give you any money until you have something worth investing in. Go get that done and you can get the meeting with the VC’s.