There’s been a bit of back and forth on what the best place to start a technology company is these days. The conventional wisdom these days is that the place to start and run a technology company is Silicon Valley. The key reasons put forth to justify this is money, talent, and expertise. If you’re initially choosing where to move and start a company, Silicon Valley seems to be the right choice based on the confluence of these factors – but I would argue that in some cases these advantages are not that strong and there are just as good reasons to start it elsewhere.
Most of the time when people are talking about money in the context of startups, they’re talking about access to capital, particularly in the early stages of a company. Menlo Park has perhaps the highest concentration of VCs around, at least those focused on technology companies, but for the most part they don’t limit investments based on geography. Sequioa says it is "helpful" if seed and early stage companies are close, but in the last year they've done Series A investments in companies in Shanghai, Honolulu, Virginia, and Israel. The Foundry Group has long said they invest in themes, not geography, and Chris Wand has a great article about how geography is overblown. In any case, there are no shortage of VC regional offices in places like Boston, New York, Austin, Pittsburgh, and Boulder.
The more relevant piece is that there is more early stage capital available. The area is stock full of entrepreneurs with previous successes willing to pump that money into potentially new successes. But there’s also a dark side to this. First, Silicon Valley is one of the most expensive places around - and if you factor in the need for a car (or two, if you’re a married couple and work in different place) and so on, it can even be more expensive than New York (which is usually one of the biggest knocks on our beloved city). Contrast this to raising a small friends and family round in Austin, Pittsburgh, or Colorado – you may have less available cash, but talent and office space (by far the two biggest drains) are a small fraction of what they are in NYC or Silicon Valley.
In other words, there may be less early stage money available, but you need less.
To put price in perspective, you can buy a beautiful new 4 bedroom home in Pittsburgh for $250,000 - a fraction of what you would spend a studio apartment here or in San Fran. The going rate for a small office that can house 5-6 people here seems to be around $3,000 plus utilities - that same space in Pittsburgh seems to be going for $800-1,400. That's a big difference.
Talent is a funny thing. There's obviously a lot of startup-minded technical folks who either went to Stanford or Berkley or move to Silicon Valley because they were interested in working in a startup. They know what they’re getting themselves into as far as potentially deferred compensation.
Again, though, that doesn't mean that there isn't great technical talent elsewhere. The cities I mentioned before - Pittsburgh, Austin, Boulder - all have great engineering programs producing local, young talent.
There’s also great talent in NYC - you should see some of the engineering that goes on at financial institutions, with people used to working with large datasets and so on. The problem is that New York is not built, financially and otherwise, to support the startup lifestyle. Now, as Charlie mentioned, not everyone here is an investment banker or lawyer who makes $300,000 – in fact, we have a thriving struggling artist scene with cheap rent, etc. Of course, good development talent doesn’t typically associate with that “poor” mentality. That said, with such a focus on the corporate lifestyle, being able to come to the office in shorts and a t-shirt and work flexible hours is a nice draw, and people are willing to make a little less with that equity upside to live that lifestyle. And remember, no one gets rich working for a boss - they get rich through entrepreneurship (or being involved in a startup early enough to reap the benefits of an exit).
Going a step further, I think some cities like the ones I mentioned already – given how inexpensive they are – are really viable epicenters for technology companies. I’m not sure if it makes sense to move to Austin or Pittsburgh to start a company, but if you graduate from UT or Carnegie Mellon, it certainly makes sense to stay. Pittsburgh in particular has been working very hard to try to keep their engineering talent and foster a high-tech scene, offering lots of tax and other incentives to get people to stay. Rodrigo of Sonya Labs talks a little about the dynamics of Pittsburgh trying to become a startup hub, and the opening of Alpha Lab should help there.
One thing I will say that I’ve noticed is that, unlike Silicon Valley, very few people move to NYC to start a company. Rather, they happen to be here (for whatever reason) and decide to stay and start something.
It’s interesting to me that there doesn’t seem to be any real incubators here in New York City. It seems like this would be a big start for getting people to start more companies here, especially given how expensive office space is. People like Charlie and his team at Path101 have been able to use donated office space, but there’s no YCombinatator or TechStars program here, or even something like AlphaLabs. There’s Rose Tech’s SparkSpace, but I struggle to put that in the true incubator space - “starting at $200/month for a virtual office for starving entrepreneurs”. Granted, they don’t take an equity stake, but contrast this to the incubators in Boston, Silicon Valley, Boulder and so on. The NYSIA Incubator closed earlier this year. I’m not really familiar with any others – though feel free to point out anything I’m missing in the comments and I will update the post accordingly.
Someone mused recently that there’s plenty of early-stage money in New York, but not as much what we would call “smart money”. And it is certainly true that less of the wealth in NY was created by those in the technology/Internet space as compared to Silicon Valley – but as I’ll talk more about later, not only might this not be a bad thing – it might actually be a good thing.
Misconception #1: We are not second-class citizens
One big misconception I want to clear up is the idea that in Not Silicon Valley, you’re a second-class citizen when you’re in a tech startup. That’s simply not true. As Charlie put it,
I have to be honest—I’ve felt that way several times, but mostly from people outside NYC. Within the city, I’ve actually felt really supported. Most of my 21 angel investors are not only in NYC, but they’re either NYC natives or have lived most of their lives here. Among my large diverse group of friends (I grew up here, went to school here, never lived anywhere else, and know tons of people doing very different professions), I’ve received fantastic support. No one ever asks me why I don’t just go into investment banking or trading.
And this isn't just within the NYC tech community. None of my former colleagues have "looked down on me" for leaving to this - in fact, many have said they wish they could do something like this as well. I would imagine the feeling is the same elsewhere.
In his Cities and Ambition article, Paul Graham said Silicon Valley is all about startups. “What matters in Silicon Valley is how much effect you have on the world. The reason people there care about Larry and Sergey is not their wealth but the fact that they control Google, which affects practically everyone.” I tell you what – power matters just as much as money in New York!
Avoiding the Echo Chamber
In fact, I would put it another way: In Silicon Valley, you’re just another guy or gal with a startup. You’re a small fish in a medium-size pond that thinks it is the only pond out there. It’s really no secret that the tech community – and Silicon Valley especially, it seems – are huge echo chambers.
Mark puts this well in his discussion of bubbles and business models.
I've been noticing a common theme in the Valley the past few weeks and it got me to thinking. We finally have some proof that things are changing here in the Valley. In fact, we may be at the end of our nice little bubble. Sure, lots of people don't think we're in a bubble, but I do, and I have for quite a while. At least now I have some proof.
So what's been happening lately that makes me think this? It's all of the startups who are "changing their business model". Company after company has been singing this tune of late. Why? Well, for one, just having tons of users isn't going to bring in the cash like they thought it would. Monetizing these users has been a challenge.
I usually hate making broad statements like this, but in general we’ve noticed an interesting pattern: when we meet with West Coast-based investors, they tend in general to gloss over our “monetization” slide. “Lead generation, advertising and data analytics? Ok, done, let’s move on.” Almost every one of these folks was more concerned with how we’re going to get traction. They wanted to see how we’re going to get 10 or 100 million users.
This is in stark contrast to some of the discussions we’ve had with NY-based firms. NY firms don't ignore traction and growth, but they are also more concerned with how. In some cases, these were investors targeting much earlier stages – like, the “2 guys with a company and no employees and maybe a prototype stage” – who were pushing us much further on the actual revenue strategy. (Not specific numbers, but they clearly wanted us to focus more energy there).
One of Corey’s favorite quotes is that “you should stay in New York but leave before it makes you hard, and stay in California but leave before it makes you soft.” Put another way, it’s easy to become complacent and tied up in the “local mindset”.
Don’t start "West Coast companies" on the West Coast
I would say the Notches mind-set is distinctively West Coast. As I’ve written about here on occasion, we’re free because we want to disrupt - our model is built around getting traction and generating data and “figuring it all out later”. I initially approached these business-minded questions with some skepticism but I’m quickly starting to appreciate those challenges. Just because our assumptions are being challenged doesn’t mean they’re wrong or that those challenging them "just don't get it" – in fact, the reason we have bubbles in the first place is this unchecked optimism.
You should start a company in an environment where it is not an echo chamber for you. Start a company where the people in the community bring a different perspective, because this will ultimately help you get a better picture of the world. If you’re a finance guy, you’re probably best not starting a tech company in NYC. As location matters less, maybe it’s better to start a company where you don't feel comfortable and see eye-to-eye with everyone.
Plus, from an expertise perspective, we have a lot more models on how to get traction than we do on how to make money. The bigger concern now for a video site is not how to get traction, but how to make money once they do. If anyone is going to figure that out, I sure wouldn't be surprised if it was in NYC.
Maybe the fact that NYC is so focused on money isn't a bad thing. After all, we're not building technology, we're building technology companies. As much as I subscribe to the "business models happen" philosophy, there's some merit to being focused on the money earlier - or at least being challenged on it.