Why Tech Startups Should Consider Abandoning Silicon Valley
To read the press accounts, the city of San Francisco is in the midst of a veritable civil war. On one side are the technology companies whose Web 2.0-fueled success has driven the city's unemployment rate to a staggeringly low 4.6%. On the other are many of the city's longtime residents worried about how San Francisco's transformation into a tech industry company town—an urban extension of Silicon Valley's sea of office parks—has turned a place that has long prided itself on inclusiveness into the gilded bastion of "the 1%."
Physical manifestations of this cultural tension have been myriad. The private shuttles offered by large tech companies for their workers have become the site of tense protests. One tech entrepreneur said he was the victim of unduly aggressive treatment from cops who derisively labeled him with the epithet ‟billionaire wannabe." A prominent venture capitalist (this one an actual billionaire) infamously compared criticism of the tech sector's extraordinary wealth to the persecution of Jews in Nazi Germany. Then, of course, there's the lady who claimed she was assaulted at a local dive bar for wearing Google Glass.
The combination of a high demand for housing and a meager supply constructed by high-population density, rent control, and NIMBY-friendly development policies has created a situation where the middle class—especially people with families—are being priced out of the housing market. San Francisco has become the single most expensive city in the country.
This contentious situation has led to an ongoing debate over whether the fact that every other person in San Francisco seems to be working on a tech start-up is a net positive for the city. However, the converse of that question is something that's maybe even more interesting: is the San Francisco Bay Area's reputation as ground zero for tech start-ups even a good thing for the start-ups themselves?
There's a growing sense that good tech companies can spring up from anywhere—not just tech bastions like the Bay Area, or even cities already well known for their bourgeoning tech scenes like New York or Austin, Texas. If it's increasingly possible to grow successful tech companies in unexpected places—from Wichita, Kansas, to Lexington, Kent.—might it behoove the protesters lined up front of the Google bus to change their argument from ‟you're ruining our city" to ‟you could make more money somewhere else"?
The world outside the Valley
‟The first thing you have to understand about the San Francisco tech scene is that it's very deeply entrenched," explained author Alice Marwick. ‟Through numerous boom-and-bust cycles, Silicon Valley has been the epicenter of American tech culture for the past half century."
Status Update, Marwick's 2013 book-length ethnography of the cultural capital and rampant neuroses of the San Francisco tech scene, revealed a insular, status-consumed world obsessed with the concept of entrepreneurship. She explained that this tight focus on either attempting to become, or at least helping to create, the next Mark Zuckerberg has both positives and negatives.
"There is a very deep infrastructure here [for supporting tech start-ups] from lawyers to recruiters to hackathons," she said. ‟It's hard to overstate how beneficial this is. If you want to create a tech start-up, everything you could possibly need is right there for you. Even in someplace like New York, it's sometimes hard to get high-speed Internet in your building. People in the Bay Area don't run into those sorts of problems."
Marwick noted that being in Silicon Valley often makes it relatively straightforward for tech entrepreneurs to get from having an idea to putting a product out into the marketplace. But she insisted that the area's density of start-ups creates an echo chamber where everyone not only talks about things in the same way, but all seem to be chasing the latest trend.
"Silicon Valley is very much a company town. Tech is what everyone talks about and it's difficult to get away from," she noted. "Even in places like New York you get cross-pollination from other industries, but in San Francisco there's a lot of tunnel vision."
‟In San Francisco, there seems to be a lot of copycats," she adds. "Right now, wearable tech is all the rage, so there are two different companies [in the region] making Fitbits for dogs. If you look at the needs of working class people and people of color, there aren't a lot of apps marketed to them. The Silicon Valley tech scene sees itself as disrupting the world, but they're really just disrupting technologies used by a small subset of people—mainly rich and white."
This isn't to imply that tech companies based outside of the Bay Area are necessarily paragons of diversity and outside-the-box innovation. However, according to Kenton Hansen, a self-described ‟serial entrepreneur" who runs a co-working space in Wichita called the Labor Party, the physical distance between his hometown's budding tech sector and Silicon Valley's bubbling mass of start-ups engenders a different perspective for determining a company's underlying philosophy.
‟I think the types of products being developed in Wichita aren't really the same ‛blue sky' apps that tend to proliferate in Silicon Valley," he explained. ‟We tend to develop products that meet specific needs. We're looking for a viable product that we can get to market and then build off of that. Building a company that's the next industry darling but isn't profitable isn't going to feed our families. That's just the Midwestern approach."
Hansen points to local companies like BalancedComp, which makes HR management software for banks and credit unions, mobile email client EvoMail, and digital billboard advertising sales platform Fliphound as proof that tech firms based in places like Wichita can thrive. He notes that a lot of the companies in his scene are B2B, providing services for prominent industries in areas like aerospace or energy.
"A lot of the people at these companies really just think of themselves as small business people who just happen to be working in tech rather than self-styled ‛entrepreneurs' in the style of TechCrunch, even thought what they're actually doing is pretty similar," agreed Richard Stevens, a lawyer who advises start-ups in the Wichita area. ‟Also, out here in the Midwest, we tend to be a little skeptical of all that hype."
The inexpensive center
Danny Maloney spent the first part of his career working at tech firms in established hubs like San Francisco and New York. And one would think that when he was deciding where to locate the headquarters of Tailwind, the company he founded in 2012 that manages an analytics platform for Pinterest, one of those coastal metropoles would have been an ideal choice. Instead, he packed his bags and moved to his wife's hometown of Oklahoma City, put down his company's roots, and hasn't looked back.
Like so many start-ups, Tailwind started out doing something slightly different before pivoting to find its ultimate niche. The company began life as a social network for brides-to-be that incorporated content from Pinterest to assist in wedding planning. Maloney had his team create a set of internal tools to monitor data coming from Pinterest and quickly realized that the analysis platform he had built actually had far more potential than the company's wedding business. Tailwind switched gears and began selling access to its software to firms looking to maximize their exposure on the social network. Maloney boasts that the company has over 12,000 clients paying for its tools—ranging from individual small business owners to massive Fortune 500 corporations.
While Tailwind does have a small handful of employees in New York, over two-thirds are based in Oklahoma City. If nothing else, Oklahoma City's comparatively lower cost of living has given Tailwind a number of advantages that will undoubtedly help the firm in the long run. Maloney noted that all of his personal monthly expenses in Oklahoma City are significantly less than just what he was paying for rent alone in New York. It allowed him, as the company's founder, to not have to take a salary.
In fact, almost all the costs associated with starting a business in Oklahoma City are lower than they would be in places like San Francisco or New York. Rent is lower, the salaries required to attract talent are lower, and even the cost of food and power are lower. As a result, he was able to bootstrap the company's growth—meaning pay for expenses directly out of revenues—for a longer period of time than if Tailwind were in a pricier location.
"We're practitioners of the lean start-up philosophy," Maloney insisted. ‟We don't believe in raising a lot of cash early on and then throwing all that money at the problem of not having a business model until somehow everything starts to work."
Instead, Maloney said he was able to generate the funds to hire his first few rounds of employees without having to tap into the venture capital market. Only after about 18 months of existence did Tailwind did go out and get venture capital. Since they were able to do it further along in the company's lifecycle, Maloney wasn't forced to give away as much ownership in the company as he would have had to otherwise.
There are, however, two sides to the staffing coin. Startups based in Oklahoma City may be able to get away with paying many of their employees less than ones in San Francisco, but there's also likely going to be fewer qualified candidates—especially for the highly technical, highly specialized engineering roles.
The price of commercial office space in the rows of converted warehouses in San Francisco's trendy South of Market district has skyrocketed in recent years. The neighborhood certainly has its perks—good food and a location walking distance to the city's famously scenic waterfront being among the most notable. The main reason that the price of real estate in the area has become so expensive is that SoMa, as it's called, is where so many of the most talented employees already are. If a hip, youthful start-up sets up shop in a hip, youthful office space in the area, it won't be particularly difficult for the company to poach the programmers working at the competitor across the street. For companies scrambling for an edge, this physical proximity to top talent can be viewed as the difference between becoming the next Facebook or the next MySpace.
This doesn't necessarily mean that companies located outside places where programmers are known to congregate are going to be shut out of the market entirely.
Tom Hart, chief marketing officer of tech staffing firm Eliassen Group, explained that there's a growing ecosystem of third-party companies whose services start-ups can take advantage of to avoid having to hire their own employees. "A lot of companies just starting out will outsource a lot the infrastructure parts of their business, like customer service or marketing, to third-party firms that specialize in those areas," explained Hart, noting that companies can contract Zendesk to run their customer service no matter where they're located.
Hart added that in places where companies find it difficult to find someone with a very particular, very specialized skill set, it's becoming easier to hire someone wherever they happen to live and allow them to work remotely. "If you create a flexible workspace, you can attract top talent wherever they are," he said. ‟A company based in Iowa can employ a programmer based in Seattle. I'm not saying this is easier to manage or get everyone on the same page when they're all over the country, but it's doable."
This isn't to imply that it's impossible to find talented programmers all over the United States. In 2014, most large companies are in some way in the technology business, and many of them employ people who write code. Lots of cities have pools of talented engineers, many of whom would jump at the chance to sign onto an exciting new project as they are already working in companies that are primarily associated with other industries.
Pete Kazanjy, the co-founder of the HR search engine TalentBin, explained that it's now become a common practice for Silicon Valley firms to go shopping for human capital in what he called ‟under-leveraged regions" of the country—places where there isn't such a saturation of opportunities for young engineers. Kazanjy noted that these big-name Silicon Valley firms will recruit directly out of the computer science departments of schools in the South and Midwest. It follows that there's already a big opportunity for companies based near those schools to scoop up talent with an offer that means the new hires don't have to move halfway across the country in order to start working.
For a start-up operating outside of a traditional tech hub, plugging into the talent pipeline of a local university is a huge benefit. If there's a good university nearby consistently pumping out highly competent engineers, losing access to the ones who live in San Francisco and don't want their daily commute to be longer than a 20-minute bike ride isn't the end of the world.
The lack of start-up density in a given area can also be seen as an advantage when it comes to retaining talent. When every other company on your block is also making Fitbits for dogs, the odds of your employees getting poached are comparatively higher than if you're the only game in town. High rates of employee turnover can damage any business, but they can be fatal to young, nimble start-ups where individual roles are fluid and a hole left by employee number three may prove impossible to fill.
At the end of the day, attracting employees really comes down to product. "If you're building something interesting, people will want to work for you no matter where you are," Maloney insisted.
Will the money follow you to Oklahoma City?
When Maloney finally got around to pitching Tailwind to VC firms on the coasts, he was met with skepticism before ultimately getting funded. ‟They said we had to prove it to them we could be successful from here," he recalled, noting that there are an increasing number of VC firms looking to companies in the South and Midwest because the market for deals in places like San Francisco is quickly becoming overheated.
Washington, D.C.-based Revolution Capital is just such a pioneer in seeking tech investments in unexpected settings. Founded about a decade ago with former AOL CEO Steve Case, Revolution is a big advocate of what it calls the ‟rise of the rest," namely the formation of tech hubs outside of Silicon Valley. According to Tige Savage, Case's co-founder at Revolution, the firm's philosophy is to, ‟find markets that have been kind of sleepy and where tech allows for the creation of a new business model."
An example of a prototypical Revolution investment is Cambridge, Mass.-based Zipcar, which used technology to revolutionize the way people thought about the rental car business. Savage boasts that over 80% of Revolution's investments have occurred outside Silicon Valley.
‟We think Silicon Valley will continue to be the center of entrepreneurship, but we think it's already an extremely efficient market there," Savage said, noting that young companies elsewhere in the country have a greater likelihood of being undervalued because there are simply fewer investors seriously looking at them. ‟It's actually a lot easier to create a company outside of Silicon Valley than it has ever been before."
Savage pointed to Lexington, N.C.-based LollyWollyDoodle, in which his firm was an early investor, as an example of a tech company that likely couldn't have arisen in Silicon Valley. LollyWollyDoodle creates custom clothes for young girls on demand and does the majority of its sales directly through Facebook.
Lexington has a long history of producing textiles, but that industry has suffered in recent decades as many of those jobs have been shipped overseas. LollyWollyDoodle was able to leverage the skill set of the people in the community—namely an ability to produce clothes—to rapidly become one of the city's largest employers. ‟LollyWollyDoodle put that whole town back to work," said Savage. "That company could have been started in Silicon Valley, but it would have had a hard time finding people to do all that sewing. They would have had to outsource everything to China."
"We don't think Silicon Valley's day is over, it's just growing everywhere else.... [Most of these places] won't ever be Silicon Valley, but I do think they're going to produce a lot of great companies," Savage continued. ‟Right now, the majority of VCs are geographically focused, we're the exception rather than the rule. But, I think, 10 or 20 years from now, most VCs will have a more national strategy ... closer to ours."
The key to growing that acceptance will likely be success. The more investors are seeing home runs come from outside traditional centers, the more they're going to be comfortable making investments there," said Maloney. "The myth that great tech companies can only be built in Silicon Valley is being quickly broken down."
The article Why Tech Startups Should Consider Abandoning Silicon Valley originally appeared on Fool.com.Aaron Sankin was formerly an employee of AOL and holds an small amount of the company's stock, although his tenure there did not overlap with Case's time at the firm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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