Starting a company in Silicon Valley is stupid
One of the reasons I moved from New York City to Madison, WI is that I knew I would start another company. I wasn’t sure what it would be, but I had already launched two startups, and I could feel another one coming. It’s a sort of itch I get when I have too many ideas piling up in my head: I think to myself, “One of these must be good for something.”
People ask me how I picked Wisconsin. The bottom line is that I wanted to be able to support my family and take the wild risks that come with having a startup. Supporting a family in NYC or Silicon Valley is insanely expensive especially for someone who has no cushion to fall back on during the months when funding is tight. (Which is a major reason you see lots of Silicon Valley startups from twentysomething men with no expenses and few startups from women with kids, and heated discussion on TechCrunch about salaries for founders who can’t make ends meet.)
So, here are some things to think about when you know you are going to do a startup, and you know you are going to move.
1. The first stage of a startup is constipation, which can happen anywhere.
The beginning of a company is slow and meandering. You have pretty much no idea what the company is or what you are doing with it, or if you even picked the right partner to do it with. You sit in a room and argue for a while. And you throw in the towel ten times. And then go get it and try again. You develop a bunch of revenue models that are either so lackluster that they are not worth your time, or so outstandingly huge that they are not believable.
During this time, it does not matter where you live. You are not hiring. You are not pitching your business because you don’t have a pitch. And you are probably not spending much money because you know the near future does not include a lot of money coming in.
2. Angel funding is about fun, and you can get money in any state.
Angel funding is local. You will need to get your first funding from people who live near you. This is because angels typically do not need more money—after all, they are investing in a crazy, half-baked idea that has a one in ten chance of making any money.
So the angels are investing in a startup to have fun. They think the entrepreneur is cool, they think the idea is sexy, and they will tell their friends about it at cocktail parties. There are some things you cannot buy in life, and one of them is street cred. But angels try to do this with their startup investments.
The good news about this is that there is angel money everywhere because, in every state there are some rich guys who want more spice in their life. As a person who had to pitch her social media company in Wisconsin without using the word blog, I can tell you with certainty that angels do not need to understand your business to be able to sniff out if you’re the real deal. They invest because they like the person. You can get that funding anywhere. If you are likable.
3. If you stay small, you can stay put.
Most companies do not get huge. This is because most companies never even get off the ground. (Not that this is a huge problem. Of course, failure is productive, and you’ll learn from it.) But most companies do not grow to be 50-100 people. If nothing else, that number of employees is usually out of the sweet spot of the founders who are managing the company. So they usually sell or go under before they get huge.
If you are not going to get big, you do not need to take in venture capital. And if you are not going to take in venture capital, then you don’t need to be where the big VCs are: New York and California. There is also the talent issue – if you need 50 developers who are great with Ruby on Rails, that’s gonna be hard in Tulsa. But finding three, that’s possible. Especially if you can train one or two.
4. If you live in the boondocks, you need to fly.
There is research from Babson College suggests that traits that make a successful entrepreneur do not point to a single personality type per se—a very wide range of personalities can do a good job starting a company. But what differentiates successful entrepreneurs is networking skills.
So while you don’t need your network in your backyard (which you would have automatically if you lived in Northern California), you do need to be able to fly to your network frequently. The network you can build by just showing up in California or New York is unprecedented. And while LinkedIn is great for getting a bus dev guy, it’s not great for meeting entrepreneurs and swapping stories. You need to show up. I try to fly to each coast once a month. I book myself back to back for three days and then I return to Wisconsin to decompress.
5. Live in an expensive place only when you need venture capital.
Most of you will not be going after venture capital. You simply will not have a business idea that warrants that kind of investment. And in that case, you will be bootstrapping for a long time. And it’s a lot easier to bootstrap in a place with a low cost of living.
There will be months when you cannot pay people. There will be days when you worry you can’t pay your own bills. You will fall behind much faster in Silicon Valley than you will in Iowa. And a big reason that startups fail is because the founders don’t keep going — searching for what will work. Living somewhere inexpensive gives you leeway: a way to have a decent lifestyle while you’re gambling that a dream will come true.
And, just like Facebook, and many, many other startups, if you do get to a point where it’s time to get huge, you can open offices in Silicon Valley.
So, how do you decide where to live? Well, I took a bunch of research about what makes us happy and I concluded that living in a city where there is a low cost of living gave me more flexibility to create a life that was right for me. There are trade-offs in every city, but the most expensive cities demand the most expensive trade-offs.
And, one more thing: You should move where your family is, or where there's anyone you know and love. Work does not matter as much as being close to people you love. So if you’re still determined to do a startup in New York City, maybe you should relocate your loved ones as well.
Key point here. “If you are likable.” Pretty much sums it up. Can I be you when I grow up? Oh, wait, I’m already older than you are. As they say, “Never mind…”
Hi Penelope,
As someone who successfully bootstrapped a company to success in the Valley, I have a fairly unique perspective on this.
The Valley offered many advantages to my web hosting company; namely, that I was able to network with startup founders and poach potential clients from competitors who couldn’t look those clients in the eye and give them a tour.
The problem I ran into was that hosting is extremely competitive price-wise, and our customers here in the Valley often wanted us to match prices from competition in Texas.
Contrary to what most people believe, the hardware cost (which does drop every year) is actually negligible when it comes to hosting. Most of the expense is 1) real estate 2) electricity 3) staff. On all of these, Texas and Kansas win.
So, I was quite successful, but if I were starting another hosting company, there’s not a chance I would do it in the Valley. I’d start someplace with cheap real estate and datacenter-building subsidies and simply fly in for networking events.
-Erica
as alwayes, one of the factors of a good business is the location. Starting from the tax rates, population, rent costs and more.
Great post, Penelope. Another recruiting angle: While there are fewer potential employees to choose from, they also have fewer options than they would in the Valley, so a fun company can still have a decent shot at the best talent. There’s also the possibility of hiring telecommuters, depending on how you feel about that.
Generalizations are pretty stupid too…
Great post! I am actually a great Rails developer living in Tulsa so I can attest to the fact that we do exist. But, you’re right, there aren’t 50 of us.
I’m not saying there’s no point in this posting, but it could be condensed to one well written paragraph. We’re in the middle of the most dynamic economic time in the last 60 years and this is today’s post?
Because we’re in this dynamic economic time, everybody who is out of a job and has a half assed idea will be starting a business. So it’s relevant, today.
As a Dutch entrepreneur, I can relate to this. Yet I don’t think _good_ Angels are as accessible as you make them out to be. After all: if you take somebody else’s money, make sure it’s smart. You’d hate it if somebody who doesn’t get your company starts to be a pain after a while when you’re not generating sufficient return.
great writing, complete poppycock!
great city’s SF, NYC, LA have attract talent and ideas. rapid iteration of ideas creates the velocity of testing ideas leading to start-up success.
wuss-con-sunk track record, cheese:]
rest my case.
That’s fine if you aren’t addicted to living in LA like I am. =) It would just be plain silly for me to live in Iowa if I intended to fly out to the coast once a month though. I might be able to get a house there for the cost of my studio in LA, but the monthly expense of a trip to the coast would more than exceed any savings in the cost of living as it is. I might as well just be where I like to live and all of my resources are.
Well, the post assumes that you are at a junction in your life where you are trying to decide where to live. The majority of people in the world are not at this juncture, probably. And you are one.
I have to say, though, that my guess is that you’re sticking in LA becuase of friends and/or family. Which is my point, at the end.
–Penelope
The irony is actually that I’m originally from Iowa and my family lives there… LA is more about that perfect beautiful sunset over the ocean outside my window every day. Thanks for the post though.
When you factor the costs of flying coast-to-coast and hotels, restaurants, etc, each month, is the cost of living for you in Wisconsin really that low?
I have lived in NY, Chicago, Boston and LA. And really, the cost of living in Wisconsin is absolutely amazingly low beyond anything I imagined. There are so many things people buy in big cities that people just don’t do in the rest of the country. And it adds up.
Not that the culture shock of moving to Wisconsin from NY is not huge and disturbing — it is. There are costs and benefits to everything…
Penelope
Really interesting article. Something I have been thinking about for awhile in anticipation of working on a few of my own projects. For me though, the cost of flying in and out of the valley & SF would be above what I would save by moving back home. Of course, there is always the happy middle ground of setting up shop in Oakland or another cheaper city still within the bay area.
Interesting post, I just read an article on a study that measured the best and worst places to have a business (based on taxes, state laws, etc.)
Ironically Wisconsin ranks 43 out of 50, but the reasons you have to live there are probably different from what this study measured. Here is a link to the list if you are interested: http://www.chiefexecutive.net/media/usbestandworststates/2009/
“There is also the talent issue – if you need 50 developers who are great with Ruby on Rails, that’s gonna be hard in Tulsa. ”
We actually are starting to deliver Ruby and Ruby on Rails courses at Tulsa Community College ;) Point taken though…..
Tom Mancino
Associate Dean, Business and Information Technology
Tulsa Community College
I agree that Silicon Valley is ridiculously overpriced but what about the time you spend commuting to and from Silicon Valley and anywhere else you go to network, attract investors, etc.? There’s still a cost associated with that, even though it might be a more qualitative cost – time away from home, family, etc.
Penelope:
A related article that came out this week, based on the SXSW panel:
http://smoothspan.wordpress.com/2009/03/15/is-the-valley-too-expensive-for-normal-people-to-launch-startups/
Sincerely,
///d@
Emily, I suspect Penelope’s point is that the vast majority of companies shouldn’t waste their time trying to get venture capital, so you won’t need to go to the coast.
In my experience coastal VCs generally hate investing in flyover country anyway, so unless you’ve got a great track record it’s a waste of time anyway.
That said, there are other options besides Silicon Valley. Boulder (where I live is a terrific place to start a company without having to pay Silicon Valley prices. Austin too. Though neither is as cheap as Madison or Tulsa.
A very good post, and a very good comment by Derek Scruggs.
In another life I worked for a startup company in Montana making grain-derived products — protein and fiber isolates, seed oils, beta-glucans, antioxidants, etc., mostly from oats and barley. We had some very good technology for making products used in the food, cosmetics, and other industries.
The east-coast VC’s insisted they would not back a company based in Montana.
Never mind that the raw materials were here — the best barley in the country and some of the best oat varieties are grown here. All the processing would have to be done near where the crops were grown, because transportation is expensive. That didn’t matter to those VC’s. They just didn’t want to invest in a “flyover state” company.
I wish you would quit talking about Wiscosnin like it is a second class citizen. The “I am only here because it is cheap” gets old. Maybe you could mention that Wisconsin, particularly Madison, provides tremendous services for children with autism and many people choose that as reason to relocate here. We have a vibrant University community, and engaged political environment–and we knew who won the Iowa caucus when you didn’t. You can go back to New York at anytime, I am sure they would love to have you…
Tax write offs for travel are huge.
I also find living in a smaller city to have tremendous benefits that are well worth the trade offs. Portland is extremely cheap compared to SF, LA, or NY, but there are still many direct flights to the latter two daily and it only takes an hour or two. I know several people that commute to their “offices” in Silicon Valley a couple of days a week or month, then work from Portland the rest of the time. NY is a good over nighter flight, but luckily I’m one of those people who can sleep well anywhere.
How cheap is Portland? One can easily find a one bedroom apartment for under 800.00 bucks in a central location that is in a good neighborhood. The price of my house (a 2BR bungalow in a vibrant arts and shopping district) was $125K in 2003. Now its worth about $300k, but my mortgage is still less than $800 per month. Luckily, Portland, unlike other parts of the country hasn’t taken a dive in real estate, but try finding housing like that in NY or CA.
There’s also commuting costs. I live less than 2 miles from my office. In fact, I hardly ever use my car. I can bike to work in 20 minutes, take the bus in 20 minutes (and work on my Iphone while I’m busing it), or drive within 10 minutes if I need to. Parking per day is about $10.00. So there is both a hard cost factor (costs in gas, insurance, wear and tear on auto and a soft cost factor (less time commuting in my car means more time I can work or there is an easy trade off with long distance travel)
Then there is also the office rate factor. My start up is a shared office with 2 other smaller firms located in the heart of the central business district next to many hotels, streetcar, and the MAX light rail that takes one directly to the airport. They in turn sublease from a shoe store that has lots of extra office space upstairs from their store. I pay for two desks and have access to a conference room, kitchenette, bathrooms, mail service, wifi, printers, fax. I pay for my own phones. Cost for me for everything but phones? $300.00. I’m not kidding. The total space is about 1300 square feet and I think total costs $1800 per month to rent. It’s not class A for sure, but is easy for clients to get to, and my office mates are architects and designers so it’s decked out in true Nest Magazine/dot.com fashion. Try finding space like that in silicon valley.
Finally, there is the general cost of living factor. Besides housing, transportation, office and the time costs, Oregon has no sales tax. Compare that with some other places in the 7-9% sales tax range. There are also lower salaries here and lots of freelancers, so although I do certainly pay fair market rates it’s easier to find programmers and developers, designers, admin help, and whatever else I need for a lower cost.
Outside of that, there is the sanity factor, or call it quality of life factor. It’s cleaner, easy to get to the mountains or coast, still has decent arts, culture and music and yes, good food and the like.
I’m totally with Penelope on this one. NYC, especially is just out of control expensive for what you get in return.
P – I love your blog even though I suspect I’m at the upper end of your targeted age demographic. Two years ago I dumped out of my high flying corporate job to reinvent myself. With a new husband, a new baby, a new mortgage and newly over 40, I had no idea how much the odds were stacked against me. Everything you say about start-ups is true! The pain, the anguish, the stress of money going out and nothing coming in. Today, I bounced my first check on the business account and Monday I have to sell stock to pay April’s overhead. BUT….when it’s not a nightmare I’m living the dream. I know this is the only chance I’ll ever have and I fight every day to keep hope alive and the wolf at the door. Thankfully, I live in a business friendly state with no income tax and relatively cheap real estate. If costs were any higher, all the great times I’m currently having wouldn’t have been possible to begin with. The Midwest isn’t for everyone but as a native Iowan (Dubuque) I’d be back there in a heartbeat for free babysitting and no commute time if I could!
Could you set it up so I can subscribe to the comments on your blog in addition to the blog itself. There is a place where I can check a box to do this in the same area that it asks for my name and email but it never works. Only if I comment and check the box for follow up comments.
I love this comment because I love the comments section. I adore reading the comments, so it makes sense that other people would like it too. I will work on this…
-Penelope
Right on! I’m moving from the New Jersey suburbs of NYC to Raleigh, NC. It appears I’ll save $20,000 a year in housing and insurance expenses…and get nicer weather, too.
Living in a high-cost area makes sense only if you have a ton of reliable cashflow. I’ll have much less pressure as I downsize to my $650 rent payment compared to my $1900 mortgage…and cut my car insurance in half, and cut my health insurance payments by 60%.
Your post points out why I’m starting my own teeny tiny startup — a resume writing business — in our spare bedroom/study/computer room/junk room, right here in suburban Philadelphia, north of King of Prussia.
Very little overhead, we already have the broadband cable Internet connection, I can do it on the weekends, and there seems to be a need for it. I have reworked a handful of resumes so far. I ask for feedback and everyone has liked what I have done for them.
I bought a clearance special desk from Staples. Yes, I saved the receipt. Guess I need an accountant now, huh?
Also, I got my first paying customer from one of the Yahoo writing groups of which I am a member. Cool, eh?
I am starting slow, but that’s fine by me.
Working from home is the best way for a startup to insure a low overhead. In Silicon Valley, even though the homes are expensive you don’t need to rent office space. There is a ton of office space for rent there with vacancy signs for that reason. All this new technology makes working from home very convenient. Also, using part of your house as an office is a way to get a good tax deduction as long as you use it only for business purposes.
Our townhouse is so small every room serves several purposes. Even the computer room. Maybe I can get a partial deduction. Partial would be better than nothing.
Startups start in garages not on Sand Hill Road! At least that is the myth. So I need to clean out my garage. I went to a couple of networking events lately. I found a few good people to talk to, but also a lot of white noise. Sometimes I think the Valley is the Hollywood of High-Tech with more than one Paris Hilton or Britney Spears.
As with VC and traveling – either not travel at all or to India or China I guess…
Penelope. I happen to think this is one of your more sensible down-to-earth posts in a while.
People can nit-pick over things like the cost of traveling(which is a business expense, therefore a deductible)from Wisconsin to elsewhere, but all they have to do to get a grasp of the reality of living in Silicon Valley is to look at the cost of buying a home or condo out here. And that is just the cost of finding and buying a property. Wait till you get your tax bill in the mail, if you want to get a reality-check. The cost of owning drives people to demand substitutes(renting), which drives those costs up as well. Got kids and want them to attend the best(public) schools? Better factor that variable into the area you want to live in, because that will drive up the premium you’ll pay to live there(the new wave “snob-zoning”). No family in the area? Tack another $10 grand onto the cost of raising kids. The value of the availability of a family support system can only be underestimated by those who have never had kids and never tried to raise any without a support system(LINKS or DINKS).
Chances are pretty high that if you are not already a high-roller and just have a “regular” job, or are starting-up, you flat out cannot afford to live out here unless you have family to bunk with(preferably family who bought their property back in the 60’s or 70’s who are living a whole lot cheaper than anyone who bought in the last 10 years).
You will always pay more to live anywhere that provides more quality-of-life benefits, especially recreation/lifestyle benefits, and there certainly are plenty of those out here. And then there is of course the availability of quality jobs available. This is just basic supply/demand stuff. But out here on the peninsular/bay area, if you factor in the other real costs such as traffic congestion and commuting times, crime rates, etc., the luster dims out considerably.
I think you did a great job of explaining why someone in your business/position would choose to live somewhere other than Silicon Valley. Oh yeah, you also get the benefit of pulling up and getting away from your regular day-to-day, bump-and-grind, which I think is a positive rather than a negative.
You really do have to factor in all the costs and benefits to get the best deals in life. It’s always more complicated than just looking at the obvious stuff.
Steve C.
Great post and tons of fun.
My little startup is based in NYC where my partner lives but I shifted out to Minneapolis because I’m working remotely and am able to tour the Midwest roadside attractions while living cheap.
I’ll be moving back to NYC in a few months and well, I;ve had to basically stop spending on anything but the essentials so I’ll be able to afford my new place in Park Slope.
Our Development team is based in Chicago and another partner in Madison and so I agree, you certainly don’t need to be in the valley or NYC. We don’t need VC investment yet since we’re actually doing perfect without a big investor reworking our unique vibe.
Either way, much love for the great read!
This post really cheered my up – mainly since I am at the constipation stage (I don’t even have a partner yet and am banging my head against the wall to focus the idea) of starting a business. It’s good to hear that this is quite normal.
I also live in a city – Amsterdam – which is not particularly entrepreneurial. But I do think that it can be good to be outside the major startup centres like Silicon Valley. There are fashions in everything including business ideas and a herd mentality can take over in that kind of environment. It’s like bands – the really original ones often don’t come from New York or London but the middle of nowhere where they had to create their own vision.
Ciara
Great posting, as always. But no cracking on Tulsa. I assure you that 50 guys who live in their parents' basement and can do Rails could be quickly found.
For the record I’m not one of those guys. I hire them and give them strong coffee.
One thing you left out (but obviously did): locating in a college town is extremely helpful. Lots of bright, underemployed people trying to prove themselves = lots of good talent to leverage.
The last paragraph really says it all.
Its really nice read about it companies in current trend
Well it depends really on an individual. Silicon Valley is the most happening place currently.
To Clive: You must not be a very clever or astute businessman if you truly believe that Wisconsin is only “cheese”.
That’s about as accurate a generalization as saying NYC is full of criminals, or that California is filled with crazy hippies.
Madison is home to a lot of activity, and not just because the University of Wisconsin is based there. It’s a great base to incubate a company – and not a bad place to grow a small company.
Having said that, it’s not exactly cheap. It’s undoubtedly cheaper than the coasts, but it’s hard to get even the smallest shoebox of a house there for less than a quarter mil, and the condo market is still woefully inflated.
I keep thinking that a town in economic recovery with resources and a willingness to help small businesses would be great. Pittsburgh comes to mind – it’s a safe town on the whole, with cheap real estate and cost of living.
Interesting article, and very familiar in so many ways since I just started my own business. In fact, I’m thinking of moving to a cheaper locale (asia in fact). Where I live isn’t expensive, but it isn’t cheap either and I could avoid quite a few taxes by moving to somewhere else.
I also have just started my own business, and its technology related. The thought of moving to Silicon Valley is not something that appeals. The competition is so high, and as you say, the rates are too. Good article with lots of nuggets of information that will come in handy so thanks.
Yeah, I completely agree. There are so many options for cooperating over the internet that starting up in expensive areas is a waste.
There is nothing to be stupid if anyone want to start a business. Every business depends on management skills and hard work. if you are hard working then any business can grow anywhere in the world so there is nothing to be stupid to start a business in silicon vally or somewhere else, just do hard work and grow your busines, why you thinking alot
Paul Grahams’ essays are excellent reading for anyone starting a company outside Silicon Valley.
Great post! I am actually a great Rails developer living in Tulsa so I can attest to the fact that we do exist.
For me entrepreneurship was one of the big challenge of my life. Though I am succeed but still do remember those days where I was.