The Majority of Startup Tech Companies Should Not Be in the Bay Area Companies should be where their customers are.
By Ron Shah Edited by Frances Dodds
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It's time for early stage founders in NY, Boston, D.C. and other markets to face the facts: The VC funds in the Bay Area aren't always giving you a fair shake at the seed stage. While the Bay Area has a reputation for being the startup hub of America -- and there are plenty of valid reasons for that reputation -- many founders don't come to terms with the negative realities of fundraising in the Bay Area when you don't live there. After all, it's 2017: Why should you need to be local in the Bay Area? Isn't that the opposite of the meritocracy of technology the VCs talk about, and the borderless ideas that VCs plaster on their websites?
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The irony is uncanny. When VCs are on the road fundraising for their fund, they tell their investors (LPs, or limited partners) that they need bigger funds and more management fees so they can chase global opportunities since technology has "opened up so many borders."
But, what is the reality for early stage founders? A common objection from Bay Area investors is that getting on a plane to attend your board meetings "makes it too difficult." If only their LPs knew that when paying them 2 percent to 3 percent management fees. Imagine if a founder told a VC that visiting clients across the country was too inconvenient. Or another common retort, "We just don't have the connections outside of the Bay Area to be helpful to you." When questioned on this strange insular behavior, they will justify it to their LPs by adding, "The lion share of early stage returns are made in the Bay Area." But, wait, doesn't the fine print on your fund prospectus say Past performance is no indication of future success?
A culture in question
Topics in recent news should be blaring indications to LPs that the VC culture in the Bay Area is riddled with questions. Both cautious and contrarian LP investors must take notice. Just this year, there have been numerous scandals with Bay Area VC funds involving sexual harassment of female founders. These weren't odd outliers; these were industry leaders in the VC world. And the sheer volume of incidences wasn't a serendipitous coincidence. These incidents are undeniably connected to the insular and predatory culture that has become commonplace in Silicon Valley. After all, "it's my turf" and we run "the world" from here.
It's important to remember that returns and liquidity aren't exclusive to the Bay Area. Seattle is gaining major steam as the country's leading tech hub, with Amazon's recent surge, the Redfin IPO and Microsoft's re-emergence. While the Bay Area does keep an undeniable lead in total dollars, it seems its founders often face performance anxiety when it comes to timely IPOs, leaving many employees, VCs and their LPs stranded.
Meanwhile, many of the biggest startup successes relied on customers on the East Coast to prove their business. While Silicon Valley can be an excellent petri dish for innovation, New York is often the first market for scale. Uber and Airbnb are excellent examples of companies that wouldn't be able to scale without their start in New York. It would only be logical that entrepreneurs should live near their customer community. Capital and talent are much more fluid. In his interview on Masters of Scale, Brian Chesky, the CEO of Airbnb, mentions a story about how his move to New York in the early days of the company to be near customers made all the difference for Airbnb's focus.
But, if you can't beat them, should you join them?
Despite the elements to beware of, undeniably, the Bay Area has a ton of strength and draw when it comes to tech startups. There are many blaring and obvious reasons why people consider -- and do -- make the move, including:
Talent: The Bay Area has an unparalleled depth of engineering talent that makes scaling efficient and more feasible. It is much more difficult to retain adequate talent in other markets where the talent is scarcer and the competition for that talent is fierce. Companies like Twitter and Facebook capture engineers in New York with salaries that are completely out of reason for startups. With this being said, if you are a talented engineer, you may get the most value out of your career by moving to the East Coast.
Related: No One Can Match Silicon Valley, But Other Cities Benefit From Fostering Startups
Competitive culture: Another big reason to move is the overall culture of tech startups in the Bay Area. There is a built-in community of early adopters who will use your product, beat it up and tell the honest truth about it, which can push you higher. This community creates pressure on the founder to make the product better. The downside is that the pressure can also cause collapse, as teams may run to the next startup at the first sign of decline.
Capital: The dollars are another big reason to move. VCs will back significantly worse teams, concepts and track records, as long as they are local. The bar is lower. The investor's reasoning for this is that they can be responsible for making sure the outcome is good, because they have such a great local network. It is the same omnipotent vibe emerging in dangerous ways in other parts of their lives. In reality, their value-add hasn't statistically changed the failure rate -- but their money has.
The bottom line: there is a higher probability of funding -- and at more attractive valuations -- if you live locally in the Bay Area, particularly in the early stages. There are significantly fewer VCs on the East Coast or locally in other markets like Austin and Atlanta, and many of them end up focusing on regional themes like blockchain or fintech.
All of this being said, the reality is that the majority of startup tech companies should not be in the Bay Area. It's expensive, it is insular, and the culture is getting worse, and it just may not make sense depending on focus and customer base. For a consumer platform, the Bay Area could be logical since it's got such a great early adopter community. But, for many industry verticals -- pharma, industrial manufacturing, finance, travel, hospitality and the list goes on -- all the action is happening outside of the Bay Area. This is a case where being close to customers, industry events and relevant talent should be your primary focus. If enough founders follow this ideology, the capital -- and talent -- will follow.
Related Video: You Don't Need to Be in Silicon Valley to Grow Your Business
