Why You Shouldn't Start A Venture In Silicon Valley

Apple, Google, Facebook, they’re all technology firms and pioneered transformative ways in how our society uses information. It seems that over the past 30 years such firms have seemingly grown out of super fertile soil or by some unidentified minerals in the water supply at Palo Alto. Whatever the case, if you live, eat, and breathe technology and you’re looking to start a business then Silicon Valley is what NYC is to of finance.

But do you have to be in Silicon Valley to follow in the footsteps of one of these fabled start-ups? CEO and Co-Founder of Zenoss, Bill Karpovich writing for VentureBeat thinks that the valley is over-hyped and the economic reality is much different. Read more to find out why and the latest paradigm that didn’t come from the valley…


…and that is cloud computing technology! Surprisingly, it began in Annapolis, Maryland where he worked at Digex and USinternetworking with CEO Chris McClearly and together they got the idea for their start-up while working at these large-scale IT operation firms and their struggles with the management software that led them to launch Zenoss in 2006. Subsequently, Karpovich’s thinks that the valley is losing ground by saying,

…I feel it’s actually a competitive advantage to build startups outside of Silicon Valley.”

Do you think Silicon Valley is still the Mecca for technology start-ups, why?


He goes on to cite three specific areas...

1. Capital
The allure of the valley attracts a lot of competition for funding and it’s actually quite accommodating to out-of-towners, almost preferential even. He says that famous ideas don’t always originate there and that the entrepreneurial ecosystem is global and that capital can flow from anywhere because as Eric Ries says, "entrepreneurs are everywhere."

2. Groupthink
While it’s good to keep a pulse on the hottest ideas, Karpovich makes the observation that, “New ideas are rare in Silicon Valley.” They spread like wildfire from firm-to-firm once something is proven. It then spreads quickly gaining popularity, stiff competition unfolds, and fashionable templates form. The problem is firms end up going with what works for another firm, not their customers. A successful case-in-point would be MySpace losing first-mover advantages to FB and LNKD.

3. Passion
When it came for Zenoss to continue growing and scaling their IT operations, what city do you think they turned to for the best employees?

Try the live music capital of the world Austin, Texas! Their reasoning?

…Silicon Valley lacks the talent pool of Austin when it comes to IT operations software. While you could certainly find the technical talent there, it would lack the passion and context that we have found in droves in Austin.”

Do you think this is a sound case or just a singular perspective?


To conlude, I’ll be honest. I’m quite interested (and just starting) as an entrepreneur and so I’m not going to comment on something I don’t have a firm grap on. as it requires more of an ex post experience in acquiring knowledge on this subject.

However, I would like to defer to the community as I’m more interested in what you monkeys have to say on all of this. So, my last question is...

If you could chose any location for a start-up, where and what business would it be?

 
Best Response

Exactly 100% of (non-biotech) entrepreneurs I know from all over the world, from Japan and India to Britain and even Boston, would like to eventually set up in the Valley if they are not there already. The three of my classmates who have now exited for 2 digit million dollars all moved to the Valley (from the UK) once they secured US funding.

There is enormous money floating around, so the idea that funding is scarce is a funny one; it's more a question of idea quality :P

Graham has posted an essay regarding location which is worth reading: http://www.paulgraham.com/cities.html

The question is not really Austin vs Boston vs SV; Austin is where you go to start up because it's cheap, Boston is where you stay for biotech or hardware (even then...), but SV still remains the no. 1 place to be because it has the best people and the most driven. Also, it retains this crazed Californian spirit of "anything is possible", which helps broaden your mind and take more ambitious decisions. Re: finding talent, everybody already wants to move to SF. Personally, I see the people factor as overriding all others, the costs of being in SV being costs you pay for being in the heart of global innovation.

Why would you NOT move to SV? 1. taxes - the highest in the US, and on a worldwide basis, some of the highest; fiscally the situation is disastrous, too. 2. regulations - see 1. Local government is broken and getting worse. This impacts you longer term: terrible schools, bad security in the cheaper areas, homeless people, etc. 3. cost of living is super high (vs Austin, but not Boston or NYC) 4. it's in the US: the majority of my co-workers come from non-US locations (we probably almost have a nationality/headcount ratio of 1:1) and H1Bs are VERY hard to get.

The alternatives I have seen have been: - London: an issue for US citizen, visa-wise. Expensive, high tax, but close to European markets and talent. The local startups tend to have a very small mind and small ambitions due to a British recent phenomenon of calling the smallest of coffee shops a "startup" and "entrepreneurship" being constantly pumped by the government and the various TV channels (e.g. Dragon's Den, a good local comedy show) - Berlin: the cheapest to live in, but the German startup scene is a joke. Plus, you need to speak German. It is a "very cool" place to be, apparently, due to a high concentration of starving artists and former communists. - Switzerland: actually an attractive place, despite high cost of living: very easy to get work visas, very low regulations, low taxes, people respect entrepreneurs, and it gives you access to the German programmer market which is cheap, very cheap. On the downside the trend is towards further federalization and regulations, and well, it's not the most fun place to live either. - Singapore: low tax, low regulations, NUS is rapidly climbing computer science rankings, it's bang in the middle of SEA so your weekends can be awesome and cheap, and it's never cold. However, you need PR status to start something, or have a local partner; you might not want a local partner. Also, the availability of plenty of very easy women causes the odd westerner to just lose it and spend all his time in bed like an addict.

 

I'm currently working as a software engineer at a Bay Area company.

As far as a supportive ecosystem goes, I'll say it's as good as they say it is; no one looks at you funny when you say you're on a diet of Red Bull & Ramen and seeking funding ( or at least, they better not as they could cut off future opportunities in the Bay Area should you become successful ).

But good luck trying to compete ( even as a cashed out founder ) with all the wealth in the good areas. If you don't have a family you'll be fine on the standard 100-140k. But, if you have a family... it can be dicey. Also, it's hard to get one if you don't already have a girlfriend or social circle out here; the guys who do the best seem to be Stanford/UC who already had deep networks. If you're a transplant, shit's going to be rough as you'll be an outsider and you won't standout at all.

As for Austin, it sounds oppressively hot and stuck on summer. I would rather go to Vancouver or Chicago where there's at least seasons. Just my 2c.

 
  • "Berlin: the cheapest to live in, but the German startup scene is a joke. Plus, you need to speak German. It is a "very cool" place to be, apparently, due to a high concentration of starving artists and former communists."

I am living in Berlin. While the ladder might be partly true, the former is absolutly wrong. What about Rocket Internet & Team Europe. As an example, the Samwers online shop Zalando just sold a 10% stake for 287 Mio. Euro. Furthermore, they are involved in startups all over the world and have partners like J.P. Morgan. Of cause compared to the Valley this might be a "joke", but solely seen Berlin has by far the most important Start-Up scene in Europe and with current developments I would place it directly after the Valley.

Just to provide clarity, feel free to ask anything!

 

Hubs: how about... Cambridge? ARM, CSR, Autonomy at the large end, things like AbCam at the small end, there's literally hundreds of companies, and even a few startups (http://paulgraham.com/growth.html) coming out of that area every year. If you want to rank hubs outside the US, that's probably the first in terms of deliverables so far. However Cambridge is not an attractive hub for most of the readers here, as most of its big successes have come from university profs spinning out their tech, much as Boston's biotech hub is developing. I doubt anybody here could replicate ARM...

Rocket is not a startup. Rocket is a mid-cap (close to 1bn EUR funding) retail company that happens to use the internet (not very well) as its supply chain. Saying that a Rocket MD is an entrepreneur leading a startup is like the new COO of BMW Brazil saying the same thing about his rapidly growing market and slightly faster management methods (which are common to any small org). Other than the previous Samwer exits, and a couple other small Germany-focused things built in bad PHP (usually clones of US ideas), there is not much going on in Berlin that would fit Paul Graham's description above. How many German companies started in the last 20 years are winning in the US? That should be your yardstick of success. From having worked with Germans and particularly Berlin Germans, I also doubt they are able to have enough mission focus to give up on "work/life balance" for the crucial first few months. 5pm? Ach! all the Berlin office appears offline

It does come down to emergent versus deliberate strategy. If you know what business model you want to execute, you have experience of it already, and you know which resources you need, it might make sense to save costs and move outside a major talent hub. If you are going to work on a disruptive business model - the kind of thing you find in Y Combinator, vs Rocket/Project A/whatever latest Rocket clone is coming out of Berlin - you need to be in a hub to benefit from network effects, understanding investors, rapidly moving talent, etc.

 

Thank you everybody for your comments! It's been educating to read them and learn a few things myself. And excellent comments by EURCHF parity! Thank you for sharing your knowledge, it was broad and had depth. I look forward to hearing more from you as I plan on posting more about entrepreneurism in future articles.

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