Do You Have To Go To Mecca?

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  Originally uploaded by macoggins.

Randall Stross suggests in today's New York Times that Silicon Valley remains "mecca" for tech startups. And he cites data that Silicon Valley has consistently drawn about 1/3 of all venture capital dollars in a given year. Randall is right that Silicon Valley is the biggest venture capital center in the world.

But his implication that you really can't do a startup as easily elsewhere demands a response.

Where is the other 2/3 of the capital being invested? Boston, New York, Los Angeles/San Diego, Seattle, Denver/Boulder, Austin, Chicago, DC, Atlanta, London, Tel Aviv, Banglore, Beijing, Shanghai, etc, etc.

The venture business is alive and well all over the world. And it's getting easier to do startups outside of Silicon Valley every day.

Randall cites the fact that 43% of "web 2.0 deals" were in the bay area. Well that may be true. But as someone who invests in "web 2.0 deals", I can tell you that we are seeing really interesting "web 2.0" deals coming from all over the world. And in many cases, the most interesting ones are not coming from Silicon Valley.

Let's look at the three biggest Internet deals of the past three years, Skype, MySpace, and YouTube. Only one of them came from Silicon Valley.

I think entrepreneurship is going global. It's a flat world in the venture capital business. The best developers are not only in Silicon Valley. They are in Siberia, Israel, Australia, Argentina, and Canada as much as they are anywhere else these days.

And the comment by Seth Sternberg that:

“In New York, it would be extremely difficult to find a law firm willing to defer the first $20,000 of your legal fees,” Mr. Sternberg said. “Here, we got that. It’s a pretty standard thing in Silicon Valley.”

is dead wrong. I can name three firms that we work with regularly in NYC that are more than willing to do work for free or at a loss in order to get a company going.

Same with this comment:

He did end up needing Silicon Valley for something else: technical talent that would be willing to accept equity in place of any salary. Six weeks ago, he moved to Silicon Valley to recruit more people like his chief technical officer, who has been working full time since Jan. 1 for equity only.

Working for equity in lieu of cash is not somthing that is limited to Silicon Valley. It happens all the time in NYC and every other place that there is a startup culture.

Randall is a professor at San Jose State. Maybe he should get out of Silicon Valley and see what goes on elswhere. I'll give him a tour of the startup scene in NYC, and I am sure there are people in Tel Aviv, London, Seattle, and Toronto who will do the same.

I am not predicting the Valley's demise. It's a wonderful place to do a startup. But it's by far NOT the only place.

Comments

[Diran Afarian]

Hi Fred,

I wonder if you can shed some light on the last sentence, "But it's by far the only place." Is this correct or was it supposed to be, "But it's not, the only place." Because I am running a startup called www.NextEmployee.com and I am in Southern California, (Pasadena to be exact).

Does this mean I should pack up my gear and head 400 miles North? I am not getting a fair shake from investors on the revolutionary business I am trying to establish and the business plan. Your input would be highly appreciated.

Thanks in advance,
Diran Afarian

[Erik Schwartz]

I lived and worked in Silicon Valley for 14 years. I've worked for:
-Big overfunded startups in the valley
-Little underfunded startups in the valley
-Big companies in the valley
-Little companies in the valley that became big while I was there

Now I'm doing a new start up, that is not in the valley.

If an entrepreneur has never worked in the valley, then I think it would behoove that entrepreneur to very seriously consider founding a company there. SiliValley has a community that is very valuable to the entrepreneur.

But I'm already a member of that community. I have all of those contacts and relationships. I communicate with that community every day via email, phone and blogs.

There is also a lot to be said for NOT founding your company in the valley. There is a serious "valley myopia", particularly in regards to understanding mainstream customers for consumer products. This leads to a lot of people blowing smoke up their own asses (see Bubble 1.0). Infrastructure (office space, services, cost of living) are as expensive in the valley as they are in Manhattan. Traffic sucks and the public transit system is a joke.

[Peter]

Fred-

All good counterpoints -- it's a shame that only the readers of your blog will see them.

I encourage you to write short letter to the editor to the Times -- it's important they set the record straight -- or at least know that they're printing false and/or misleading information.

Peter

[TomBomb]

Fred,

You are one of the few Enlightened Ones living outside our hallowed ground, so you are granted some slack here, but it would be a terrible mistake not to appreciate the historical miracle that is Silicon Valley. There has never been a wealth-creation place like it on the planet--and with its lead-time to the future, it is highly doubtful anyplace can ever hope to compete with it. It's not just the numbers of life changing technologies and brands to come from this tiny pocket of geography--it is the durability and consistency over time of its contributions. Silicon Valley is like Boston during the American Revolution, or Israel after World War II. More genius per square mile than any place else, all wound tight with creative tension and heated by Brownian Movement. This is the center of the unviverse as we know it, baby. The Times got it right today for once.

[Rex Hammock]

Re "TomBomb", who writes: "Silicon Valley is like Boston during the American Revolution, or Israel after World War II. More genius per square mile than any place else, all wound tight with creative tension and heated by Brownian Movement. This is the center of the unviverse as we know it, baby."

I guess this is meant to be a bit of satire. Surely. I especially like that pun in which a physics term "brownian movement" is used to suggest another form of brownian movement: BS.

[Julien Turri]

Fred,

thanks for this post. I do believe there is life outside of the valley as well.

Even though VC activity is still small here in Brazil (compared to VC activity in the USA, or especifically in the Valley), quite a few new companies are being created and funded in São Paulo, Rio, and a few other places around the country.

There are great programmers in Brazil, great marketing and financial people, and a very strong entrepreneurial spirit.

The Vila Olimpia and Brooklin neighbourhood in São Paulo are crowded with start-ups and older internet and technology firms... and the professional networks are growing.

The whole economy is growing, and the internet market in general is also growing fast (30 to 35 million internet users, and growing fast!).

But no Brazilian VC seems to have a great blog so far :-)

So, thanks for your blog, it is very interesting for us to read and learn from your posts.

Julien

[Dimitar Vesselinov]

"But no Brazilian VC seems to have a great blog so far :-)"

Simon Olson has a blog. He is a partner at FIR Capital Partners, a leading Brazil-based venture capital firm.
http://galaxy.blogs.com/venture_capital_thoughts_/
http://www.fircapital.com/eng/frames.asp?codigo=team

[Ben Metcalfe]

Hey Fred,

Firstly, it's difficult to argue with a VC on this cos ultimately your side of the industry the life blood to most star-ups in the first place.

However, as someone who has moved his life (and that of his wife!) from London to San Francisco for start-up reasons, I have to say that I am already seeing the benfits just a month into settleing here.

I can only compare to London, where frankly there have been very few successful Internet startups in recent years (Skype being the only notable mention).

There is a strikingly different attitude to failure here in SF and the Valley than there is in London. We all have to accept that failure is a real (almost likely) outcome of most start-ups but in London failure is taken personally. It's a black mark against you that will remain with you, unlike here in the Bay Area where it is put down to 'gaining experience'.

VC's also only fund teams they know - that's often the main aspect of the package they are funding and it's easier to get to know VC's when they are in the same physical space. I didn't know any VC's in London despite working in the industry for 6 years. I've been in the Bay Area for a few months in total and I already know 4 or 5 personally and have dialouges and relationships with probably 4 more (my company isn't VC funded so I would probably know even more if it was!).

Finally, as a non US-Citizen it is particularly challenging to found a business of any kind here in the Bay Area. There are all sorts of visa issues that only dissappear if you personally have $1m's to invest from abroad.

Maybe America should do something to improve that - otherwise many highly successful ideas are never realized as they sit in people's heads in geographic locations where they would already be onto a looser if the were founded locally.

[AlFromChicago]

Fred -- you have it exactly right -- and one of the other commenters made a point that drives me nuts everytime I hear it: Diran Afarian said,
"Does this mean I should pack up my gear and head 400 miles North? I am not getting a fair shake from investors on the revolutionary business I am trying to establish and the business plan. Your input would be highly appreciated."

I have heard that same refrain from many folks here in Chicago. The fact is this -- good deals get funded. There is PLENTY of money out there for the right deal -- and especially if you live in a major city like LA or Chicago. And LA is quickly being known as an epicenter of online media -- so it is probably a great place.

The answer is, if people don't like your deal, find out why. Find out what about your presentation didn't pass muster -- is it your experience, your assumptions, what? And work like hell to prove your points. I also find it is much much easier to get customers than investors -- so go generate some business before you try to get cash.

Finally, if you don't know enough people, then figure out ways to network. Most entrepreneurs I know are always willing to have coffee with other aspiring entrepreneurs and give them straight feedback. Most major cities have a ton of networking events. And of course, nowadays you can comment on blogs, join MyBlogLog, and even write you're own blog.

Are there more VCs in the valley? Sure. Are there more people out there to potentially join your team, probably yes. But that doesn't mean that bad deals that don't get funded outside the valley get funded in the valley. It means that most valley deals stay in the valley for funding.

Figure out a way to make your deal a no-brainer, and you will get funding. It has nothing to do with your location if you are in a major city.

[Nik Cubrilovic]

Or you get the best of both worlds, like what we have done at Omnidrive. We keep a really thin presence in the valley and have all core engineering back in Australia and in our office in India. I split my time between the valley and Australia and take the best parts out of both (eg. fundraising, partnerships and BD, legal advice, advisors in the valley - engineers, larger office space, support, etc. in Australia and India). I don't see why more companies don't do this - being in the valley doesn't mean that you need 20 people here and a huge office - you can suck up the best parts of being here.

I also know some companies that have a split between the valley and some other part of the USA - and it works well. Don't think that you need to relocate everything to take advantage of the valley.

Ben: Coming from Australia, I had no problems registering a company, opening a bank account, getting legal representation and raising money within the first 7 days. Also my personal situation has been sorted out where I can get a phone, rent a car, have a credit card etc. and that didn't take long either. If you need some tips shoot me an email on nik at omnidrive.com

I have worked in 10 countries on 4 continents and the valley is by far the best place to either start or do business - this whole damn place is built around and geared towards tech startups

Living here though, is something else all together :)

[Don Dodge]

There are actually very good reasons why there are more startups in Silicon Valley than anywhere else. The biggest reason is people. Success attracts other successful people who want to compete at the highest level.

If you think of insurance it is Hartford. If you think of automobiles it is Detroit. Movies = Hollywood, Country music = Nashville.

Tech startups are done everywhere...it is just that more of them are done in Silicon Valley than anywhere else.

I wrote a blog today about why this happens. http://dondodge.typepad.com/the_next_big_thing/2006/10/why_are_more_st.html

[JayR]

I would tend to agree with AlFromChicago (haven't spoken to you in a while - hope all is well). I don't think that a bad deal in NY, Chi or LA magically gets funded in the Valley. The VCs in those locales are no different than those in the Valley.

What is different is that virtually everyone in the Valley knows someone in the VC industry or ties to the VC industry. To Erik's point, if an entrepreneur has never done a startup or has not been involved in tech economy, the Valley might be a logical place to establish some relationships, because by just being out there the process becomes a little more efficient. But the same resources are available in NY and I'm sure in other cities if you know where to find them or who to ask for help.

I also wanted to chime in on Seth Sternberg's comments on lawyers in the Valley, which I think are somewhat dated. The number of Silicon Valley firms that will take clients on the come is dramatically smaller than it was six or seven years ago, and from what I have seen, those that will are a lot more conservative and selective about it. I don't think that there is much difference in approach to this between Valley firms and many firms in other markets that service startups and VCs. Like the VC business, the law business is relationship-driven. If you went to Crain's list of the 20 highest-grossing law firms in New York, probably none of them would front fees to a startup because startups aren't core to their business (and because when times are good, they have more than enough profitable work from their core institutional clients). But there are more than a few firms in NY (including mine) that view startups and VCs as core to their business, and if an experienced entrepreneur (or one who comes highly recommended by a trusted referral source, like a VC) comes to us with a business that looks like it has legs, then we would certainly consider a deferral arrangement (and have done so on occasion). I don't think that methodology is all that different from what our Valley counterparts are doing. Maybe there is a perception problem because a smaller percentage of NY firms will cater to startups than those in the Valley. But it seems to me that the Valley firms aren't much more likely to offer a deferral arrangement to someone off the street than a NY firm would.

[Stephen Collins]

While I agree that getting into the Valley isn't the be all and end all of getting your startup off the ground, it surely has to help.

I look at my situation (see http://www.acidlabs.org/2006/10/23/you-might-not-need-to-be-in-the-valley-but-it-helps/) where I've blogged on this very subject in response to this post and the related post at WeBreakStuff (http://blog.webreakstuff.com/2006/10/no-need-for-the-valley/) and shake my head. I wish I had the time to incubate the stuff I want to (and I think I have some worthwhile ideas).

I just can't imagine a Silicon Valley or NY venture capitalist being interested in a small early days Australian startup, no matter what their idea was.

[Joseph Hunkins]

Hmmm - 2/3 of a good point here? The Valley is small and you are comparing it to *the rest of the world*. I'd say it remains remarkable (for the reasons you say) that 1/3 of the VC is still so targeted.

[howardhoward lindzon]

Hope you are right :)

[CK]

Ditto to Ben Metcalf above

[Graeme Thickins]

Actually, a lot has been written on the subject of the Valley not having the corner on tech starts, or smarts. Rich Karlgaard of Forbes has made kind of a sideline career out of proving it's so, with his book "Life 2.0", and his seemingly endless speaking schedule. I blogged a great talk he gave to angel investors here in Minnesota earler this month, which is here.

And I've found my blog is taking this on as a kind of subtheme. I love it. It has legs. I even interviewed a hot Internet startup here in Minneapolis that had a chance to move to the Valley (as other notables here before him have done), and said "No, thanks."

And Nik, my fellow Aussie above, knows exactly who this is: Flyspy. I think Nik's closing comment alluding to the negatives of living in the Valley is no small point. It's okay to visit, or even spend some time in regularly, but I know Nik must love getting back home to a saner world (even despite those hellish plane rides).

For most Web 2.0 startups -- meaning the other 99.99% besides the Skypes, MySpaces, and YouTubes -- VC sucks. Angel is where it's at. I also blogged a lot more about that event where Rich Karlgaard spoke, which was an annual gathering of angel investors. And the editor of The Angel Journal -- yes, this sector has a magazine of its own -- tells me they plan to run it in their print edition.

Note to Valley and Big Apple: there's a whole other world out there, people.

They don't need your stinkin' money. :-)

[Evan Rudowski]

In contrast to Ben Metcalfe, I've gone in the other direction. I went from Silicon Valley to London in 1998, working for Excite.

London only caught on to Bubble 1.0 late in the game and as a result there were few authentic success stories and lots of cynical ploys to try to cash in. Nevertheless there were still some good wins and an experienced community developed.

The bubble bursting stripped away the hangers-on and left a core who knew and respected each other. These formed the nexus of the web 2.0 era we're in now.

Unlike Ben, in the 8-1/2 years I've been in the UK I've met and come to know loads of VCs and private investors. There is no shortage of them here. Seeing that Ben spent most of his time here at the BBC, I would suggest that's not the most entrepreneurial of environments (although the quality and innovativeness of their products is excellent).

Lately there is a buzz of activity around things like Robert Loch's Internet People; Second Chance Tuesday; MashUp and other events. There is a lot of excitement in the sector here.

Still, Ben is right that institutions here are more risk-averse. I don't think people are stigmatized by failure here but it's no badge of honor. And the British media have a way of tearing down self-made capitalists while eagerly glorifying the exploits of the old-money set.

Still London is a very exciting place to be right now if you're building an internet company. London is a huge media and financial capital, meaning there is a tremendous pool of talent and resource here to draw upon.

There's also lots of EU and other funding if you're elsewhere in the UK; my latest start-up, SubHub, is in Cardiff, Wales, where we have raised more than $500,000 in funds from the public sector without giving up a single share of equity. That's something you don't get in Silicon Valley, or New York.

Evan

[Jeff Stewart]

Fred,

Hope all is well, really enjoyed the Meca/Sand Hill post, thought you might like the 2cents I added on why New York is the Best! The Selling Fields – Is New York better than Silicon Valley for Startups

[David Wadler]

Jeff's makes an excellent point and one I've echoed repeatedly -- New York is a great place to grow a business. However, in the early stages of a start-up, I think we lag considerably behind Silicon Valley. There are all sorts of metrics one can dig up, but ultimately I think there is a non-measurable zeitgeist in the Bay Area that we lack here. I felt like New York had it briefly during the boom, but its disappearance serves a sharp reminder that it was not and is not deeply rooted in our business culture.

[jimmy]

It communicates important entrepreneurial management practices, such as how your venture will mitigate risk, and how your venture will manage uncertainty. Most importantly, new business venturing is now about focusing on creating sustainable value. jimmy
info@ibowtech.com
www.onlineuniversalwork.com