Subscribe to Inc. magazine
STARTUP

5 Reasons to Avoid Silicon Valley

Sure, it seems like a great idea to start up in the Valley. But have you really taken a good look at the nation's most famous start-up hub?
Advertisement

Many would argue that since Silicon Valley gets the most venture capital, has the most powerful pillar companies, the deepest talent pool, and the best universities that it’s the best place to locate your start-up.

But all that external evidence of success masks a deeper reality.

Silicon Valley is a hugely expensive place to operate your start-up and depending on what product you’re selling, locating there might handicap your chances for success.

Here are five reasons you should avoid Silicon Valley.

1. Too much seed money. You must be scratching your head now and asking yourself: How can too much money be bad? If you remember the dot-com bubble in the 1990s or the housing bubble that burst in 2008, you get the idea.

So many individual investors have grown super-wealthy in Silicon Valley over the last few years thanks to big IPOs for companies like Facebook and Zynga that there are scores of so-called angel investors.

They can write checks of $50,000 to $500,000 to help start-ups get off the ground. That sounds great but it also means that those “lucky” seed money recipients will be on their own from the moment they cash the check.

If they succeed, those angels will cash out--giving them bragging rights. But odds are good they’ll lose the seed round lottery and fail. And that is not the kind of cash your start-up needs.

2. Insufficient mentoring. If you run a start-up, there’s a good chance that you’ve never built a business in your life. And that means you need experienced entrepreneurs to help you take your great idea and turn it into a business.

A big reason that so many of those Silicon Valley seed-capital-backs start-ups will fail is that their CEOs won’t be able to get that help. The reason is simple, those angel investors have the know-how to give mentoring to start-ups – but they have better things to do with their time.

So if you move to Silicon Valley and get that seed capital, you will be on your own to build a prototype and get customers willing to buy it.

3. Absence of second-stage financing. And even if you get over that first hurdle, your start-up will need a bigger check to hire the sales people you need to generate revenues in the seven or eight figure range.

Unfortunately, if you’re in Silicon Valley you can’t get those so-called Series A checks in the $5 million to $10 million range. That’s because venture capital firms that provided those checks in the past have not generated spectacular investment returns for their limited partners in recent years.

As student loan start-up, SoFi’s CEO, Mike Cagney explained in a December interview, "The $5 million to $10 million dollar check just isn’t out there like it used to be. However, it is not hard to raise $500,000 seed capital and ironically it is not hard to go out and get a $25 million to $30 million dollar Series B at a $100 million valuation. What is hard is getting that $5 million to $10 million Series A."

And without the Series A, your start-up’s growth is going to be stunted. So you’re better off locating close to a source of that second-stage financing.

4. Exorbitant rents and salaries. If you’re like most start-ups, you are not exactly flush with cash. This raises a significant challenge when it comes to renting office space and hiring people. Simply put, odds are that you do not want to pay the highest rents and salaries in the country.

But if you locate your start-up in San Francisco that’s what you have to do. For example, the monthly rent in a decent office space in the South of Market (SoMa) district in San Francisco if $57/square foot – that’s how much Airbnb spent for its 170,000 square foot office in SoMa in November -- and salaries for top engineers can easily top $120,000 (as they do at Google).

The point is that this is a terrible environment for cash-poor start-ups. Why would you want to pour your scarce resources into such high rents? So stay away and less you have a huge capital basis.

5. Fierce competition for talent. And it’s not just the high salaries that ought to dissuade you from locating your start-up in Silicon Valley. It’s the fierce competition for that highly-paid talent.

Waltham, Mass.-based data storage company, Actifiio, CEO Ash Ashutosh, explained that talent in the Boston area is in it for the long-term but not so much in California. As he said in a December interview, “If I am trying to build a company for a long term the last thing I want to do is worry about constant churn of people coming in and out [which is so common with West Coast companies]."

What he means is that in Silicon Valley, it is common for an engineer to join a start-up and get stock options. If those options don’t pay off within a year--with the company going public or being acquired--engineers find another start-up and try again.

 

 

IMAGE: warzauwynn/Flickr
Last updated: Feb 4, 2013

PETER COHAN

Strategy consultant, startup investor, teacher, corporate speaker, pundit, and author of 11 books, Peter Cohan has invested in six startups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael E. Porter.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: