California is a land of contradictions. It is at once notorious for business-unfriendliness and the most entrepreneurial state in the nation; a place talented people swarm for the good life and flee because a good life is unaffordable.

Exhibit A: Silicon Valley workers are making less today, adjusted for inflation, than they were 20 years ago, says a 2018 study by UC Santa Cruz. The median price for a house statewide exceeds $600,000--more than twice the national level. And 44 percent of Bay Area residents say they will likely leave in the next few years, according to a 2019 poll conducted by the San Jose Mercury News and Silicon Valley Leadership Group.

Higher costs complicate recruitment and retention--and they can affect a company's ability  to build the kinds of skilled professional ranks that powered an earlier generation of companies, like Intel and National Semiconductor. "Of course you are going to get Web marketing companies where 80 percent of the employees are 25 years old," says Joel Kotkin, the Presidential Fellow in Urban Futures at Chapman University in Orange, California. "Because who is going to live in California when they are 35 and want to buy a home and have a family?"

And while California's GDP and employment numbers remain strong, it's unclear how long they'll stay that way. The state now attracts 47 percent of venture dollars, according to Pitchbook, but that's down from 60 percent last year and the lowest proportion since 2013. It is also severely concentrated in the Bay Area, which accounted for 68 percent of deals and 80 percent of dollars. 

Over the past two years, 660 businesses have moved 765 facilities out of California, business relocation agent Spectrum Location Solutions reported in November. Not surprisingly, the company cited high taxes, workers' compensation costs, and excessive regulation as principal culprits. California falls 49th in a 2019 ranking of state public policy and tax climates produced by the Small Business & Entrepreneurship Council, a nonpartisan advocacy organization. A 2019 survey by Chief Executive magazine put it at the very bottom nationally.

Entrepreneurs are particularly unhappy with two laws that went into effect with the new year. The California Consumer Privacy Act, or CCPA, requires that companies ensure their systems can handle consumer queries about personal information collected, delete that information if requested, and let consumers opt out of having their data shared. The CCPA can be painful for entrepreneurs. "For small to midsize companies, I'd say you need to earmark between $50,000 and $200,000 to get ready for this thing," says Matt Dumiak, director of privacy services at CompliancePoint, an information-security consulting group based in Duluth, Georgia.

Meanwhile, Alastair Mactaggart, the chief activist behind CCPA, is working on an even more restrictive ballot measure that would, among other things, require companies to get permission before selling consumers' personal information and allow customers to prevent use of that data to serve targeted ads. 

Another 2020 law that threatens business progress is Assembly Bill 5, known as AB5, which makes it harder for companies to classify workers as independent contractors rather than employees. AB5 compels some owners to start offering an assortment of protections and benefits, including overtime pay and workers' compensation insurance. "AB5 is a nightmare, particularly for a growing tech company that can't afford to hire full-time employees and has to contract out," Kotkin says. 

Yet despite those headwinds, California's startup activity remains strong, with the nation's highest percentage of people starting businesses and the best one-year survival rate, according to the Kauffman Foundation. The Golden State also justifiably wears the national innovation crown, according to Bloomberg's 2019 Innovation Index, which weights states based on factors like R&D intensity, STEM jobs, and patent activity. 

State government wants to build on that foundation. In January, Governor Gavin Newsom announced a four-year, $1 billion loan program to seed startups in sectors like energy-efficient transportation and smart agriculture. That money may prove a particular boon to less robust areas like the Central Valley, which is developing a specialty in agtech and climate tech, says Isabel Guzman, director of the state's office of the small business advocate. 

California is also striving to make entrepreneurship more diverse. Already 40 percent of businesses in the state are owned by minorities and 38 percent are owned by women. In 2018, California began allocating $20 million annually to enhance and expand services through government centers to women-, minority-, and veteran-owned businesses. "Finding solutions to improve access to capital where it is especially difficult--around the hard sciences and perhaps more early-stage for underserved entrepreneurs--is where we see our challenge is in the next five years," Guzman says.

Published on: Feb 19, 2020