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“Silicon Valley is not a place, but a state of mind.”
—John Doerr, venture capitalist,Kleiner Perkins Caulfield & Byers
BLAME THE $4 TOAST.
And the corporate shuttle buses.
And the sky-high office rents.
And the borderline-insane local housing market.
Most importantly, blame the seemingly never-ending hustle to find, train, and retain top development talent, which forces technology company founders to go so far as to take out ads on the sides of city buses and all but throw money at Stanford’s engineering department in hopes of landing the top candidates they need. All in a kill-or-be-killed competitive environment that, for many small-time tech startups, can make it nearly impossible to get noticed, let alone funded.
For some tech entrepreneurs, it has all gotten to be a little too much.
This is life in California’s Silicon Valley, situated at the south end of the San Francisco Bay. It has long been the center of America’s innovation culture, considered the ideal breeding ground for tech startups. And for good reason. The area is overflowing with engineering and software development talent, thanks to nearby Stanford University and the University of California, in Berkeley; it is home to pretty much every major venture capital firm in the country, thanks to the long-established culture of tech funding and investing in the area; and it is an idea-rich environment that brings like-minded people together, creating more opportunities for outside-the-box thinking. In short, it’s where smart people go to do big things.
But the Bay Area is not perfect. And locating a new business in Silicon Valley is not always the answer for every tech entrepreneur. It’s crowded, it’s hypercompetitive, and it’s becoming staggeringly expensive. The city’s consumer price index—which measures how much everyday purchases cost—is now rising at a rate of 2.5 percent per year on average, and the rent for a one-bedroom apartment in San Francisco was up to an astonishing $2,800 a month as of 2013, according to Priceonomics. The city’s median rent, $3,250 per month, and median home price, $900,000, are both the highest in the country, and only 14 percent of homes in the city are considered affordable to the middle class.
“Every day in every way, from rising rents to rising prices at restaurants to its private buses, the tech world is becoming an object of scorn,” wrote former mayor Willie Brown in a November 2013 op-ed in the San Francisco Chronicle. “It’s only a matter of time before the techies’ youthful luster fades, and they’re seen as just another extension of Wall Street.”
This growing scorn is not entirely without cause, since the area has also lately developed something of a reputation for arrogance. “As the tech industry has shaken off the memories of the last dot-com bust, its luminaries have become increasingly confident about their capacity to shape the future. And now they seem to have lost all humility about their place in the world,” wrote former Wall Street Journal reporter Farhad Manjoo in a November 2013 story about the Bay Area tech scene’s growing superiority complex.
The examples are numerous. Stanford professor Balaji Srinivasan, the cofounder of genetic-testing company Counsyl, has suggested that Silicon Valley secede from the United States. PayPal cofounder Peter Thiel has floated plans to build a Waterworld-style artificial island off the coast of California where tech-minded residents can live outside the jurisdiction of US laws. And then, of course, there is former AngelHack CEO Greg Gopman, who created a controversy in late 2013 when he posted on Facebook that San Francisco’s homeless residents were “trash” who have no place in the nicer parts of town.
“It is becoming excruciatingly, obviously clear to everyone else that where value is created is no longer in New York. It’s no longer in Washington; it’s no longer in LA. It’s in San Francisco and the Bay Area,” venture capitalist Chamath Palihapitiya said on the tech industry podcast This Week In Startups in October 2013. “We [the tech industry] are becoming the eminent [vehicle] for change and influence, and capital structures that matter. If companies shut down, the stock market would collapse. If the government shuts down, nothing happens and we all move on, because it just doesn’t matter. Stasis in the government is actually good for all of us.”
Attitudes like these notwithstanding, the real issue for entrepreneurs these days is that Silicon Valley is simply getting very crowded. There are so many startups at work in the Bay Area that it can be hard for a small team to get attention and, by extension, get funded. Even if they do manage to get funding, it’s equally challenging to find technical talent to help get that product off the ground. It’s a big pond, and it is overflowing with both big and small fish. The odds are stacked against many of the new smalltime founders trying to break into business in the Bay Area.
But the fact is, the tech landscape isn’t just about California anymore. Entrepreneurs have plenty of other options these days, such as Austin, Texas; Raleigh-Durham; Las Vegas; Kansas City; and even New York. All of these cities, and more, have emerged as tech startup hubs in recent years, offering founders access to tight-knit entrepreneurial communities, solid engineering talent, and even some investment capital to get their ventures off the ground, all without the high pressure and added challenges that can come with a Silicon Valley address.
“There certainly are several jurisdictions that have been working hard to develop venture capital environments lately,” Mark Heesen, president of the National Venture Capital Association (NVCA), told me in late 2012. “It’s very long-term play, but it has been effective in certain areas.”
It’s true. In New York City, former mayor Michael Bloomberg put a new focus on entrepreneurship in the city during his term in office (his namesake company even created its own $75 million early-stage venture fund, Bloomberg Beta, in 2013) by rallying investors and supporting local entrepreneurs via a range of city-backed initiatives. Austin has been a destination for tech startups since the early days of Dell, bolstered by the nearby University of Texas. Chicago has shown that one company, in its case Groupon, can have a major impact on shaping the startup ecosystem in an entire metropolitan area.
“Cities are starting to realize that the real engine of job growth is entrepreneurial companies, not big, established companies,” Heesen said.
With this trend in mind, AOL founder and Startup America Partnership chairman Steve Case started a $200-million fund dedicated almost exclusively to investing in companies outside of the Bay Area in 2013. The fund, called Revolution Ventures, complements Case’s more traditional venture fund, the $450 million Revolution Growth that he started in 2011, by casting a wider net in hopes of snagging promising companies that other venture capitalists aren’t seeing.
“This isn’t negative on Silicon Valley. We think Silicon Valley is awesome,” Case said at the launch. “But there are also a lot of great entrepreneurs in other parts of the country, and there is not as much capital focused on them. Not all great companies are in Silicon Valley, so we’d like to shine a spotlight on some people and ideas and companies in some off-the-beaten-path places.”
Of course, there are limitations to this approach. These emerging startup ecosystems are often much smaller than what exists in Silicon Valley, limiting the number of opportunities that they can offer, and can be difficult places to find significant local funding. And that’s not to mention the challenges of finding talent outside of the Bay Area or generating publicity for your new app when you don’t have a large core of nearby users to test-market your product. The challenges are different, but they’re challenges nonetheless.
This is all to say that, in terms of new tech companies, the Bay Area is far from fading away. In fact, it’s still growing. According to the MoneyTree™ Report, produced quarterly by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), Silicon Valley accounted for nearly 46 percent of all venture capital deals in the third quarter of 2013, with 305 deals accounting for more than $2.6 billion