Ask almost anyone about the hotspots in the United States technology development and they will likely name Silicon Valley. The follow-up question to find out why Silicon Valley has lured tech start-ups from all over the world is usually met with glaring silence. Silicon Valley (SV) draws companies from all over the world hoping to write their name in the annuals of history (while cashing excessively large checks) with their revolutionary business. For the entrepreneur beginning the process of establishing a start-up, one of the primary considerations is the location of the start-up. Evaluating the location, the incentives available to the company and the resources available are essential and play a large part in the future success of the company.
The west coast of the United States is home to one of the largest startup hubs in the world. How do you select one location over another? What sets Silicon Valley apart from the other startup locations around the world – and is it right for your company?
In this article, we look at six essential elements of any location that must be evaluated: 1) location, 2) tax incentives, 3) legal incentives, 4) availability of investors, 5) local resources and workforce, and 6) specialization.
Not every location will be ideal for every type of start-up, so the savvy entrepreneur must determine what elements are non-negotiable and which ones are more flexible. A detailed study of the essential elements can narrow down the potential locations that would best serve as ‘home’ for the start-up.
The beautiful countryside in northern California is a draw to visitors and locals alike. The soaring landscape and varied temperatures make it an ideal place for vacation and life. The location however, is both a positive and a negative in the consideration for Silicon Valley. In the far west of the country, getting to Silicon Valley is not an easy feat. It is not considered a stop-off point and is not “on the way” to another location – it is a destination on its own right. By locating a company outside the path of regular traffic patterns, the company cannot depend on customers “finding” them. In addition, getting the product or service into the hands of consumers can be more difficult. The location is a draw to potential employees who may want to explore the California landscape, but is a deterrent to those who want easier access to international flights or quick hops.
The benefits to locating a start-up within the famed Silicon Valley, however, often outweigh the downside. Placing a tech start-up in the middle of an environment that is primed with the resources and track record of success can give the company an advantage that other locations can’t match. Yes, the climate and physical location of Silicon Valley are important. But perhaps even more than the geographical impact of the environment it is in, the start-up in Silicon Valley will be among legends in the tech start-up industry. Silicon Valley embodies more than a place with specific climates, latitude and longitude. It is a mindset – a state of mind that places high value on innovation, on collaboration and competition, on failures and continued experimentation. The entrepreneurial climate in Silicon Valley lends itself to the type of thinking that makes going against the expected norm completely acceptable. While other locations have had their share of successes, there is a proven pattern to the companies that call Silicon Valley home: at least a dozen start-ups a year clear the billion dollar mark, and demonstrate once again that success does breed success.
2. TAX INCENTIVES
Tax incentives in Silicon Valley are negligible. Many, if not most, of the Silicon Valley start-ups are registered elsewhere, to avoid the excessively high tax rates that companies are under. To offset the less than friendly tax codes, corporations offer often un-heard of perks to their employees to take advantage of pre-tax dollars. Employee benefits such as free meals, dry cleaning on site, in-home care agents, 24 hour counselling services and more are all being offered in an effort to add value to the employee’s check without tax penalties. Giving their employees additional perks to offset the tax rates is what has helped instigate the playful atmosphere one sees at Google where gaming stations, ping pong tables and nature walks, along with fully stocked employee break rooms are part of the culture. Casual dress codes, flexible scheduling, employer provided transportation are all ways that the companies can add value to their employee’s pay without adding dollars. Their strategy seems to be working, the number of applications at successful start-ups in the area doesn’t seem to be dwindling.
Recently, tax regulations changed, eliminating the long-held tax deduction offered to corporations in the state. High capital gains, once offset by the deduction, are now cost prohibitive to some companies considered locating their headquarters within Silicon Valley. It is difficult to say how many companies may choose alternate locations based solely on the tax codes. Companies who are looking to create long term wealth may view the tax incentives as a small price to pay to receive the benefits of the SV environment. The long term effect of the loss of the tax deduction has yet to be seen, but one can surmise that the heavy financial hitters of the area will be fighting to maintain their tax break.
3. LEGAL INCENTIVES
For a tech start-up, there are few things as important as Intellectual Property (IP). Intellectual Property is the basis for a majority of start-up companies, and the ability to protect that property legally is imperative. California laws support trade secret policies and laws are in place to provide companies with legal recourse for violations of misappropriations. This incentive can be huge for the company that is not producing an actual product. The tech industry that has built Silicon Valley’s success has very few actual items. Their stock and trade can be found in ideas, in coding and in computer programs that are nebulous to explain or demonstrate outside the programming lab. Unfortunately, it sometimes become necessary to protect ‘trade secrets’ of companies from disgruntled (or misguided) employees who may want to take their intellectual property somewhere else to play. Recognizing the need to maintain ownership, the IP supportive laws are fundamental in protecting the start-up. For companies who are heavily invested in IP, this is a tremendous benefit that many other locations do not have.
4. AVAILABILITY OF INVESTORS
Silicon Valley has attracted a large number of Angel Investors, Seed Funding sources and more potential investors. With the number of tech start-ups in the area, the surrounding investor pool is already familiar with the industry and is most likely already geared to invest in a tech start-up. Unlike in other cities, venture capital opportunities are scattered throughout Silicon Valley making financing easily accessible. Other locations may have to select out of a limited number of venture capital firms all within a ‘financial district’ of the start-up hub. In the Silicon Valley area, the investors are spread through-out the entire area making it almost impossible to go anywhere without being mere yards away from potential funding. Investors are plentiful for every stage of growth, and have the luxury of deciding between investing in established and proven companies (Apple, Google, Oracle, to name a few) or getting in on the initial start-up phase of new technology and companies (e.g. Chegg, Cloudera, Evernote).
Seasoned investors in the SV area, like investors everywhere, have seen promising young companies fizzle out, and have seen the little known ideas grow to greatness. There is a sense of anticipation that one can almost feel in the atmosphere – that no matter what type of funding an investor takes part in, they are a part of making history. Approaching tech investments with more than a drive for financial gain, many SV investors are looking to help develop companies that have long term potential.
Significant in the development of Silicon Valley as a forefront for tech start-ups is the commitment of investors to remain steady for the long haul. Not tempted by the promise of immediate rewards, the SV investor knows that great reward can be found in the long term investment. Unlike start-up investors in other areas, the investors in Silicon Valley have learned the value of holding on to an investment for at least ten years.
Studies have shown that there is something almost magical about the tech start-up ten years after it begins. Facebook (another Silicon Valley start-up) founder Mark Zuckerman turned down an offer by Yahoo! to sell the then two year old social networking site. At that point, the company wasn’t showing a profit, and revenue was a paltry $30 million. Seasoned start-up investors assured Zuckerman that his share of the sale would be impressive: he owned 25 percent of the stock. He may have been tempted by the sudden promise of wealth, but Zuckerman held fast. He had a clear vision for what the company could become, and felt as though Yahoo! would let his creation flounder. Contrary to what the media and financial ‘experts’ told him to do, Zuckerman passed on the sale. Recent valuations of Facebook have placed the company over $100 billion in worth, earning Zuckerman a place as a start-up legend.
Investors in other areas do not seem to have the drive to hold onto their investments long enough to pass that famed billion dollar mark – as evidenced by the fact that only two start-up hubs have consistently turned out companies who have surpassed it. While Silicon Valley has its share of investors who simply want to generate a large profit quickly, there seems to be an attitude among a majority of the start-ups that longevity is to be valued.
5. AVAILABILITY OF LOCAL RESOURCES AND WORKFORCE
The primary resource that SV can offer is a talented workforce. The lure of successful SV companies brings highly qualified talent from all over the world, hoping to land a job with a start-up. The resource pool for mentors, network opportunities and employees is large, making it ideal to find the perfect people for your company.
The business infrastructure available to companies in Silicon Valley is unmatched in other locations around the country. Already established and working in the Silicon Valley area are lawyers who are familiar with the legalities facing a new start-up. Public Relation firms that are skilled in launching start-ups into the public’s eye have offices in the middle of SV. Mentors who have been through the trenches of starting a company can be found in nearly every coffee shop and restaurant in town. Accountants who specialize in business start-ups are already in place and know the specific forms and reports that every company must have.
Experienced management can be vital – especially to a fledgling start-up. By putting an experienced manager in place, they can help navigate the treacherous waters of entrepreneurship and lead the company to success. Finding a CEO that has start-up experience gives a company an edge over other start-ups and can be the difference between success and failure. Within the SV area, there are CEOs who have weathered the initial, frantic days of start-ups and have lived to tell about it. They bring a wealth of experience and knowledge that can’t be matched by less experienced management.
Establishing a way to get your service into the hands of consumers is another important consideration. By locating within Silicon Valley, you are placing your company near the platforms that can be used to deliver your product: Google, Microsoft, Facebook, for example, providing you with quality partnership opportunities. Collaboration is prized in the Silicon Valley area and leads to business partnerships that have proven to be win-win situations. Being near the companies that can be a benefit to a start-up, as well as be the beneficiary of the new technology a start-up is without question one of the most important benefits of the Silicon Valley location.
Located within the Silicon Valley area is Stanford University. Business talent and top rated engineering students flock to the school, and the result is a flood of highly skilled and talented labor. For the start-up who needs highly skilled programmers, engineers and developers having a consistent pool of talented workers not only helps push the development of the start-up, but can ensure that the company is always on the cutting edge of technology advances.
These intrinsic benefits to establish your company in Silicon Valley cannot be easily dismissed. Yes, there are experienced professionals in nearly every city in the world, but the density of the SV area with start-up savvy people makes it impossible to overlook.
Silicon Valley has made a name for itself in the tech start up market. Some of the largest technology companies in the world are based in the California sun but for companies looking to break into the tech field, it can be both a hindrance and a help to be based in SV. The accessibility of other companies to collaborate with, gain experience and insight through networking and an established source of resources can be a benefit to a newly formed company. The downside of the focus on tech startups is the reality that the competition is fierce. The pool of talent that is drawn to Silicon Valley is composed of some of the leading programmers and tech minds in the world. To attract the top level talent, your company must be able to edge out other companies who may be already established or offer better incentives to join their team. Google, HP, Cisco, Yahoo and Sun all began as fledgling ideas on the campus of Stanford University and have gone on to great success.
The famed Silicon Valley appeal has continued to draw tech start-up hopefuls from around the world. There is a sense that if a company can make it to Silicon Valley they have a better chance of success. While simply listing the Bay area as the company address doesn’t guarantee anything, it certainly offers benefits that make it seem magical. Trying to launch a tech start-up elsewhere is possible, but may not be the best solution for certain types of companies. Making way to the California tech market is sometimes the first of many decisions that can fundamentally change the future for start-up entrepreneurs. Reaping the benefits of an already established infrastructure can save the start-up years of frustration and struggle. For the company serious about their future success, Silicon Valley offers a list of benefits that must be considered.