It used to be that everyone went to Silicon Valley to start their company. Today that is not the case. And, in fact, there are a lot of good reasons to steer clear of Silicon Valley. Here are five things to think about when deciding where to locate your company.
1. Cost of living matters the most for early-stage companies. A startup is a very risky venture. I don’t need to tell you this. But I do need to tell you that most people fail because they quit. That’s right; if you keep going, if you keep plugging away at the market and pivoting your idea, you are still in business.
The thing that puts most companies out of business is cash flow. That is, they run out of money. Silicon Valley is terrible for cash flow. You are much less likely to run out of money if you live in a place that costs very little money to live. The difference between Kansas City and Redwood City is not very much when you are sitting in front of your computer five hours a day and talking on the phone for another five hours a day, trying to get something off the ground. But the difference between those cities is huge when it comes to cost of living, and that difference could give you another five or six months to keep making those calls and cut a key deal.
2. The talent pool doesn't matter at the beginning. The most frequent argument I hear for starting a company in Silicon Valley is that there is a talent pool. This is true for a company that is expanding rapidly. And those companies have the cash to move to the Valley. It’s definitely faster to ramp up a tech company where there’s a huge tech pool. And it’s faster to ramp up a media company in New York City, where there’s a huge pool of journalists.
But here’s the rub: If you are hiring at a break-neck pace, you have already figured out your business model, and you’ve overcome the major barriers of launching a company because you’ve figured out how to address a problem effectively enough to make sales.
The challenge of a startup is staying alive until you get to that point. And you have a better chance of getting through the tough spots if you are not in Silicon Valley. Any company that is at a stage when it needs to ramp up is also at a stage where funding will come relatively easily, and they can move to where the talent pool lives.
3. Access to capital is overrated. At the beginning of a company, you need angel investors. There are angels in every state. Because angels are not known for being geniuses as investors, they are just people who happen to have a lot of cash that they want to throw at high-risk ventures. This can happen in any state.
There are well-known investors all over the country who invest in very early-stage companies. It’s true that they are not as well networked as Silicon Valley investors. So give yourself an honest assessment. Is your company so hot that you could get a top-tier angel to give you money right away? If the answer is yes, it will pay off to be in Silicon Valley. A super-connected angel can make your funding road pretty darn easy as long as you stay on track.
But most early stage companies are not in a hot space with an idea so clearly fundable that they can attract that sort of investor. Most early stage companies are struggling to figure out exactly what they are going to do. And in that case, there are plenty of people to fund you in a wide range of states—probably 20 or 30 states.
4. Consider the positive psychology research. The life of a small-business founder is unstable and unnerving. Some days you feel like you can conquer the world, and other days you feel like your idea is stupid and you should go get a job. In any case, having a stable emotional support system will help you stay resilient, which will allow you to stay in the game longer, which will give you more time to figure out a business model that works.
Positive psychology, which is the study of what makes us happy, has reams of data to show that our work doesn’t actually make us happy. Work is interesting and engaging and exiting, but our happiness comes from personal relationships. So we should live near people we love.
Consider this when you are figuring out where to launch your company. The business needs a lot of time—more than anything—to really get going, and a low cost of living will buy you that time. And you personally need emotional stability more than anything, because a startup is an emotional rollercoaster. These two parameters should guide your location decision.
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