Where Einstein Meets Edison

Where should you locate your start-up?

Where should you locate your start-up?

Oct 7, 2013

In Why does location matter?, I made a case that picking the right place for your venture can affect its performance. There I argued that start-up activity varies across different cities and regions because of six elements: pillar companies, universities, human capital, investment capital, mentoring, and values.

If you agree that location matters, the next logical question is Where should I locate my start-up? In general, the answer is to pick the location where the six elements best fit the resources your start-up will need to thrive. Of those six, the most important is values.

Read on for a discussion of how these values vary for different regions and six principles that can guide your choice of where to locate- your start-up.

 

Start-up Common Values Vary By
Risk Appetite and Investment Horizon

Peter_CohanRegions’ Start-up Commons vary along two value dimensions (see figure):

  • Risk appetite. Start-up success in a region depends on having a high appetite for risk. Thus, cities that do not value risk-taking tend to encourage fewer start-ups. In Hong Kong, Singapore, and Barcelona, for example, view real estate – rather than equity in a tech start-up — as a good investment. Parents living in those places encourage their children to take banking or consulting jobs so they can afford to own high-priced apartments rather than begin their own Start-up. A low appetite for risk damps the success of a Start-up Common.
  • Investment horizon. The other critical dimension of the values map is Start-up Common participants’ investment horizon. Investors may seek terms  as either a fixed pie over which participants grapple for the biggest slice in the short-term or as an ever-growing opportunity space that participants enlarge by giving back without expectation of immediate return and hoping for a return over the long-term.

Interviews reveal how differing postures on these two dimensions vary for different Start-up Commons:

  • Silicon Valley. As serial entrepreneur Elad Gil explained to me, Silicon Valley’s success hinges on three values: giving back to others without expectation of immediate return, taking risk to disrupt big markets, and intellectual humility.
  • Boston. Boston gives back and takes risk, but its investors and entrepreneurs exit early, limiting the number of pillar companies. According to Bruce Sachs, a partner at Charles River Ventures “Many Boston area entrepreneurs have not had enough at-bats to turn down their first acquisition offer. As in other regions, we see the rusty Toyota syndrome. When an entrepreneur has been getting by with very little salary and an offer comes along to buy the company for, say, $300 million, he looks at his rusty Toyota in the company parking lot and decides he wants to swap it for a Lexus. So he takes the offer. Moreover, each time an entrepreneur starts a company, he wants to make 10 times more at the exit than the time before. Entrepreneurs on their second start-ups are more eager to ‘go long.’”
  • Los Angeles. Los Angeles investors take risk and fight fiercely over a fixed pie. “Part of the problem with Los Angeles is that the entertainment culture focuses on greed and individual success, not equity,” says Steve Painter, CEO of TrueCar.
  • Atlanta. Atlanta places little value on expanding its Start-up Common. Appcelerator CEO Jeff Haynie says“[In Atlanta] if you made it, you’re on your boat and you’re gone. Successful entrepreneurs had zero social feeling because they didn’t get any help; they had to do it on their own.”
  • Seattle. Seattle’s potential entrepreneurs are afraid to leave Microsoft and its investors fight for majority control of start-ups. Gary Flake, CEO of Clipboard, believes“Seattle must overcome two big challenges to realize its full potential: the adversarial relationship among angel investors, venture capitalists, and entrepreneurs and the risk-aversion of Microsoft’s talent that is seeking a steady job with a good pension.”
  • London. London is highly stratified and those at the top are short-term greedy. “In London it is very difficult to meet with people who have capital or valuable advice and those masters of the universe only help if they see an immediate short-term benefit for themselves. Silicon Valley was much more eager to help my start-up so I moved there,” says Jeff Buckley, MinoMonsters CEO.

Six principles can help you decide whether to start your venture where you live now or to move somewhere else.

That decision could hinge simply on the reality that some regions are better for different industries. For example, many consumer-focused Internet start-ups thrive in San Francisco, Boston is best for biotech and big data, and for media- and fashion-focused ventures, Manhattan excels.

But relocating is challenging. So before making a move, calculate whether the benefits of moving outweigh the costs. To do that, analyze the fit between your start-up’s current Start-up Common and the one where you might relocate.

And in so doing, consider six principles:

1. Be near pillar companies

Move to a region where the pillar companies best fit your chosen industry.

Jed Yueh, CEO of Delphix, a service that helps developers finish apps faster, located his first start-up, Avamar, in Irvine, Calif. He found its human capital pool, however, too shallow, so he moved to Menlo Park when he started Delphix.

He believes that different kinds of technology start-ups best fit in specific cities in the region where the pillar companies are headquartered. “Consumer Internet start-ups like Zynga tend to locate in San Francisco; database companies are near Oracle in San Mateo, Palo Alto is home to platform companies like VMware, Facebook, and Google; networking start-ups cluster around Cisco Systems in San Jose; the chip companies like Intel are in Santa Clara; and storage companies like Data Domain and EMC are in San Jose,” Yueh explained.

The reason to locate near pillar companies is fairly straightforward: it is easier for start-ups that will compete in the same market to recruit top talent there. After all, the talented engineers who work in the pillar companies want to preserve their previous commuting patterns by working in a start-up near the pillar company while building a new company with their former colleagues.

Irvine — which had about 500 developers from which Avamar could have hired — had no publicly-traded de-duplication software companies. Silicon Valley has between 250,000 and 500,000 engineers which are “feeder schools” for start-ups, according to Yueh.

2. Tap local universities for ideas and talent

You should consider whether local universities or accelerators supply the best ideas and talent for your venture. It’s no surprise that MIT supplies some of the world’s greatest intellectual property and talent in industries from databases to nanotechnology. But many start-ups outside of Silicon Valley have found surprising reservoirs of talent in their local schools.

For example, Becker College in Worcester, Mass. hosts a vigorous video game development school — the Digital Games Institute — that produces talent at a lower price to potential employers than Silicon Valley would charge.

If there’s a big gap between the ideas and talent your start-up needs and what’s available locally—particularly for work that can’t be outsourced– consider moving closer to the talent.

3. Move to where the human capital wants to be

Locate within commuting distance of where you can hire the full range of talent that their company needs: C-level executives, functional vice president types, engineers, sales people, and marketers.

Nashua, New Hampshire-based Data Gravity develops software to help companies analyze large amounts of data. It’s simply smart business, then, to locate where it would be an easy commute for its founders and the talent that it hoped to attract.

As CEO Paula Long explained, “I live in Amherst, New Hampshire and I was a consulting engineer at Digital Equipment Corp. doing enterprise software, so I know there’s a lot of enterprise talent in and around the 495/128 belt. And so it is not a heavy lift driving to Nashua because it’s a reverse commute.”

4. Stay close to the value-added investment capital

Silicon Valley has deep pools of the different kinds of capital needed as a start-up grows. And if your venture can readily get these different kinds of capital, then it may be better off staying put. Otherwise, you might move to where the needed investment capital is more ample.

For example, consider Boston-based database as a service company Cloudant. The company’s CEO, Derek Schoettle, believes that he has gotten great value from local angel investors Richard Levandov and Braden Bohrmann from Avalon Ventures and angel investor Andy Palmer who serves on Cloudant’s board of directors.

5. Be near your mentor

Similarly, locate near a big pool of experienced investors and executives who can mentor your start-up and its professionals. Stay in place if you already have access to deep corporate and professional mentoring, and if not, relocate to a Start-up Common with a robust supply of mentors.

Mike Bergelson is CEO of Everwise, a service that connects mentors and protégées. It’s a mentoring company that benefits from being near a key mentor. Bergelson – who started a software company in New York City that Cisco acquired in 2006 –move to California as a Cisco executive.

He left Cisco and assembled a team to work on business ideas. But Everwise did not gel until Bergelson discussed these ideas with Maynard Webb, his mentor, whose Webb Investment Network (WIN) offers “young entrepreneurs seed capital, mentorship, and on-demand access to experts.”

In periodic face-to-face meetings with Webb, Bergelson decided to focus solely on mentoring. As he explained, “Maynard asked questions that made me realize that I had a passion for creating a way for corporate protégés to find mentors and that addressing that need could be a big opportunity.”

6. Work where others share your values

Locate in a Start-up Common that shares your values.

Shimon Hason, CEO of Intigua — a software development firm whose work helps companies run their computing applications more efficiently — decided to locate in Newton, Mass. instead of Palo Alto for several reasons.

As he explained, “I find Boston to be a much more inspiring location — due to its architecture, culture, and history. It’s also more diverse than Palo Alto, which I see as a ‘one trick pony.’ If I go to a social gathering in Palo Alto, everyone is involved in a high tech start-up. By contrast, in Boston, I attend parties where I meet people in many different fields — including doctors, academics, financiers, and technology people.”

Follow these six principles to guide you in choosing where to locate your start-up.

Peter Cohan

About

Strategy consultant, start-up investor, teacher, corporate speaker, pundit and author Peter Cohan has invested in six start-ups, 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 Porter and at Index Systems, a consulting firm founded by four former Sloan School professors. Cohan has run over 150 consulting assignments for corporations and governments and engaged corporate audiences from Barcelona to Beijing. He teaches business strategy and entrepreneurship at Babson College. His eleventh book is Hungry Start-up Strategy: Creating New Ventures With Limited Resources and Unlimited Vision.

One comment

  1. Paul Mwenda /

    Nice article, though its mainly on IT, am sure the principles are the same regardless of the nature of the business. Thanx!

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