Where Einstein Meets Edison

Why Does Location Matter?

Why Does Location Matter?

Sep 20, 2013

The world-is-flat meme dismisses location as irrelevant because companies can start anywhere and reach employees and customers at any time of day via e-mail, text, voice, and video. However, my research suggests that where you locate your start-up matters tremendously; it can influence whether you succeed or fail.

Location matters to start-ups because the people who provide them with resources – revenues, talent, capital, advice, etc. — are real people:  They live in houses or apartments and commute to offices. They attend meetings and bump into each other randomly at coffee shops and in hallways.

And company founders seeking to build, develop, and sustain vital trust relationships, with their customers, suppliers, employees, mentors, and investors, must meet with people in-person repeatedly.

Start-ups could thrive or fizzle depending on the quality of their environments and the people in them. Read on to see how the choice of location contributed to the failure of one database start-up located in Israel and Silicon Valley and the success of its Boston-based rival.

Think of these locations as “Start-up Commons,” a modern adaptation of an idea from rural economics. In old England, farmers brought their animals to graze in a field at the center of their village. If farmers’ animals ate too much, the Common would wither and the community would scatter, yielding the Tragedy of the Common. But if each farmer’s animals limited their consumption and the farmers added fertilizer and seed, the Common and the surrounding town would thrive.

As illustrated in the figure below, the Start-up Common consists of six elements that get strengthened in each generation of start-up successes and failures. Unfunded start-ups tap the Start-up Common for capital, people, and advice, although a small percentage are funded.

where_your_startup_is_matters

 

When a start-up succeeds, its investors and founders re-invest capital and know-how into the Start-up Common. Even some of the many failed start-ups give back to the Start-up Common as their people and technology are composted back into the Start-up Common.

Why Picking the Right Start-up Common Matters

Where you choose to locate your start-up can influence whether it succeeds or fails. Consider two start-ups in the database-as-a-service industry: One is succeeding due in part to picking the right Start-up Common and the other failed because of a poor choice of location. Boston-based Cloudant is thriving, while Mountain View-based Xeround shut down on May 15, 2013.

Though Xeround was officially headquartered in Silicon Valley, its executives and staff were from the Tel Aviv Start-up Common. Xeround’s failure flowed from its inability to collaborate with customers during product development. Israeli entrepreneurs often tell customers the product features that they ought to buy.

As serial Israeli entrepreneur, Amir Eldad, explained, “Israeli start-ups are great at technology but they have no access to the global market unless they perform customer-facing activities outside Israel – generally in the U.S. And to succeed at ‘customer development’ – Steve Blank’s term for engineers collaborating with potential customers – the engineering team must be physically closer to the customers. That is better led by U.S. executives.”

The mindset of Xeround’s executives made it difficult for the company to succeed at customer development. Xeround stalled under two outside CEOs. Charlotte Yarkoni did not secure a robust base of telecom customers and left after AT&T canceled a contract. And Razi Sharir – who suddenly shifted Xeround’s focus from big companies to medium-sized ones — could not persuade enough companies that Xeround’s cloud-services were better than competitors’.

Eldad’s observation about typical Israeli CEOs – they believe that if they build a superior product, the customers will buy and remain loyal — certainly contributed to Xeround’s doom. Yarkoni perfected Xeround’s product and forged development partnerships but she did not anticipate that changes in customer, AT&T’s top management could lead to a quick loss of its several hundred million dollar contract. Her failure to monitor and adapt to these changes doomed her tenure.

In 2010, investors brought in another Israeli CEO, Sharir, who thought the best path to success was putting Xeround into the cloud – which was then a hot trend. In so doing, he would avoid large customers like AT&T and attract smaller ones. But Sharir moved to this strategy without calculating the all-in costs of providing the service or a recognition that competitors were crowding into the space. Xeround’s costs exceeded the prices it could charge.

Israel’s Start-up Common ultimately failed Xeround because of a human capital gap. The company needed executives with the ability to plan and execute a winning strategy by wielding competitive weapons beyond mere product superiority – including in-depth competitive analysis, corporate sales skills, and tight operational management. Israel’s Start-up Common did not supply such executives, nor could Xeround attract them from elsewhere.

By contrast, the Boston Start-up Common’s pillar companies and universities have helped Cloudant to prosper. As CEO Derek Schoettle, explained, “Cloudant benefited from Boston area pillar companies Vertica, Akamai, Brightcove, Iron Mountain, and independent software developer Bocoup. The local university scene is well-represented here. Cloudant’s founders met at MIT, and we have people from Harvard, BU, and Babson.”

Moreover, Schoettle believes the Boston Start-up Common’s values and mentors help Cloudant succeed. “The attitude in Boston has to be ‘where can we be 30 years from now?’ [This long-term view gives it an advantage over a weakness that] Silicon Valley is experiencing right now: there’s no loyalty. Cloudant has excellent mentors with Richard Levandov and Braden Bohrmann from Avalon Ventures and angel investor Andy Palmer on the Cloudant Board of Directors,” argued Schoettle.

Were Cloudant to relocate to Silicon Valley, it might have been able to tap into similar or better pillar companies, universities, and mentors. However, Schoettle makes a good case that being in Boston enables him to hire employees who will stick with the company. In Silicon Valley, he might struggle to hire the same level of talent and be distracted by needing to replace its more fickle talent.

 

The Silicon Valley Start-up Common

To understand what to look for in deciding the best Start-up Common for your company, let’s start with a detailed example, the Silicon Valley Start-up Common, and how ventures take from and give to this Common. The following six elements help explain why Silicon Valley attracts so much capital:

  • Pillar companies. In Silicon Valley, pillar companies like Apple, Google, Facebook, Oracle, and Cisco Systems help start-ups in three ways:
    1. They serve as early-adopter customers;
    2. They provide capital, from seed to exit; and
    3. supply talented executives, engineers, and sales people.
  • Universities. Universities are among the world’s best sources of intellectual property and talent. Silicon Valley hosts Stanford, U. Cal. Berkeley, and Santa Clara University. Y Combinator, the start-up boot camp, also adds value.
  • Human capital. From pillar companies, universities, and talent from around the world, Silicon Valley has an ample, if expensive, pool of start-up CEOs and other C-level executives, functional vice presidents, and engineers, sales people, and marketers. “When someone’s been working at Google or Facebook and they want to start a company, they don’t want to leave and move their whole family — so they start where they are. Similarly, it’s less risky for someone to start or join a start-up in Silicon Valley because if it fails, they don’t have to pick up the family and move to join another start-up because they’re all co-located, you don’t need to move the family and buy a new house,” explains Chuck Eesley, Assistant Professor and Morgenthaler Faculty Fellow at Stanford.
  • Investment capital. Start-ups need different kinds of capital at different stages — bootstrapping, founder financing, friends and family money, Angel, venture capital, etc. Silicon Valley has deep pools of all these kinds of capital.
  • Mentoring. Experienced investors and executives mentor companies and talented professionals. At the corporate level, such mentoring includes help with strategic vision, acquisitions, raising capital, performance monitoring, organization design, culture, hiring and firing, product development, and getting customers and partners.
  • Values. Finally, the SVSC has a unique set of values that guide the way people behave. As former Twitter executive, Elad Gil, explained, it puts a premium on giving back without expectation of short-term gain, taking a risk to disrupt big markets, and intellectual humility. These values help to expand the size of the opportunity available to entrepreneurs and investors in the region.

In conclusion, it matters where you locate your start-up. The next article in this series, Where should you locate your start-up?, will show you how to choose the best location for 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. Dear Professor

    Excellent article. I have used your inputs and criteria to start a discussion on assessing my home town as a possible location for developing start ups. You can assess it at http://drashisharora.blogspot.in/

    Would like to follow your posts in the future, as, I have just jump upon the wagon to develop myself as a faculty and trainer in promoting entrepreneurship in northern India.

    Regards

    Dr. Ashish Arora
    ashisharoray2k@gmail.com

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