In 2010, I moved myself and the company from Minnesota to San Francisco. There’s no way we would have been able to build this company in Minnesota.
Every week or so, I hear about a new city that’s trying to become the ‘next Silicon Valley’ or someone explaining to me that Minnesota is a great place to build a tech company.
You certainly can create a good company anywhere. You can also sprint at 20,000 feet. It’s just significantly harder and you’ll be giving yourself a handicap.
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Here are seven reasons I moved:
There is a unique ecosystem of angel investors and venture capitalists in the Bay Area. It’s unparalleled for tech companies anywhere in the world.
Over the past 40+ years, the large exits and IPOs (Facebook, Google, Yahoo, eBay and more) have fueled and justified the next funds at VC firms. And they've produced a new batch of rich individuals who’ve become angel investors.
It’s this group’s unique understanding and affinity for tech that has helped produce incredible returns on investments -- which in turn has justified more capital entering the ecosystem -- which have in turn funded more great companies and so on.
We raised capital in the Bay Area in 2011. While we were fundraising and bloggers were calling the environment ‘frothy,’ the Minnesota Star Tribune wrote a long article about how angel investors in Minnesota were cutting back. These are two very different worlds.
2. High concentration of specialized knowledge
almost just as valuable as capital. Within walking distance of our office, you can talk to the people who built Twitter from the ground up and experts on viral growth. Want to learn about SaaS metrics? Reach out to the companies that set the SaaS standard -- like Dropbox, Box, Evernote and others. Even with their level of success, these people are remarkably open and accessible.
3. Culture of risk
My cofounder quit his full-time job at Tripit to take a risk building this company. In Minnesota, I’d be hard pressed to get anyone to quit their job to join a risky startup. Since there’s a lack of capital in Minnesota, starting a company is significantly harder for anyone with a family or any other life expenses.
Valuations are significantly better in the Bay Area. Since there is a super high concentration of billion dollar tech companies, the returns justify the higher valuations. As one investor explained to me, it’s the Facebooks, Googles and Dropboxes of the world that make this possible.
Moreover, there is a high concentration of investors competing for the best deals, which produces a better market price on equity. Certainly, a too high valuation can also be harmful, since it risks a down round. With that said, over the course of multiple rounds, you need to maintain enough equity to fuel growth. If you sell too much, too early, it can stunt your future growth potential.
Outside of the Valley, one founder explained to me that it’s not uncommon to sell 50% of a company for a few hundred thousand dollars. If it’s a capital intensive business, it’s unlikely they'll have enough equity left to sell in order to make it into a big company. Investors, getting too much of a good thing, get a bad thing, which prevents their portfolio’s ability to grow.
4. Legal terms
It’s not uncommon to see companies move to the Bay Area and be stuck with crazy investment terms from a previous angel investor.
Let’s say an investor who’s invested $10k has the ability to veto an acquisition. Not only do custom terms cost a lot of money in extra legal costs, it can also scuttle a company’s ability to raise future rounds, since this small investor has an outsized impact on the future of the company.
Because of the sheer number of deals that happen in the Bay Areas, norms on what is reasonable and not reasonable have developed.
5. “Trust-based ecosystem”
Garry Tan explained to me once that Silicon Valley is a trust-based ecosystem.
Just like repeat interactions in the prisoners dilemma produce better behavior, so do repeat interactions in Bay Area. Founders and investors know that if they behave badly, they’ll get cut out of great deals in the future.
6. Community versus isolation
Ben Horowitz explains that the most difficult job as a founder is managing one's own psychology.
In Minnesota, no one understood what I was doing or why it was worth it. I constantly felt like a foreigner. I even remember demoing our product to a family member and the person just walked away. The day I moved out here, I demoed it for a friend - he was so enthusiastic about it that he then started introducing me to his friends. After working on the product for nine months in Minnesota, I never experienced that level of enthusiasm from anyone.
Starting a company is hard and doing it in isolation is even harder. In the Bay Area, you’re surrounded by a community of people who understand. That makes a huge difference when you’re building a company.
7. Business development and integrations (growth)
This is a huge source of growth for us.
The vast majority of the companies we work with are within driving distance. In the event there’s an opportunity, we can meet in person. I’m very confident that business development wouldn’t have been a source of growth from Minnesota. Here's a talk I gave last year at 500 Startups unSEXY conference about business development.
It’s hard to evaluate odds. Especially with outliers and a desire not to move. Groupon was based in the midwest (Chicago). Startups are generally binary. So, anything you can do to stack the odds in your favor, you should do. If it takes moving to the Bay Area to increase the chance that you’ll succeed, I would (and did) do that.
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