|  
  
  
  
October 2007  
  
After the last talk I gave, one of the organizers got up on the stage to
deliver an impromptu rebuttal. That never happened before. I only heard the
first few sentences, but that was enough to tell what I said that upset him:
that startups would do better if they moved to Silicon Valley.  
  
This conference was in London, and most of the audience seemed to be from the
UK. So saying startups should move to Silicon Valley seemed like a
nationalistic remark: an obnoxious American telling them that if they wanted
to do things right they should all just move to America.  
  
Actually I'm less American than I seem. I didn't say so, but I'm British by
birth. And just as Jews are ex officio allowed to tell Jewish jokes, I don't
feel like I have to bother being diplomatic with a British audience.  
  
The idea that startups would do better to move to Silicon Valley is not even a
nationalistic one.  It's the same thing I say to startups in the US. Y
Combinator alternates between coasts every 6 months. Every other funding cycle
is in Boston. And even though Boston is the second biggest startup hub in the
US (and the world), we tell the startups from those cycles that their best bet
is to move to Silicon Valley. If that's true of Boston, it's even more true of
every other city.  
  
This is about cities, not countries.  
  
And I think I can prove I'm right. You can easily reduce the opposing argument
ad what most people would agree was absurdum. Few would be willing to claim
that it doesn't matter at all where a startup is—that a startup operating out
of a small agricultural town wouldn't benefit from moving to a startup hub.
Most people could see how it might be helpful to be in a place where there was
infrastructure for startups, accumulated knowledge about how to make them
work, and other people trying to do it. And yet whatever argument you use to
prove that startups don't need to move from London to Silicon Valley could
equally well be used to prove startups don't need to move from smaller towns
to London.  
  
The difference between cities is a matter of degree. And if, as nearly
everyone who knows agrees, startups are better off in Silicon Valley than
Boston, then they're better off in Silicon Valley than everywhere else too.  
  
I realize I might seem to have a vested interest in this conclusion, because
startups that move to the US might do it through Y Combinator. But the
American startups we've funded will attest that I say the same thing to them.  
  
I'm not claiming of course that every startup has to go to Silicon Valley to
succeed. Just that all other things being equal, the more of a startup hub a
place is, the better startups will do there. But other considerations can
outweigh the advantages of moving. I'm not saying founders with families
should uproot them to move halfway around the world; that might be too much of
a distraction.  
  
Immigration difficulties might be another reason to stay put. Dealing with
immigration problems is like raising money: for some reason it seems to
consume all your attention. A startup can't afford much of that. One Canadian
startup we funded spent about 6 months working on moving to the US. Eventually
they just gave up, because they couldn't afford to take so much time away from
working on their software.  
  
(If another country wanted to establish a rival to Silicon Valley, the single
best thing they could do might be to create a special visa for startup
founders. US immigration policy is one of Silicon Valley's biggest
weaknesses.)  
  
If your startup is connected to a specific industry, you may be better off in
one of its centers. A startup doing something related to entertainment might
want to be in New York or LA.  
  
And finally, if a good investor has committed to fund you if you stay where
you are, you should probably stay. Finding investors is hard. You generally
shouldn't pass up a definite funding offer to move.   
  
In fact, the quality of the investors may be the main advantage of startup
hubs. Silicon Valley investors are noticeably more aggressive than Boston
ones. Over and over, I've seen startups we've funded snatched by west coast
investors out from under the noses of Boston investors who saw them first but
acted too slowly. At this year's Boston Demo Day, I told the audience that
this happened every year, so if they saw a startup they liked, they should
make them an offer. And yet within a month it had happened again: an
aggressive west coast VC who had met the founder of a YC-funded startup a week
before beat out a Boston VC who had known him for years. By the time the
Boston VC grasped what was happening, the deal was already gone.  
  
Boston investors will admit they're more conservative. Some want to believe
this comes from the city's prudent Yankee character. But Occam's razor
suggests the truth is less flattering. Boston investors are probably more
conservative than Silicon Valley investors for the same reason Chicago
investors are more conservative than Boston ones. They don't understand
startups as well.  
  
West coast investors aren't bolder because they're irresponsible cowboys, or
because the good weather makes them optimistic. They're bolder because they
know what they're doing. They're the skiers who ski on the diamond slopes.
Boldness is the essence of venture investing. The way you get big returns is
not by trying to avoid losses, but by trying to ensure you get some of the big
hits. And the big hits often look risky at first.  
  
Like Facebook. Facebook was started in Boston. Boston VCs had the first shot
at them. But they said no, so Facebook moved to Silicon Valley and raised
money there. The partner who turned them down now says that "may turn out to
have been a mistake."  
  
Empirically, boldness wins. If the aggressive ways of west coast investors are
going to come back to bite them, it has been a long time coming. Silicon
Valley has been pulling ahead of Boston since the 1970s. If there was going to
be a comeuppance for the west coast investors, the bursting of the Bubble
would have been it. But since then the west coast has just pulled further
ahead.  
  
West coast investors are confident enough of their judgement to act boldly;
east coast investors, not so much; but anyone who thinks east coast investors
act that way out of prudence should see the frantic reactions of an east coast
VC in the process of losing a deal to a west coast one.  
  
In addition to the concentration that comes from specialization, startup hubs
are also markets. And markets are usually centralized. Even now, when traders
could be anywhere, they cluster in a few cities. It's hard to say exactly what
it is about face to face contact that makes deals happen, but whatever it is,
it hasn't yet been duplicated by technology.  
  
Walk down University Ave at the right time, and you might overhear five
different people talking on the phone about deals. In fact, this is part of
the reason Y Combinator is in Boston half the time: it's hard to stand that
year round. But though it can sometimes be annoying to be surrounded by people
who only think about one thing, it's the place to be if that one thing is what
you're trying to do.  
  
I was talking recently to someone who works on search at Google. He knew a lot
of people at Yahoo, so he was in a good position to compare the two companies.
I asked him why Google was better at search. He said it wasn't anything
specific Google did, but simply that they understood search so much better.  
  
And that's why startups thrive in startup hubs like Silicon Valley. Startups
are a very specialized business, as specialized as diamond cutting. And in
startup hubs they understand it.  
  
  
  
  
  
  
  
**