Silicon Valley is a lot of things: saturated, expensive, a possible echo chamber, and a hit HBO Original comedy. But, it’s also the birthplace of Uber, WhatsApp, Slack, and Instagram. It’s home to 40% of all “unicorns” and 49% of all VC funding so far this year. Sramana Mitra, founder of 1M/1M, ably summarizes why entrepreneurs come to the Valley: access to funding, advisors, and early adopters being key reasons.
But despite these benefits, building a company in the Valley is daunting. Competition for talent is cutthroat and the costs are exorbitant. Many founders now reasonably ask the question: should I start my company in the Bay Area or elsewhere?
However, this either-or approach can be flawed. The best course for some is actually a middle path that extracts the benefits of Silicon Valley while also leveraging talent from outside the traditional tech mecca. These “satellite startups” that quickly expand operations beyond their original headquarters can have substantial advantages over their more geographically concentrated counterparts that stick with a single location.
The Talent Crunch
The Valley is littered with stories of top talent hopping from one company to the next following bigger and better compensation packages. The militancy of tech headhunters is often blamed for creating a revolving-door mentality in Bay Area tech, where staying at a company longer than two years can be perceived as a sign of mediocrity.
One way to avoid this trap altogether is to build a team or teams outside Silicon Valley. This works particularly well for development teams, but other parts of the organization could be built remotely as well; there just has to be a sufficient pool of talent in the other location. This approach is especially powerful once a small startup finds product-market fit and needs to grow its team quickly. Plus, it can be rather painless if the founding team has deep roots and strong connections in the outside market of choice.
One concrete example: Bash Gaming (a Tandem portfolio company) looked to India, where founders Sumit Gupta and Vikas Gupta grew up and attended university, to avoid the Valley talent war. Although the Bash founders chose to establish their business headquarters in the Bay Area, they built their original development team in Bangalore. Once they found product-market fit, seeing Bingo Bash become a top 10 grossing app on iOS, they quickly grew their Indian dev team by 10x to over 100 developers in less than two years. The company leveraged its freshly enlarged team to briskly hit $80 million+ in revenue leading to an acquisition by GSN in March 2014. Bash may never have achieved its remarkable rate of growth had they faced the distractions and limitations of the overheated Bay Area talent market.
Silicon Valley is a very expensive place to run a company, which has dire consequences for the early-stage startup’s lifeblood: cash flow. According to data from Riviera Partners, the average engineering salary at a seed-stage startup in 2014 was $117,000, rising to $142,000 at Series B startups. According to DTZ, office space vacancies in 2014 declined by the largest rate since 2000, leading to ever more expensive rents. Salary and real estate inflation have led to a doubling in operating expenses vs. 2009.
“It was twice as costly to operate a startup [in San Francisco] in 2014 as it was in 2009.” – Tomasz Tunguz, Partner, Redpoint Ventures
Source: The Rising Costs of Scaling a Startup, by Tomasz Tunguz
Returning to our Bash example, by building a dev team in India Sumit and Vikas managed to maintain their balance of costs to revenue even as the company grew at a torrid pace. According to Sumit, “Just for engineering talent alone, the U.S. would have been at least 3x more expensive, but once you include QA, customer service, artists, etc. the U.S. would have been at least 5x more expensive.” Bash’s distributed team strategy kept costs low and margins high, easing the growing pains that many hyper-growth startups face.
(For further tips on maintaining capital efficiency, check out Norwest Venture Partners Principal Sean Jacobsohn’s article on the topic.)
Of course, the benefits of having an entire team located together in the Bay Area can sometimes outweigh the associated costs. And access to the top talent located in Silicon Valley may outweigh the associated distraction of the talent war. Founders need to carefully weigh the tradeoffs of a distributed team versus a concentrated one, taking into account the unique aspects of their business. Regardless, a key to their success of course will be doing whatever it takes to secure incredible talent in their location of choice.
Featured image courtesy of Official U.S. Navy Page via Flickr.