Can you build “Silicon Valley” companies outside of the Valley?

By boris, July 14, 2014

The big debate among tech circles has always been if it’s possible to build a “Silicon Valley” company outside of the Valley. Is Silicon Valley a physical place or a state of mind? Can upstart ecosystems in New York, Los Angeles, Toronto, or Seattle churn out tomorrow’s billion dollar tech companies? Considering a large proportion of Version One’s portfolio is located outside Silicon Valley, I absolutely believe that major tech companies can emerge outside of the Silicon Valley bubble. But there are some considerations…

When it comes to hiring, start-ups located outside of Silicon Valley have an initial advantage, because there’s a lot less competition for engineers. Smaller start-ups in Silicon Valley, particularly those in un-sexy markets, have a tough time drawing in top engineers and designers. A start-up located near a strong university system, like Toronto-Waterloo, has great access to talent without having to compete with 20 other companies and ballooning pay scales. As a result, they can get the talent they need while keeping their payroll expenses relatively low. Starting a company is one thing, but scaling is much tougher outside of Silicon Valley. While smaller ecosystems provide a strong pool of engineers and designers, they’re lacking senior talent. It’s relatively easy for a company to scale to 20-25 employees in Seattle, but when a start-up is ready to find its first VP of Sales or Marketing, it often needs to look beyond the local area. In many cases, a start-up will either need to relocate or open a second office in order to attract the right senior level talent.

The other consideration is the type of business. B2C start-ups typically have more flexibility for where they can be located, while enterprise oriented startups need to be where the customers are…and that means Silicon Valley. B2B start-ups need to have at least sales and marketing based in the valley, if not their entire operation. Keep in mind that SaaS and consumerization of IT are changing this dynamic slightly. Today, it’s a major advantage to be able to drive down 101 to meet your customers, but just 5-10 years ago, it was mandatory. Of course, all these points are generalizations.

The truth is that a great company can be built anywhere, just as building a viable tech start-up is tough no matter where you are. In many cases, success comes down to the founder’s ambition and mindset. Today we’re seeing more founders start a business on their home turf, come to Silicon Valley for an accelerated program like Y Combinator, then bring the Valley mindset back home. As more Valley-based investors and incubators reach out to assist founders across other ecosystems, the Valley can just be a state of mind.

  • http://www.startupmanagement.org/ William Mougayar

    I thought that large cities like Seattle and Toronto shouldn’t have an issue with the inventory of VP level positions. Do you think it’s always a requirement that the VP’s come from startups? At 50+ to 100 employees, then the company needs some discipline and process-driven initiatives, and the right corporate transplant can do the job, if carefully picked.

  • bwertz

    Senior people don’t necessarily need to come from a start-up but should rather come with a start-up mentality combined with a bigger company background (and hence know how to scale). I think both Toronto and Seattle have pockets of senior talent (e.g. Seattle has great depth in e-commerce talent thanks to Amazon, BlueNile and Zulily) but not comparable in depth and breadth to SV across industries and business models.

  • http://www.pointsandfigures.com/ pointsnfigures

    I don’t agree with your point about B2B. I think cities like Chicago and NYC have huge B2B businesses and plenty of ready marketing and management talent. I think it might be better to build those out of the valley than in the valley. B2C and pure tech companies certainly have unbelievable networks in the Valley that are tough to beat.

  • bwertz

    You might have a point re fintech & NYC but what big enterprise company has been built in Chicago as of late?

  • http://www.markevans.ca/ Mark Evans

    I think it’s completely possible to build world-class companies outside of Silicon Valley. The biggest challenges are attitude (aka having the confidence and aggressiveness to go after opportunities) and getting the right talent at the right. Toronto, for example, is stock with world-class developers but doesn’t have a lot of management/sales depth. But that can be “acquired” with the right amount of traction and funding.

  • http://www.pointsandfigures.com/ pointsnfigures

    Base CRM is on its way. https://getbase.com/

  • Jordan Thaeler

    Why would B2B need to be in the Valley? SV is great at layering software on top of apps, on top of software on top of apps, but is at least a 4 hour flight to anything relevant outside of CA. There are giant industries (energy, CPG, etc) that need products and services that are not in SV. Being in the midwest or south makes way more sense than being in SV.

  • bwertz

    Fully agreed

  • bwertz

    Good example, didn’t think about them.

  • http://davidcrow.ca/ davidcrow

    This is the thesis of AnnaLee Saxenian in The New Argonauts: Regional Advantage in a Global Economy http://www.hup.harvard.edu/catalog.php?isbn=9780674025660 Similar to PhD students as knowledge vectors, and it is the cultural experience and professional networks that allow the creation of global companies. But it is the need to be a global actor from day 1, to look for opportunities to raise capital, subcontract manufacturing, market products and services beyond the local geography.

    Take advantage of local resources, and hire the best talent regardless of geography (and don’t assume your geography is the best at anything).

  • http://www.pointsandfigures.com/ pointsnfigures

    https://www.youtube.com/watch?v=bsDFIhBsrDo&feature=youtu.be PaletteApp is an interesting company that will have a SaaS solution for a specialized segment.

  • bwertz

    Great find

  • bwertz

    Billion $ opportunity?

  • http://www.pointsandfigures.com/ pointsnfigures

    Who knows?

  • Jim A.

    Continuing the B2B location discussion, there are plenty of examples of B2B SaaS unicorns outside the Bay Area. Citrix Online (formerly ExpertCity, mostly the same product line as pre-acquisition) is according to IDC one of the world’s top five SaaS businesses at $600mm ARR (min $3.6mm enterprise value?). It started and is still based in little Santa Barbara. Cornerstone On Demand in LA, $2bn market cap. ExactTarget in IN, Cvent in VA, LogMeIn in MA, Constant Contact in MA, Fleetmatics in Ireland, Atlassian in Australia, SPS Commerce in MN, Concur in WA, DemandWare in MA, J2 Global in LA, Tableau in WA: all worth around $1bn or more. In fact, when one reviews the list of public SaaS companies, one might just see more outside the Bay Area than in.

    I absolutely agree that there is more VP-level SaaS competence in the Bay Area than anywhere else, so hiring world-class functional leadership gets a lot tougher outside the Bay Area once a business is scaling (e.g. above $10mm ARR). As examples, two of our portfolio companies — Invoca and The Resumator — are each based outside the Bay Area but decided to build Marketing and Sales in SF. But I suspect that such talent will get less concentrated over time, not more, even if only because it’ll become more abundant in aggregate.

    I also agree that if we’re talking about a B2B tech business that is mostly selling to tech startups (good examples might be RelateIQ, Github, Twilio, New Relic, Flurry, etc.), then a headquarters in The Bay Area likely gives an advantage. Vertical market / SMB Solutions, on the other hand, seem to be growing more organically from places that are close to their customers, who might be clustered, or might be on every main street. AthenaHealth in MA, DealerTrak in NY, Yardi in Santa Barbara, Realpage in TX, Medidata in NY, MindBody in San Lius Obispo, Booker in NY, 2U in MD, Shopify in Ottawa, Blackboard in DC, BigCommerce in Austin, Kareo in LA, etc. That makes sense in my opinion, as a key differentiator for these businesses becomes intimacy with the customers’ business (i.e. expertise in the vertical in question).

    It’s all a great experiment in which we’re engaged, and it’s fascinating to watch it play out and play a small supporting role. One thing seems worth noting: it is in the innovation business where the past might be least representative of the future.

  • bwertz

    Thanks for this long comment – some great data in there. Agree with you that I should have differentiated between enterprise start-ups that sell mostly to tech companies and those that sell to various industries. The latter can be successfully built outside of the Valley as your many examples show.

  • Jim A.

    Yeah, thanks Boris, I think I got a little caught up in the moment! Despite all the counter-arguments, I do think there’s a lot of merit to your original point of view.

    Three other supporting arguments / realities are as follows:

    1. Many B2B tech companies benefit from strategic partnerships. Since the Bay Area has the highest concentration of potential big partners for B2B companies, it makes perfect sense that a presence in the Bay Area can facilitate such partnerships. E.g. Veeva Systems ($3bn market cap on just $4mm invested capital) benefitted greatly from its partnership with Salesforce

    2. On a related note, M&A is easier when buyer and seller are closer together. More likely for trust to be established, easier to envision a shared future. Who knows whether Salesforce would have paid $390mm for RelateIQ if it were not local, or Twitter / Mopub for $330mm? We’ll never know.

    3. SaaS companies do need capital to scale. Less perhaps than in previous times, but the average capital to >$100mm exit for a B2B business is still solidly in the tens of millions. And the Bay Area has a lot more capital than the runner-up. And that gap seems to be widening.