Our Startup Would Probably Die If We Were In San Francisco

http://needwant.com/p/our-startup-would-die-if-we-were-in-san-francisco/

by marshallhaas • 12 years ago

103 69 12 years ago

faizanbhat• 12 years ago

Staying somewhere cheap gives you a tangible advantage but also puts you at several intangible disadvantages. At my first startup in the UK, we decided to base out of Birmingham instead of London, which reduced our living expenses by 70% and allowed us to really stretch our seed funding. But we ended up having to commute to London frequently for important meetings. Also, one could argue that we might have accomplished more in less time had we had continuous access to expertise and contacts at scale. Eager to hear other thoughts and experiences.

sliverstorm• 12 years ago

Well, that is naturally going to depend on the balance of work you need to do. If you have 12 months of nose-to-the-grindstone product development ahead of you, social connections are of less value. But if you are still spec'ing your product, or doing testing in focus groups, or other such things you'll benefit from those readily available connections...

Maybe I'm dreaming of having a large lab in the countryside, and a tiny office in the city.

glynjackson• 12 years ago

It all depends on the type of business you are in and at what stage your company is at. I'm a freelancer but I have staff. My office is based outside the city, but all my work comes from clients in Manchester and London, UK. The major cities are where the opportunities, networking and money comes from. My sacrifice for cheaper living means higher travel costs, longer work hours and in some cases less credibility. For myself, the offset of living in a low crime area with better schools works for me. But, I can understand why startups decide to work in expensive areas. Wealth breeds wealth.

freeqaz• 12 years ago

I've thought a lot about this and I feel like it makes sense pre-seed to do this. Save the cash, invest it in the business, and then when you raise money move to San Francisco/Bay Area. It's really tough to grow outside of SF, I feel like. But if you're bootstrapping yourself... Then I can't see many reasons to come to SF.

marshallhaas• 12 years ago

Agreed, San Francisco is probably the worst place to be if you want to bootstrap.

rjurney7• 12 years ago

I don't think so. There are so many early adopter, visionary customers here you can sign up on spec to pay you to develop your product.

brianwawok2• 12 years ago

I would take SF over Antarctica.

dyeje• 12 years ago

Why is it tough to grow outside of SF? There are plenty of successful internet businesses that are not based in San Francisco.

seanflyon4• 12 years ago

SF is the most extreme example, but I think it is hard to grow a tech company outside of a tech hub (such as Silicon Valley or Seattle). Other tech hubs have the same cost of living problems (to a lesser extent), but they also have potential investors, mentors, and employees.

curun1r• 12 years ago

Early in the bootstrapping process, I think it makes sense to go the Github route...make telecommuting and virtual presence a part of your company DNA and then get the best talent::cost ratio by not limiting yourself to employees in any city or state.

Offices in St Louis might be cheaper than San Francisco, but they're nowhere near as cheap as not having an office at all and possibly flying everyone to a common location on a quarterly basis for company all-hands.

danso• 12 years ago

It'd be interesting to see the OP's thoughts on how things would be different if he hadn't started in San Francisco? It may be expensive to live there, but it may be easier to network enough to get the contacts/experience/buzz you need to get seen, compared to starting in St. Louis.

bane4• 12 years ago

I've known a few businesses who "HQ" out of a big city, but usually just with a small sales office. Then they hire almost all of the rest of their staff in very cheap, but talent filled areas.

One mistake I've seen over and over again, don't hire your customer facing staff in those cheaper areas. You really want sales staff/etc. To be in the same area as your customer base

seanflyon4• 12 years ago

What areas do you consider to be very cheap and talent filled? I always assumed that the expensive areas are expensive because well paid talent is driving up the cost of living (though city attitude towards construction plays a large role as well).

bane4• 12 years ago

Well, depends on what you consider cheap and talented I suppose. For example, there are loads of people in Portland and the surrounding area that are employable for far less than you'd get in the Bay Area (by about 35%). You have to work at it though, it's not as bad as offshoring, but you can't half-ass it. The talent won't go as high as the Bay Area, but you'll probably be able to find folks good enough to make the kind of CRUD apps most of us are making anyways.

Here's a list and the cost of living delta vs. San Francisco (which translates into direct salary costs for your business).

   Portland, OR - 35% cheaper
   Nashville, TN - 80% cheaper
   Atlanta, GA - 70%
   Miami, FL - 50%
   Tampa, FL - 70%
   Huntsville, AL - 70%
   Northern, VA - 20%
   Blacksburg, VA - 60%
   Charlottesville, VA - 50%
   Virginia Beach, VA - 60%
   Fredericksburg - 40% 
   Richmond - 60%
   Williamsburg - 50%
   Phoenix, AZ - 70%
   Columbus, OH - 80%
   Tri-cities area, WA - 70%
   Boston, MA - 20%
   Newark, NJ - 25%
   Austin, TX - 70%
   San Antonio, TX - 80%
   Ft Meade, MD - 30%
   Chicago, IL - 40%
   Minneapolis, MN - 50%
   Las Vegas, NV - 60%

Off the top of my head, if you can't hire people in Austin, Nashville, or Las Vegas, you're doing it wrong. All of those have large tech industries and/or are near large cities with big populations. Nashville is near both a big city and a major national lab. They're also cheap enough that you can basically hire two people for the price of one in San Francisco.

arohner2• 12 years ago

Counterfactuals are very hard to know. At CircleCI, being in SF gave numerous advantages early on. We had multiple paying customers in the first two office buildings. We had multiple customers within walking distance, and many more within cycling distance. Being able to talk to real customers using the app was extremely valuable.

Customers aside, there are tons of people willing to help, either through advice or introductions. There's an entire ecosystem who understand startups, and have been there.

My failed started before that was in Austin, Tx, and the startup density just wasn't there at the time (2009).

Not every developer in SF is as mercenary as you make it sound. For your first employee hire, you might find a single person living in an apartment in SF vs. a family man in St. Louis who has to pay for day care and save for college. Their salary requirements might be comparable. [Edit: my point here is not to say that SF people are only single, and STL people only have kids, but that salaries are a distribution, and that there are places where the SF and STL distributions overlap, based on the individual's experience, desires and stage in their life.]

JPKab3• 12 years ago

"Not every developer in SF is as mercenary as you make it sound. For your first employee hire, you might find a single person living in an apartment in SF vs. a family man in St. Louis who has to pay for day care and save for college. Their salary requirements might be comparable."

This is based on a ridiculous premise:

1) That a highly paid professional in a city BRIMMING with recruiters and cool new companies throwing themselves at them isn't going to respond to market pressures and/or "the shiny new company" effect when you reach a certain growth point

2) That a "family man in St. Louis" will cost something comparable due to this odd concept unique to flyover country of having a family.... oh wait, people in the Bay Area have kids too.

I'm sorry, but there is a huge amount of delusion in San Fran about the advantages of physical proximity. I'm not idiotic enough to believe there aren't huge advantages, but it seems as if there is absolutely no point (that HN folks are willing to acknowledge) where the cost of being in San Fran and having to pay your talent at grossly inflated rates actually MORE THAN CANCELS OUT the benefits.

glitch003• 12 years ago

There is some quantitative truth to what he said, actually. San Francisco does have more single people than other cities, and in fact has almost 12% more single people than St. Louis does. So probabilistically speaking, there is a higher chance that someone you hire in SF will be single (and therefore more likely to put in looong hours) than someone you hire in St. Louis (who may be strict in going home at 5pm to be with family).

Source: SF has 44.7% single people, St. Louis has 32.9% single people

http://www.bestplaces.net/docs/studies/solocities_list1.asp

arohner2• 12 years ago

I'm not claiming there aren't huge downsides to being in SF. I'm claiming

- there are some advantages, but it depends

- the advantages depend on your target market, the stage of your company, and your desired direction, in terms of bootstrapping vs. raising

- you can't know ahead of time which way (SF vs. STL) will be more advantageous, and you can't repeat the experience, because the second time you'll have more experience, more talent, etc. This is a path-dependent experience.

Maybe if they did the startup in SF, they'd meet an advisor who changed the direction of the company to something even better, or maybe they wouldn't, in which case low cost of living in STL is an advantage. But pointing at cost-of-living alone isn't a useful comparison.

rhc2104• 12 years ago

CircleCI allows their software developers to work remotely, so that's kind of the best of both worlds.

tptacek2• 12 years ago

If you're selling products to developers, it is helpful to be in San Francisco. But if you're selling non-developer products to businesses, it can be unhelpful, because you want a diversity of clients and because tech companies have NIH objections at a scale that normal enterprise customers don't.

The subtext of your point about the STL person having kids is a little icky. You might want to reframe that point.

acheron• 12 years ago

There's also the fact that California is regularly at the bottom of rankings of "business friendly" states. I'd rather locate my business in a state that wants me there.

smutticus• 12 years ago

I've never understood these "business friendly" rankings. If CA is so terrible to businesses, then why are there so many successful businesses in CA?

WorldWideWayne• 12 years ago

Where there's muck, there's brass.

davidw• 12 years ago

"Positive network externalities":

http://en.wikipedia.org/wiki/Network_effect

The bay area has 1) a large, talented workforce, 2) great universities, 3) lots of venture capital, as well as people who have "already done it" to give advice. Plus it's a nice place to live if you don't mind the traffic. Granted, opening an LLC costs X compared to a much cheaper Y in Nevada, but that's ultimately kind of small potatoes compared to all the things in California's favor.

That said, I'm more interested in bootstrapping something: what people like patio11, Rob Walling and company have achieved doesn't look like science fiction, and they're doing it in places that are not Silicon Valley.

calciphus• 12 years ago

Because it is good for workers, and therefore workers who value themselves (or more specifically, understand their value to businesses) will want to live someplace where their rights are more important than their companies.

For example: non-compete clauses are unenforceable in California. This makes it "unfriendly" to businesses, but much more appealing to highly skilled workers who don't want to be boxed out of their industry for two years just because they dislike their job and want to quit.

gamblor956• 12 years ago

The rankings are heavily biased against tax rates and employee's rights. They focus on the factors that are related to cutting costs, while ignoring the factors that are related to generating revenues or operating the business, such as access to capital, trained/educated/trainable employees, and customers.

California and New York, both frequently at the bottom of such lists, have all 3 in spades, which is why they're great for businesses that engage in active business activities (sales or services). The states at the "top" of the lists are great for businesses that depend heavily on the exploitation of labor and cost-cutting to generate revenue or growth.

I represent quite a few companies that left California for tax reasons, and ended up coming back. They lost more businesses than they saved in taxes by moving to "business friendly" states.

rjurney7• 12 years ago

How ironic, when California has the most pro-entrepreneur labor laws. Non-competes aren't enforceable and California 2870 has the entrepreneur's back.

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=lab&gr...

Every company has to give you a piece of paper that says, "If you develop something unrelated without using company resources, you own it."

California is an entrepreneur's wet dream. The tax liability is cheap for what you get.

seanflyon4• 12 years ago

My first contract out of college specifically stated that they owned everything I make on my own time unless I live/work in CA.

cft• 12 years ago

The problem is that the massively funded SF/SV start-ups will create the "scorched earth" regime for the bootstrapped ones: try moving to St. Louis and compete with a AirBnB from there? If you get traction, you will have to get VC money, which means moving back to SF or NY.

JPKab3• 12 years ago

Why do VCs require companies to be in the city they are in? Can someone please explain this? We are talking about an industry whose product is supposed to transcend physical space, but we have to be located in an ultra expensive city to get funded? Where is the logic?

johnrob• 12 years ago

It's the same logic in requiring employees to work in the office. It isn't necessary valid, and likewise it's probably slowly eroding over time (probably due the high costs referenced in the article).

neilellis• 12 years ago

Everything we do as human beings (pretty much) is all about people. So think in people terms, not purely resource or financial terms.

People like proximity, they like being able to pop in and see other people. Distance is friction from a business point of view. Just as we see friction in applications as bad, so do business people see friction in business as bad. Distance is friction.

I'm bootstrapping in the UK, I love SF and would love to be there (at least part of the year!), there are a lot of advantages to having that much contact with other startups.

However, interestingly I notice that people who do what suits them best often seem to overcome geographic and financial obstacles. So I certainly wouldn't want to recommend or even suggest one way as better than the other.

You've got to balance what's right for you with what is right for others.

On a completely different note it would be great if we could swap the word 'funded' with debt everywhere it's used :-) The two words have very different connotations but mean the same thing (unless someone is just willing to GIVE you money :)) I think the word debt helps people to make more sober judgements.

rodgerd• 12 years ago

Where is the logic?

Maybe face time is important after all. Which makes the SV pumping of MooCs and other "disrupt education" pitches hilariously ironic and bleakly dishonest.

x0x0• 12 years ago

Disliking travel is the obvious reason (and to be fair, if you're on the board of 10+ companies, that can quickly become a lot of travel). And it's not just for board meetings; it's travel for the board member or for the ceo in order to use the board member's contacts, etc.

rjurney7• 12 years ago

There is such an advantage to being in a startup-dense area, why would you fund companies without this overwhelming advantage? You have a choice, and the valley startups come out on top.

kasey_junk4• 12 years ago

I've actually been thinking about it from the other perspective. Why exactly do companies want Bay Area VCs? I get it when you have exceedingly expensive up front costs like R & D, but in the current age of ultra cheap internet infrastructure and what appears to be zero stigma about asking your employees to work at lower than market rate, VC money seems like an overvalued property, especially when how paltry that money is compared to other industries.

So the obvious answer is that VCs are not there to provide money. They are there to provide a process/leadership to acquisition. So if you are a founder who is more interested in building something than an equity event, maybe there is a better way to do it than the VC funding route.

richard_cubano• 12 years ago

You should have moved to Oakland. There's plenty of cheap real estate there, and it's on BART.

tptacek2• 12 years ago

Is there actually "plenty of cheap real estate" in Oakland?

koberstein• 12 years ago

Depends on what you call "cheap" hahahaha

equalarrow• 12 years ago

Oakland is getting expensive too from all the overflow from SF. http://www.sfweekly.com/thesnitch/2014/04/17/confirmed-again...

I've heard people calling it the Brooklyn of the Bay Area.

crazy1van• 12 years ago

This comparison is impossible to do in any quantifiable sense. The cost savings for leaving SF are quantitative (low rent. lower taxes. etc). The perks for staying in SF are much more abstract (better networking. increased visibility). I don't mean to imply the SF perks aren't worth it, but they will only be quantifiable in hindsight at best.

Iftheshoefits4• 12 years ago

I've often wondered why startups locate in the SF/Bay area instead of elsewhere.

Right now outside of truly hot tech areas like SF the hiring scene is stacked heavily in employers' favor: there are fewer job opportunities with fewer companies. That's true even in places like St. Louis (or Austin, or any of a number of other supposedly "hot startup" areas). I get some recruiter-spam from St. Louis and Austin based recruiters looking for candidates for "hot" startups and established businesses in the areas, but these opportunities are all with hospital/medical companies (STL) or corporate-y .NET type stuff (Austin). It's a bit baffling, actually, since my resume pretty clearly puts me far outside of those boxes.

It seems to me there's an opportunity there for would-be startups to exploit. On the other hand, the very same phenomenon leads to a kind of resistance: the density of "talent" to draw from reduces substantially outside of the SF/Bay area because a lot of it has already been drawn here to the very same job imbalance.

guyzero• 12 years ago

"I've often wondered why startups locate in the SF/Bay area instead of elsewhere."

For a non-trivial number of startups, the founders were already working at a big tech company in the Bay Area before they started their own company.

For others it's access to investors or really critical employees. If you want someone who can build Amazon/Facebook/Google-scale datacenters, you're not going to have much luck in St. Louis.

frankus• 12 years ago

It's probably obvious to most, but I recently came to the realization that if you're paying off debt, a high COL works in your favor, whereas if you're living off cash, it works against you.

That means that if you're fresh out of college with lots of student loans, you're doing yourself a disservice if you don't move to a big city and get a high paying job. You can effectively inflate your way out of your debt by making your salary much bigger in comparison (assuming COL and salaries roughly match up).

And if you're about to retire (without having Fuck You Money), you should move somewhere cheap, all else equal. The same could be true for many bootstrapped startups.

bduerst• 12 years ago

Slight tangent, but it's sort of the same with investing too.

If you're investing or saving 30% of your income, it's better to work somewhere with higher COL / higher pay. This way over time you accrue more wealth than you would if you were working in an area with low COL and lower pay.

bunderbunder• 12 years ago

That only works out if the salary you can make increases in proportion with the cost of living. I haven't lived in a lot of places, but at least based on the few cities I have lived in, I don't believe the two are anywhere near that tightly correlated.

For example, consider Milwaukee vs. Chicago. Chicago's a major finance and banking center, and a huge percentage of the people living there are in some kind of profession. Milwaukee's still mostly a blue collar town. This difference shows in the very different costs of living: An apartment in Milwaukee costs about half of what an equivalent one costs in Chicago, restaurants cost less for similar quality meals, drinks are way cheaper, etc.

But it does not follow that you can earn twice as much money working as a developer in Chicago. The same job in Chicago might pay a bit better, but the difference is modest. This is because the two cities are so close to each other that at least in tech they're essentially the same job market. There's even a busy commuter train connecting the two cities.

In short, it's not necessarily doing yourself a disservice if you don't move to a big city and get a high paying job. You might do yourself an even better service by moving to a small city and getting a high paying job.

kasey_junk4• 12 years ago

There is a bit of a fallacy going on here. If your housing costs 2x of another place it does not follow that the total COL is 2x. For instance, most cost of living calculations predict that even though housing is 85% higher in Chicago, the total cost of living is more like 28%.

A 28% salary differential is just about right for the last couple of jobs I looked at and maybe a bit lower. This also doesn't count for the choice differential between Chicago and Milwaukee which is extreme.

brianwawok2• 12 years ago

Cost of living in Chicago is NOT 2x Milwaukee. Nor is salary, so you need to go more in depth.

I think 30-40% more salary is easy in Chicago. I think you can easily live at only 30-40% more expenses in Chicago (think of all the stuff a big city saves you.. can get rid of all your cars, get more free entertainment options, etc).

Thus, I think Chicago is awesome for post college people to inflate their way out of college debt. I do not know enough about SF to say if that is a good idea, but the COL to Salary ratio could be off.

superuser2• 12 years ago

This is because the two cities are so close to each other that at least in tech they're essentially the same job market.

I live in Milwaukee and disagree. There is no tech scene here. Programmers work for banks, insurance companies, Time Warner Cable, manufacturing, etc. if they work at all. In Chicago, there are actual software companies and consultancies. You would never see something like ThoughtWorks or Matasano (and their correspondingly competitive salaries) in Milwaukee.

7Figures2Commas• 12 years ago

You're missing one other consideration: retirement savings.

If you have a 401(k) plan, you can contribute up to $17,500 of your salary each year as an elective deferral. While it's possible to come out ahead earning a lower salary in a lower cost of living area, for most folks, it's generally going to be easier to set aside the $17,500/year for retirement with a higher salary. If you have a decent employer match, a higher salary can also be meaningful over time.

Of course, it is possible to obtain the best of both worlds (make a lot of money in a low cost of living area). You don't need to be in a high cost of living area to own a profitable business or become a consultant, and folks who are self-employed can set up their own 401(k)s.

ChossMops• 12 years ago

Er, to be a startup you have to be in a hot, happening city. Otherwise you're just a new business.

sayemm• 12 years ago

I think this all depends if you're really a "startup" or not. As per Paul Graham's definition: http://paulgraham.com/growth.html. Just because you're starting something up doesn't mean you're really swinging for the fences for a big home run. But if you are, your survival depends on deal-making and hardcore talent, so you're at a huge disadvantage by not being in a major tech hub.

But if you're focused on building a 7 or low 8-figure business, bootstrapped, and self-funded, and your goal is financial independence/freedom instead of "changing the world", totally agree, starting up outside of SF is a great way to build up and earn those first stripes.

I live in San Diego and there are lots of internet millionaires here: http://helenchangwriter.com/2009/11/20/millionaire-internet-...

josephjrobison2• 12 years ago

Agreed that the word startup is highly overused to apply to everything from Pinterest to a new marketing company in town - small business is what usually applies to companies not swinging for the fences trying to quickly acquire millions of users.

parennoob• 12 years ago

Wow, this comment really stopped and made me think. I honestly used to think "startup" was used for any new business with an unusual, efficient way of doing business.

Now that I know how HN people define it, I guess my inclinations are way more towards small business than startup.

josephjrobison2• 12 years ago

SF vs Austin, COL vs salary difference - deciding between the two in the next few weeks - please help me choose!

rjurney7• 12 years ago

If you want to be an entrepreneur, there's no choice at all. You have to move to the bay area.

kasey_junk4• 12 years ago

Correction, if you want to be a bay area VC backed entrepreneur. Oddly there are businesses started in other parts of the world.

Our Startup Would Probably Die If We Were In San Francisco

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