
Starting a Company Outside Silicon Valley Just Saved Me $1.1M - robertjmoore
https://blog.getcrossbeam.com/vc-arbitrage
======
duxup
I always assumed the valley focus was because, yeah VC money there, and VCs
wanted people close by to help (well if they help), and just generally there
are a lot of good people there. By no means are those bad reasons, but not
everyone will have those reasons.

A calculator seems a bit simplistic but I would generally agree that if there
isn't something outright drawing you to that area, you don't have to be there
and there are costs.

I worked for a really large company a while back. They bought some smaller
company and discovered a support center ... that I worked at. They thought
they'd try doing support at that site as they suddenly had support there.

For less than half the cost per employee we managed to do twice the workload,
higher customer satisfaction, and we often were requested by customers who
quickly realized we wouldn't just shut down cases on them. Almost immediately
there were tensions. I'd go out and visit and oh man it was tense. There was
this idea that support just had to be in the valley because straight up the
managers and folks working there didn't know there were technical people...
anywhere else (this was before we had other islands of tech in the US).

I even bought it for a bit thinking I was going out to meet some high
performing folks and found ... way not that.

It was amazing that they had (including some management) convinced themselves
that stuff only happens in the valley and if they hadn't seen it they wouldn't
have believed it was possible outside (and some did not, oh the excuses)....
and that was just for a maintenance type task like tech support. (granted this
was some high end stuff so it did take good people, but they're everywhere)

~~~
Nasrudith
Personally I think ego is part of the issue - VCs don't want to admit they
don't always need "the best of the best talent" for their application.

Especially if their actual product would still be a turd no matter how
polished like Juicero - there is no real sophistication needed there, they
just wanted to copy Keurig to get rich.

~~~
jlarocco
> Personally I think ego is part of the issue - VCs don't want to admit they
> don't always need "the best of the best talent" for their application.

I'm sorry, but isn't that the same bigoted mindset?

Unless there's real evidence that the valley actually has "the best of the
best talent". Every time I see that claim, though, it boils down to some kind
of circular logic.

I would definitely agree SV folks _think_ they're the best, but real evidence
is lacking.

~~~
lotsofpulp
The multitude of world changing organizations, especially by market cap, that
have come out of SV is some evidence. Not that that means “best of the best”,
but if I were to bet on where something transformative will come from, SV
would still be on my short list.

It’s all about playing the odds, not necessarily being absolute about
statements like best of the best.

~~~
jlarocco
There aren't many "world changing" organizations coming out of SV lately, and
I'm not sure that claim holds in any case:
[http://fortune.com/fortune500/visualizations/](http://fortune.com/fortune500/visualizations/)

Even narrowing down to "tech" companies, there are enough outliers that I
don't buy it.

Change it to "SV has the best developers searching for VC funding," and I
believe it, but I'd still question the cause and effect of the situation...

~~~
scottlocklin
Hard agree. IMO the best tech talent in the US is in finance, telecom and oil,
none of which are Valley based. Most of what comes out of the Valley these
days is mountebanks with software written by overambitious undereducated kids.

Older companies like Google, Oracle and so on still contain pockets of tech
excellence, but you can't buy those guys with your startup idea.

------
geverett
As someone who started a company outside SV, then moved there for 3 years to
grow the company, and has now moved away again - I would say it's well worth
it to spend at least some time in the Valley to build a network and understand
how deals get done in person.

The density of investors and other founders/early employees in Silicon Valley
can't be beat, and I often found myself learning inadvertently - dinner table
conversations would be about how people raised their round, the friend of a
friend you meet while camping turns out to be a partner at a fund you're
trying to pitch. In more cases than are logical or fair, people simply invest
in their friends - which means if you make friends there you're increasing the
chance you'll be able to raise money easily.

That being said, the cost of living is absurd and I would never hire an
engineer in Silicon Valley unless I was building something at the outer limits
of frontier tech (and even then I'd scour the globe for qualified engineers
elsewhere). And I don't think you need to be there forever. If you build up a
solid network you can move away and still reap a lot of the benefits from afar
/ through occasional visits.

~~~
true_tuna
Where did you move? I’d guess 50% of the people in this thread are open to
leaving the Bay Area if we find a location with comparable opportunity.

~~~
ghaff
The thing is that "comparable opportunities" equates to (perceived) Bay Area
salaries which are more or less equated to higher-end FAANG salaries and the
(perceived) ability for a random engineer to drop a few emails and be starting
in a new well-compensated position the following Monday.

You're not going to get those most places. I'm not sure it's the norm in the
Bay Area either though.

~~~
Kalium
> The thing is that "comparable opportunities" equates to (perceived) Bay Area
> salaries which are more or less equated to higher-end FAANG salaries

In my experience, people mostly look to preserve their financial position
rather than take a jump up. Just because rent's cheaper somewhere else doesn't
mean I want to take a proportionate pay cut. I've watched people turn jobs
down flat when offered 50% of their pay in NYC because rent is half of NYC's.

Salary history matters a lot of negotiating power in the future. Salary
matters for building up a financial cushion in case this job elsewhere doesn't
work out and now I'm somewhere that has a lot fewer options on offer.

------
unignorant
Similar things can be said about starting a company with a fully remote team.
I’d estimate we saved _much_ more than $1M for our thirty-person company. An
additional benefit is that you can recruit the best talent from anywhere, so
long as they have experience working remotely (it’s a bit of a risk to
experiement with someone who hasn’t done remote work before). With this setup,
I’ve been blown away how easy it is for us to recruit amazing people. It would
be much harder recruiting for local engineers wherever you are based, whether
that’s SV or Philadelphia.

~~~
sontek
I started my company fully remote but doing payroll in multiple countries is a
pain. Have you solved this? I'm limiting my employees to the areas I've
already registered with the proper authorities and not hiring in any other
locations.

~~~
unignorant
In US we do payroll. For other countries the employees are legally
contractors, though still with equity and not treated any differently from
anyone else on the team

~~~
jedberg
> For other countries the employees are legally contractors

How do you actually pay them as contractors? Do you literally just wire them
USD or do you some service?

~~~
Finbarr
Not OP, but we are fully remote with a similar sized company and we just wire
USD every month after they send us invoices. It’s pretty easy.

------
filoleg
What about the opportunity cost that he potentially lost by starting his
company outside of Silicon Valley? I am not saying that he definitely did, but
the fact that OP doesn't mention it at all makes his whole post feel a bit
disingenuous. In fact, it reminds me a lot of people who talk about how much
money they saved by not going to college and how it is the way to go for
everyone, despite studies [of US colleges] showing otherwise.

P.S. I don't lean one way or the other about colleges, there are definitely
cases where not going is a good idea. However not even seriously looking into
upsides of going and closing eyes on potentially missed opportunities will
devalue your argument.

~~~
sontek
What would the opportunity cost? What does silicon valley have that philly
doesn't?

~~~
jedberg
Not being around the valley and not having random run ins with people who can
help you. I got one of my best employees by running into her roommate at a
birthday party and finding out she's looking for work. I've had other cases of
running into people at events that later helped me out. Events I wouldn't have
gone to if I didn't live in SV.

Also I've found that a lot of VCs don't want to talk to you if you aren't
local, because they don't seem to believe in video conferencing and like to be
able to have last minutes meetings. This seems to be changing though.

The key here is that my company is fully remote and my employees _don 't_ live
here, so they get to take advantage of this purchasing power, while I get the
advantages of being SV.

I don't think the whole company needs to be in SV, but it certainly helps if
the founder is.

~~~
ghaff
Location isn't irrelevant but for both locating in a less fashionable location
and teams that are at least somewhat distributed, you probably have to budget
for T&E. Traveling to events/meetings aren't a panacea but they can fill in a
lot of gaps. I get your basic point though.

------
jawnv6
50% of VC funding lands in CA. 50% of that is on Sand Hill. So ~25% of all VC
funding happens in offices in Palo Alto, the sheer efficiency of chasing a
funding round can't be beat.

For an established serial entrepreneur with a proven track record, it can
absolutely make sense to stay in an area you know. But I think that math
really changes if you're going to be cold calling VC's, trying to wrangle
meetings from 3 time zones away, get meetings bunched up to consolidate
travel, etc. The overhead of redeye travel is relegated to a joke at the end,
where's the "measurement" on that?

~~~
bluGill
You only need the VC who funds you though. Chasing after one elsewhere might
be better odds because everyone else is looking to CA.

~~~
jawnv6
"the" VC? lol

------
JohnFen
Personally, I wouldn't start a company in silicon valley. On the whole, it
looks to me like the downside of doing that far outweighs the upside.

~~~
true_tuna
Where would you go? Asking as a Silicon Valley person looking for a place
that’s a step less Silicon Valley, but not quite middle America.

~~~
JohnFen
Personally? I don't go anywhere, I start my businesses where I already am (a
relatively small town in the Pacific Northwest). I don't know what would work
for you, though, because it depends on your business goals.

If your goal is to get as wealthy as possible as quickly as possible, then you
need to be where the VC money is. That isn't my goal, however, so I have no
such need.

For my purposes, there is usually plenty of high-grade engineering talent in
the area. If I can't fill a need locally, then it's fairly easy to get someone
remote that can handle it. Likewise, there is no problem with sales and
distribution (I produce software -- if I produced hardware, that might change
the equation). I rarely need financing -- I prefer to bootstrap that stuff
rather than sell equity positions or take on debt -- but if I do, there are
lots of options for that as well.

If you are happy with where you live, then the only reason to consider moving
elsewhere for business purposes is if you can't meet a business need
otherwise.

If you aren't happy with where you live, then choose a new place based on what
would make you happy. Then analyze if it would work for you business-wise.

I do have another observation, if you're the sort who doesn't want to start
your own business but just wants to do interesting engineering work: look
outside of the computer industry itself. Pretty much every industry needs
engineers, and most have difficulty finding exceptional ones. If you're a
solid engineer, you can often write your own ticket if you avoid the obvious
employers.

~~~
magduf
>If your goal is to get as wealthy as possible as quickly as possible, then
you need to be where the VC money is. That isn't my goal, however, so I have
no such need.

Well, that _is_ the goal of most start-ups, so it sounds like, by your own
admission, they're right to found in Silicon Valley.

------
40acres
Why do you need to start a company in the Valley when two mega-corps (Amazon,
Microsoft) have already shown that you can succeed outside of the valley?

The huge companies are already starting to branch out (Amazon in NYC/DC, Apple
in Austin, FB/Google in NYC) and ecosystems will be built around these hubs.

Not only that but there are a variety of other hubs in the nation that are in
close proximity to elite technology schools (Pittsburgh, Boston). The talent
is definitely there, the VC infrastructure may be lacking but you're telling
me Marc Andressen won't hop in his private jet to meet with a promising
founder?

~~~
ghaff
It's also somewhat of a bias that tech = "whatever Silicon Valley does." While
there is a fair amount of that tech in e.g. Boston/Cambridge as well, you also
have way more biotech/pharma than exists in SV.

------
samprotas
I find it kind of odd that there are all these comments claiming the article
glosses over nuance and therefore its conclusion is baseless when the
counterpoints have even less data.

Everyone seems to agree successful companies have started in SV and outside of
SV, and that there’s a lopsided distribution. No one has spent much time on
whether the location is the cause of or just correlated with success. I get
that this is hard to determine, but maybe people should speak in less
absolutes? The article is one persons decision making process, explained for
the benefit of others. I don’t think it’s claiming to be The One Truth.

Disclaimer: I worked for the author in Philly previously.

------
inputcoffee
I think there is an error in the title.

It should read: "Starting a Company Outside Silicon Valley Saved Me _Just_
$1.1M"

~~~
adventured
I agree. I was surprised that the gap was so narrow. Only costing 25% less is
not a favorable outcome for Philadelphia given how expensive Silicon Valley
is.

If I can do Philly for $3.3m or SV for $4.5m, that's an easy choice. The
valuation boost you'll get for being in SV instead of Philly will cover that
several times over. The network and talent available in SV is worth suffering
that gap all by itself. The only way that difference is a meaningful deterrent
to choosing SV, is if you're not going to raise serious VC and will mostly
bootstrap the business or otherwise raise smaller amounts of investment. In
that case saving that money can make a big difference.

~~~
jryan49
So 25% more runway has no value?

------
jillesvangurp
There is talent outside the valley and you can get it at a discount. I live in
Berlin but I've worked with lots of Polish, Rumanian, Belarusian, Russian,
etc. colleagues spread all over Europe. Good hard working people, with solid
academic degrees, plenty of experience, up to date skill sets, etc. You can
hire an entire team of them for the kind of money valley based teams spend on
a single person. It doesn't even have to be a good one.

From what I've seen, there sure are a lot of not so great developers working
in the valley. At least judging from the copycat designs, the clumsy UIs,
chronic UX issues, etc. from typical startups I don't think that the grass is
greener over there in any meaningful way. So, I think it is a myth that you
get better than average people or products in SFO. Sure there are geniuses but
the success/failure rates are not significantly different. There's simply more
of both around. However, the failures are five times more expensive (ballpark,
give or take, lets assume that for the sake of this argument).

That is only offset by the occasional unicorn; which due to the enormous
amount of startups happens more often there as well. IMHO this is the main
benefit the valley has. There are lots of unicorns creating lots of wealth
which quite often gets reinvested locally. There's a lot of money flowing
around there. Most of it gets wasted on the same BS that VCs are funding
elsewhere. But then you get the occasional unicorn making up for that and the
practice of those companies acquiring the expensive failures to funnel some of
that back to investors.

Is a valley based team five times more expensive than a Eastern European team
five times as good? I don't think so. I'd say it's quite easy to find people
and teams elsewhere that are arguably just as good. Also, job hopping is a
thing in the valley. Despite the insane salaries, the average tenure is quite
short, especially at the bigger unicorns.

So, there's a bang for buck problem in the Valley and the smart VC money there
is already encouraging startups there to work remotely or consider having
remote developer teams. Relocating to the valley after you get funded stopped
being a thing here in Europe. VCs are no longer asking or expecting that; that
was a standard question a few years ago. What would be the point? Quintupling
the burnrate is not a goal; you need a good excuse than vague beliefs/hopes.
You basically pay five times what you pay in e.g. Eastern Europe and most of
that goes directly to real-estate owners, the state of California (taxes are
actually very high there, even compared to Europe), and all the other
overpriced stuff that the Valley has to offer.

~~~
mschuster91
> From what I've seen, there sure are a lot of not so great developers working
> in the valley. At least judging from the copycat designs, the clumsy UIs,
> chronic UX issues, etc. from typical startups I don't think that the grass
> is greener over there in any meaningful way.

This is not the fault of "not so great developers", this is the fault of
"agile development".

Whereas a decade ago you could go into a store and buy an AAA game, you could
expect that it was free from major bugs and generally playable from start to
100% on decent hardware. Today? Gonna be happy if the patches on first run are
not consuming more space than the original game itself and you don't have the
feeling that the game you shelled out 50$ for is not just a green banana that
ripens at the customer.

The same is valid for general software and especially web apps. Time-to-market
is everything, who needs a QA _department_ (it can all be done by developers
in their spare time / overtime, no need to hire persons who know how to write
proper testcases), who needs a proper ops department (the people who actually
know about how Linux operates, what security is and what ACID means, compared
to full-stack devops developers who cost a tenth of the money a good DBA or
system architect can command) and if it works in a half baked A/B test
(cheaper than running user studies or, heaven forbid, actually inviting power
users from your target market to fly to you and show you how they use your
product) then it gets rolled out indiscriminately to all your users. And when
the pile of layers of shoddy bugfixes and other general crap (e.g.
foundational architectural issues) finally collapses after a couple of years,
the original creators have long since jumped ship and cashed out. It's
definitely not sustainable.

------
jarjoura
The conversation that you're either starting a company in SV or not seems
silly. Of course you can start a company in most civilized places in the
world, people do it all the time. Case-in-point the article above.

Plenty of industry defining tech companies started outside of the valley too.
Microsoft up in Redmond, Commodore in West Chester Penn, AOL in Reston VA, and
so on.

The point I never see talked about with conversations like this is, should
you? You can find plenty of data points that say you can and you absolutely
can. It's the, does your idea and execution path make sense for the location
you're setting up at.

Some of the worlds top talent for tech are located in SV and that's why so
many companies are here fighting for them. We're told, we need the best of the
best to stay competitive and execute. If your product doesn't need a
concentration of world class product managers, designers and engineers, then
don't waste your time here competing for that talent. You'll have a much
easier time finding talent elsewhere and for less money.

For me, an engineer, I chose SV because I didn't want to be the best person on
my team. I wanted to be surrounded by people who are 10x smarter than I am and
learn from them.

------
tschellenbach
Traditionally the valley has clearly been the best place to start companies.
Many VCs still believe its the best place today. Hard to say if that's true,
you won't really know till companies that are started today end up growing and
succeeding. That takes about 10 years to play out, so in 2029 we'll have a
good idea of where the succesful startups came from. I'm going to go ahead and
guess that a larger percentage of them will come from outside of the valley.
There is more VC funding outside the valley than before, great startup
knowledge is available via books, classes, techstars outside of the valley.
Due to cost of living talent has moved outside of the valley. So yeah
definitely expect to see more startups succeed outside than has been the case
historically.

------
aantix
Sadly, if you're an engineer, those savings aren't passed on to you
(obviously).

If you're a software engineer and want to make an amazing salary by most
people's standards, move to the Bay Area and get a job with
Google/Facebook/LinkedIn/Etc.

You can literally make a 500K+ a year.

~~~
true_tuna
Add Netflix to the list. They pay extraordinarily well.

Although most engineers make half what you listed. And what’s the median home
price in Mountain View, San Francisco, Palo Alto, Los Altos? None of the above
are less than a million. By contrast an engineer making 150k but buying a 500k
house might have a better deal.

------
erikb
Which is not much, if you could've gotten $500M more in investments.

My experience is the complete opposite of Tim Ferris Wisdoms TM. If you are
where the money is at, you have vastly more opportunity to participate on the
receiving end of money flows as well as information flows. So if you are a
keen developer in SF you will not live on $60k for long, but rather quickly
bargain your pay up the food chain to $120k or $150k. And then check out how
well you can live on $120k in Thailand, you know?

There are two exceptions to this rule of following the money, though.

Exception 1: When you hit the ceiling. It might be much higher than you
initially thought, but there is one. And when you hit it, it might be more
reasonable to try to stabilize on that level and find a more peaceful and
cheap environment to live in.

Exception 2: When the current location is over hyped. Bay Area might still be
in that phase where prices really are too ridiculously high. If you spend more
than $60k/year on rent alone then maybe it's not wise to go there for $120k.
But it might still be worth an internship or finding customers there.

------
ojbyrne
“It’s VC arbitrage.”

The problem with arbitrage is that everyone wants to capture it, since it’s
basically free money. Not in SV? You only need 1/4 the funding.

~~~
bhelkey
> As you can see, the $3.35M I raised at a San Francisco valuation netted me
> over $4.5 million of purchasing power in Philadelphia.

3.35 / 4.5 = 74.4%. 3/4 the funding not 1/4.

~~~
ojbyrne
Arbitrage == information asymmetry. It gets reduced over time (this post and
comment will help).

------
kokokokoko
Philadelphia is less than two hours from New York. There are plenty of well
known and successful startups from New York.

This is more like "Starting a Company in Daly City". Definite clickbait hustle
story to drive traffic and sell his product. I wouldn't waste your time on the
article.

------
oarabbus_
Is it just me or is the headline a good reason to start a company _inside_
Silicon Valley? I can't be the only one who thought "all you saved was $1.1
million? I'd rather spend that and be in a location which is drowning in tech
talent"

------
rc_kas
Good on you that you had access to $1.1M.

Congratulations.

------
znpy
tl;dr: the silicon valley is unreasonably expensive.

~~~
isostatic
Pope is Catholic. Bears shit in woods.

~~~
znpy
software is broken. computers were a mistake.

------
avallark
penny wise, pound foolish

~~~
kgwgk
Million wise, billion foolish?

------
jacquesm
You could save a ton of money starting a restaurant on the North Pole! Free
real estate, low bill to light the place during half the year, what's not to
like. As much as I hate the draw of SV _if_ I were to start a company that
needs that kind of funding I would do everything I could do to do it there.
Why hamper yourself on purpose, the $1.1M saved might easily translate into a
couple of missed connections worth a very large multiple of that amount.

