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Why startups are moving out of Silicon Valley

Many startups are looking for new geographies, which suggests that their primacy could decline as a technology center

“Like Florence in the Renaissance”

That is a common description of what it is like to live in Silicon Valley. The technology capital of the United States has a disproportionate influence on the economy, stock markets and culture worldwide. This small portion of land that goes from San José to San Francisco is home to three of the five most valuable companies in the world. Giants such as Apple, Facebook, Google and Netflix have Silicon Valley as their birthplace and headquarters, as well as companies that open new directions, such as Airbnb, Tesla and Uber. The Bay Area has the nineteenth economy in the world, above Switzerland and Saudi Arabia.

Silicon Valley is not just a place. It is also an idea

Since Bill Hewlett and David Packard settled in a garage almost 80 years ago, it has been synonymous with innovation and ingenuity. It has been at the center of several cycles of Schumpeterian destruction and regeneration, in silicon chips, personal computers, software and internet services. Some of his inventions have been absurd: teapots connected to the internet or an app that sold coins to people to use in automated laundry laundries. But others were global successes: microprocessors in chips, databases and cell phones, all have lineages that start in Silicon Valley.

His combination of expert engineering knowledge, prosperous business networks, large capital funds, strong universities and a culture of risk have made Silicon Valley impossible to clone, despite many attempts to do so. However, there are signs that his influence is reaching its peak. If that were just a symptom of a much greater innovation in another latitude, it would be a source of happiness. The truth is less happy.

There is already evidence that something is changing

Last year more Americans left San Francisco County than those who arrived. According to a recent survey, 46% of respondents said they plan to leave the Bay Area in the next few years, compared to 34% in 2016. So many startups are branching out to new locations that the trend has a name: “Off Silicon Valleying “(” go to the off Silicon Valley “). Peter Thiel, perhaps the highest-profile venture capitalist in the place, is among those who leave. Those who stay have broader perspectives: in 2013 Silicon Valley investors put half of their money in startups outside the Bay Area; now the figure is closer to two thirds.

The reasons for this change are many, but a very important one is the cost of the area

The cost of living is among the highest in the world. One founder estimates that young startups pay at least four times more for operating in the Bay Area than in most other US cities. New technologies, from quantum computing to synthetic biology, offer lower margins than internet services, which makes it more important for startups in these emerging fields to take care of their money. All this without considering the most negative aspects of life there: traffic, discarded syringes and income inequality.

As a result, other cities are reaching relative importance. The Kauffman Foundation, a nonprofit group that follows the records of the entrepreneurial initiative, now ranks the Miami-Fort Lauderdale area as the first startup activity in the United States, based on the density of new firms and entrepreneurs. Thiel is moving to Los Angeles, which has a vibrant technological environment. Phoenix and Pittsburgh have become centers for the development of autonomous vehicles; New York for media startups; London for fintech; Shenzhen for hardware. None of these places equals Silicon Valley alone, but all point to a world in which innovation is more distributed.

If great ideas can arise in more places, that is welcome

There are some reasons to think that the field of play for innovation is becoming more even. Capital is more available for new ideas everywhere: technology investors increasingly pass the sieve in search of brilliant ideas all over the world, not just California. There are fewer reasons than ever for a single region to be the epicenter of technology. Thanks to the tools that the Silicon Valley firms themselves have produced, from smart phones, through video calls, to messaging apps, teams can work effectively from different offices and places. A more even distribution of wealth can be a result of it, a greater diversity of thoughts, another. Silicon Valley does many things remarkably well, but it is dangerously close to being a monoculture of white nerdy men. Companies founded by women received only 2% of the funds distributed by venture capitalists last year.

The problem is that the most widespread field of play for innovation is also leveling down

One factor is the domain of technology giants. Startups, particularly those that operate in the internet business for consumers, increasingly have difficulties in attracting capital in the shadow of Alphabet, Apple or Facebook. In 2017, the number of initial funding rounds in the United States was 22% lower than in 2012. Alphabet and Facebook remunerate their employees so generously that startups may find it very difficult to attract talent (Facebook’s average salary is US $ 240,000). When the chances of success of an enterprise are unsafe and the reward is not so different from that obtained with a stable position in one of the giants, the dynamism suffers, and not only in Silicon Valley. The story is similar in China, where Alibaba, Baidu and Tencent are responsible for about half of the local venture capital investments, which gives the giants great influence on the future of potential rivals.

The second way in which innovation is leveling down is by increasingly antagonistic policies in the West

The growing sentiment against immigrants and the toughest visa regimes, of the kind imposed by President Donald Trump, have effects on the economy as a whole: foreign entrepreneurs create around 25% of new companies in the United States. United. Silicon Valley initially flourished to a large extent thanks to state generosity. But spending on public universities in the United States and Europe fell since the 2008 financial crisis. Funding for research is inadequate – US spending on research and development was 0.6% of GDP in 2015, a third of what it was in 1964 – and it goes in the wrong direction.

If the relative decline of Silicon Valley were heralding the rise of a global network of rival technology centers, it would have to be celebrated. Unfortunately, the peak that has reached Silicon Valley seems rather an alert that innovation everywhere becomes more difficult.

Also published on Medium.

Published inStartups

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