Why Geography Still Matters
If you’re reading this, you may already know that last year 75% of US Venture Capital went to one of three states: California, New York, or Massachusetts. That left the remaining 47 states begging for sub-1% scraps.
Of course, 75% of investor capital is not from those three regions: pension funds, endowments, HNWIs, and other LPs are much more broadly distributed. This means that most states are actually net-exporters of Venture Capital.
This strikes me as a major problem.
On the tech conference circuit, I’m consistently amazed by the insistence from a subset of technologists that “anyone can start a company, anywhere.” This simply isn’t true.
While some software companies have extremely low startup costs, the vast majority of companies — even startup companies — are not pure software plays. And for those that are, proximity to talent and customers still play a major role in where they choose to domicile. Even assuming that investors stopped exerting influence on companies to relocate to be closer to them (e.g. Sand Hill Road), there are major factors driving companies to a small number of places.
But is this the best decision for those companies?
Certainly, from a pure cost perspective, this rarely makes sense — salaries and rents are much higher, even in Oakland or Brooklyn. I believe that we are already seeing the beginnings of a market correction.
My favorite factoid from last year was that it’s 4x more expensive to rent a U-Haul leaving San Francisco than one heading there — the exodus has begun, leaving San Francisco in its way to becoming a walled city for the very wealthy. More and more startups are getting the message that high cost of living cities use capital inefficiently, but we are nowhere near a watershed moment of rejecting these hubs. Why?
This is because cost can’t, and shouldn’t, be the only driver pushing companies into, say, the sunbelt South or the industrial Midwest. These places need to have other competitive advantages that allow companies to thrive in order to be successful. Here are a few of the major ones I see:
More than 76% of Fortune 500 companies are headquartered outside of CA, NY, and MA — directly inverse of the VC trends. Being adjacent to big companies in their sector has major advantages for a startup: it’s one of the reasons we are seeing flourishing ecosystems in places like Atlanta, Houston, and Minneapolis, places with a density of big companies. Big companies are full of highly-talented individuals who can set off on their own or be great early-stage hires. They are also ideal customers for many startups. This “clustering” notion was part of the founding ethos of Silicon Valley and will continue to play a big role for new ventures moving forward.
Access / ecosystem
One thing I hear time and time again from folks who move from a smaller market to a bigger one is the disorienting feeling of being (perhaps) the same sized fish in a much bigger pond. In the reverse, I hear cities like Detroit and Philadelphia sell themselves on being places that are “big enough to matter in the world, but small enough for you to matter in it.” Places like Silicon Valley and Boston are full of gatekeepers — professionals whose sole job it is to sit between an entrepreneur and an investor, for example. Smaller ecosystems necessarily take a big-tent approach and end up being far more welcoming and accessible, even to newcomers.
Quality of life
It often takes me well over an hour to get from my office in Manhattan to the airport, and my subway commute spans nearly 45 minutes each way, typically jammed in like a sardine with my fellow straphangers. When I visit St. Louis, where I grew up, the airport is basically 20 minutes from everywhere, and my mom’s commute is a breezy 8 minutes. This sort of thing matters for our humanity — as does the fact that a typical down payment on a house in my Brooklyn neighborhood would buy two entire houses in cash in my hometown. There is a reason the typical adult lives only 18 miles away from their mother. We need community, and we need babysitters. If I had a dollar for every time someone in the midwest has pointed to quality of life, or being close to family after they had kids, as the reason they live where they do, I would have enough capital to start a moderately-sized VC of my own.
For better or worse, we haven’t yet uploaded our brains to the internet. We are physical beings, living in real communities, and working for real companies. Even when those organizations are highly distributed, place has an outsized effect on the culture and impact of a company.
A little over two years ago, I made the decision to have the Venture For America Team become more representative of the communities where we work. We moved from being 100% New York-based, to now less than 50%. It has paid countless dividends, the most important of which is that we are more effective in carrying out our mission because we are closer to it. If I was starting from scratch, I would almost certainly not start my next company in New York.
While we can’t ignore the lingering benefits of being in more saturated markets, smart companies — and investors — should be moving their resources elsewhere and get ahead of the exodus.