Go West, Young Entrepreneur! Is The Valley Better For Software Startups?

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Go West, Young Entrepreneur! Is The Valley Better For Software Startups?

 


I want to start out by saying that this is one of the more troubling articles that I’ve written for this blog.  The topic is something that is near and dear to my heart (i.e. Boston as a center of software entrepreneurial activity).  As much as it pains me to say this, there seems to be increasing evidence that Boston (and New England in general) is losing further ground to the West Coast as the place to be to start an exciting new software company.

I’ve long accepted the fact that Silicon Valley has the edge when it comes to the necessary ingredients to foster the right kind of entrepreneurial energy for high-tech startups.  They’ve got more VCs and angels.  More successful serial entrepreneurs that are putting their cash back into new companies.  More startup employees that made money on earlier startups and going back and doing their own thing.  Generally speaking, The Valley has much more of the right stuff to spark a ton of exciting new companies.  I’ve known this for a while, but was reminded of it today when I came across an article titled “Capital Between The Coasts” in the Mercury News.  If you’re involved in startups on the East coast (either as an investor or an entrepreneur), you should read it.  Hopefully, it’ll keep you up at night, like it will do for me.  Another article (which cites the original) that I didn’t really agree with is the one from Venture which claims that the east coast loses the modesty game too.  Hard to believe

I want to get on the record that I love living in Boston.  My wife does too.  We wouldn’t rather be anywhere else.  We love the culture, the academic institutions and the overall energy of the city (we’ve lived here for about 7 years now).  I’ve been an active member in the startup community here, invested in a few early-stage companies and have co-founded a new startup of my own in Cambridge.  But, the evidence is mounting that Boston may not be the place to be for software startups (particularly world-changing software startups).  A number of people for whom I have great respect are beginning to convince me that the Silicon Valley edge is large and growing.  From the above cited article, Harvard Professor Josh Lerner says “There’s considerable evidence that except for biotechnology, where Boston has a strong advantage, the advantage of California is becoming more pronounced.” 

What’s Wrong With Startups In Boston?
 
Here are some random thoughts and ideas I have on the East Coast vs. West Coast theme.  
 
  • Where did we go wrong?  On a relative basis, Boston is still the second best place to be if you’re involved in startups (of the software kind).  There’s no decision or moment I can point back to and say, “There!  That was moronic, we shouldn’t have done that…”  Reality is, we still have lots of the right ingredients here too (just not as much as what can be found in the valley).

  • As an entrepreneur that has bootstrapped two prior companies (and working on my third), I think one of the biggest “costs” of raising capital is not dilution, but distraction.  I wrote about this in my article “Fatal Distraction:  The True Cost Of Venture Capital”.  Though not specifically targeted at Boston, I think the problem is worse here than in The Valley.  We simply take too much time and energy to get early-stage companies funded.  Instead of spending time building companies, our entrepreneurs are spending too much time raising capital.

  • As investors on the East coast, we are too careful.  As entrepreneurs, we are not careful enough.  This is the point that keeps me up a lot, because I think I’m part of the problem.  Or, more accurately, I’m not enough a part of the solution, and so I’m part of the problem.  

  • In my own small way, I’m trying to change this.  Last year, I made three early-stage investments (and when I say early stage, I mean early-stage).  The average due diligence for each of these investments was < 24 hours.  Actually, to call what I did due diligence is a grave distortion.  I really didn’t do any due diligence at all.  I tried to understand the idea (as best I could), I tried to understand the entrepreneur (as best I could), and I made my bets.  That was it.  For those deals I said no to, I said so quickly and convincingly.  At some level, I think that’s how it should work.  This is why I have a fair amount of respect for Paul Graham and Y Combinator.  You may not agree with their investment thesis, but I think it’s closer to what entrepreneurs actually need.  [Interestingly, the smart folks at Y Combinator actually divide their time between both coasts].

  • This year, I joined CommonAngels (a local angel investment group here in Boston with a great reputation).  There are a great bunch of folks involved in CommonAngels, and they are certainly moving in the direction that I think early-stage investing should go, but we’re still not quite there yet.  It simply takes too long.  It doesn’t matter if the startup doesn’t have financials to ponder or customer references to check up on.  It still takes months to get a deal done.  That’s too long.  But, it’s changing for the better and I’m encouraged by this.  

  • As for the entrepreneurs themselves, I think many of them are not understanding the reality of the mindset here.  Sure, you might have a game-changing, paradigm-shifting, belief-shattering idea for a consumer Internet play.  But, you’re going to spend a couple of months finding the right people to talk to, another couple of months educating these right people and the last couple of months (if you make it that far) convincing them to invest.  At the risk of alienating a lot of the people I know in the investment community (and even a few entrepreneurs), I’ll give you my sound-bite:  Many software entrepreneurs may be better off moving to the west coast than dealing with the pain of trying to get funded on the east coast.  There, I said it.  I’m going to walk around for a little while now because I feel so traitorous. … pause…  As much as I hated to do it, I think it needed to be said.


If I sound frustrated, I don’t really mean to.  I think I’d sound a lot more frustrated if it weren’t for the fact that I’m not really looking to raise large funding for my own startup, HubSpot, which is in the online marketing for small business space.  I’m fortunate in that I can bet on myself and keep writing checks until the money runs out, sanity runs in, or the idea itself succeeds.  Let’s see what happens there.  But, not everyone else can do that, and there are lots of entrepreneurs here in Boston/Cambridge that have ideas and would possibly make great startup founders. 

For all of you budding software entrepreneurs (and the investors that invest in them), am I off-base?  Is the East Coast actually closing the gap (instead of widening it) when it comes to being a great place to launch an exciting new software startup?  Is raising money even necessary now for software startups?  Can’t most people just bootstrap?  Would love to hear your thoughts in the comments.  This is one of those cases where I’d really, really like to be proven wrong.  I really like it here in Boston.  Go Sox!!

Posted by Dharmesh Shah on Tue, Dec 12, 2006

COMMENTS

I wouldn't argue with any of your detailed arguments, but I think there's one big "meta" or ecosystem-level feature Boston has that the Valley doesn't: lack of a myopic view and unrelenting focus on The Next World-Changing Thing (TM).

My experience in the Valley is such that people get sucked into this bubble where everyone's changing the world, everyone is cutting-edge, so they tend to forget what most of the world (and in turn, most of their potential users / customers) live and behave like. You tend to forget not everyone uses flickr or del.icio.us or BaseCamp...

In Boston, I think we have enough non-techies to retain a balance and a realism that's some helpful. It feels like a more balanced life. So while you might be right when one looks at only the VC/money-raising scene, I don't think that's the whole picture. But that's just my personal experience, and I haven't spent that much time in the Valley.

posted on Tuesday, December 12, 2006 at 10:11 AM by Yoav Shapira


Excellent points, Yoav. I'm starting to feel a little bit better already.

Boston is also working on some of the "harder" technological problems (which may indeed, "change the world" and not just how we share digital media).

And yes, it's not just about capital raising (for which I'm very thankful).

Need to write a follow-up article: "Go Invent, Young Entrepreneur!".

posted on Tuesday, December 12, 2006 at 10:17 AM by


I have found most of your articles interesting and realistic. I have also appreciated the comments generally posted against the articles.

This one however is foreign to me both literally and figuratively. I am from South Africa and own my own software business. In South Africa there is a very small pool of VC's or angels (with investment risk models stricter than what you would find at the bank) and our investment vocabulary and community does not understand software or technology funding at all. For example, there is no such thing as early investment or funding.

I was wondering if how I could learn something from your article and I suppose the only way I could would be to request an article on how companies outside the US could somehow interact with VC’s and angels in the US. For instance, what would be a viable strategy to follow?

posted on Tuesday, December 12, 2006 at 10:56 AM by Myles Rennie


A year ago I was interviewing for a Development Director job at Monster Labs, the innovation center for Monster.com, and the first question I was asked at the interview was "Why is the East Coast not having the startups like the West Coast is?".

I think all the reasons you give are valid, but there is another critical reason: we lost the big computer companies. No Wang, no DEC, all the Web 1.0 companies (except Monster) are gone.

These companies are the engines of entrepreneurship - the West coast has HP, Google, MS, Amazon, Adobe etc. etc. People, projects and ideas very often spin out of the big companies - without them we have lost our spawning grounds.

posted on Tuesday, December 12, 2006 at 11:27 AM by Christian Knott


It's the weather stupid!

posted on Tuesday, December 12, 2006 at 11:50 AM by Christian Pearce


I would like to echo the sentiment that East Coast start-ups seem more pragmatic -- less bling, bling, guess -- than the West Coast companies. If the investment style of the West Coast looks a lot like gambling at a casino, that's probably because their investment style has been that way. Sure there are huge YouTube payouts with that kind of gambling, but I'll sign up to work with old school investors, not gamblers, any day, because I know investors will be more likely to work with me, rather than squeeze my company for all it's worth.

posted on Tuesday, December 12, 2006 at 12:09 PM by Nate Westheimer


I can offer a view from the trenches. Bootstrapping is certainly more possible now than in the past. Even just a couple years ago, it was more difficult. However, bootstrapping can only take you so far, especially with the cost of living in the Boston area. There is somewhat of a paradox that bootstrappers will face, unless the founder is one of the few who posesses both business and programming skills. Very few people do. Those who don't need to either partner up, or hire out. Hiring good programming talent is expensive in this area. I dont' think that web-based startups need the enormous funding that we saw in the 90s anymore. A lot can be done for well under a million dollars. I think savvy VCs will start looking more at smaller deals. For every 25 million dollar deal, you can fund 50 half-million dollar startups. More swings at the plate = more chances to hit a homer.

posted on Tuesday, December 12, 2006 at 1:02 PM by Peter Davis


I think this argument should be sectioned out three ways:

1) Startups looking for full-on VC cash
2) Startups looking to subsist on Angel / Seed funding (early revenue)
3) Startups that are bootstrapped


I think that there’s no question that the Valley is the best place for the first type. It’s just too much work anywhere else to try to attract real Venture Capital.

But when you get into smaller-scale deals, it is not only easier to attract and close, but there are other arguments that come in where the Valley has a significant disadvantage. And by far the biggest is Money.

It is prohibitively expensive to start a company in the Valley. Rent (both home and office) is exorbitant. Employees are more expensive (trying to hire a programmer is 20k/year more expensive than in Atlanta). Little things like food and gas are more expensive, too.

I’m obviously biased (aren’t we all), but in my opinion Atlanta is a pretty darned good place to start a bootstrapped company. Rent is stupidly cheap ($500 a month for a semi-decent apartment). Potential employees are plentiful, skilled and reasonably cheap. Georgia Tech cranks out better CS students than almost any University in the nation, and there are easy ways to access and recruit the students into a startup.

The education one, in particular, is a really big boon for Atlanta (not only Georgia Tech, but also Emory and Georgia State, which has a great business school). The only other city that comes close, in my opinion, is Boston, which is nearly as expensive as the Valley and therefore not as attractive for a bootstrapped startup.

Oh, and Atlanta has much better weather than Boston. I went there this May for a friend's graduation from BU, and I couldn't wait to leave.

posted on Tuesday, December 12, 2006 at 1:17 PM by Erik Peterson


I agree that if you are in a position that you need to raise money, then the valley is likely the place for you. However, I think it's easy to get sucked into all the hype when you're over there. Not all startups have to go that route.

We're bootstrapping our startup in 2 different cities: Chicago and Seattle. This has given us interesting exposure to both startup environments. I would say that both are generally more pragmatic than the valley - startups tend to just try to build a business rather than seek funding and buy-outs. Seattle does seem a little more drawn into the hype than Chicago though.

If you're bootstrapping and looking to build a sustainable business, then I think being in the valley is just a distraction from your task at hand.

posted on Tuesday, December 12, 2006 at 1:56 PM by Justin Chen


Dharmesh, great points, specifically about how the time it takes to raise money can be prohibitive to growth. We have been working on raising seed capital for our startup here in Israel, and all our time has been consumed by meeting with Angels. It actually gets ridiculous after a while- we are anxious to get started already. It's unfortunate because the longer we are bootstrapping, stressing out and going to endless amounts of meeting with Angels who really lack visionary qulaities (necessary for our market), we could be building a better product and setting up our company. Any tips? The three F's are a non-issue in our case.

Keep up the good work!

posted on Tuesday, December 12, 2006 at 3:02 PM by Itamar Weisbrod


what about midwest startups?

posted on Tuesday, December 12, 2006 at 3:09 PM by Dave


Justin brings up a good point- Seattle is also a very good place for startups. I wonder if somebody could produce a list of startup-friendly areas and rank them.

Other potentials:
Austin
Denver
Chicago
Portland
Phoenix

Short of Rust Belt cities, as long as the city has a decent-sized Tech workforce and decent educational institutions nearby, I think it would be a viable place for startups.

posted on Tuesday, December 12, 2006 at 4:30 PM by Erik Peterson


I am a young (23) internet entrepreneur with a few companies under my belt. I just moved to Boston from Chicago and work with Zoominfo.com.

" Is raising money even necessary now for software startups? Can’t most people just bootstrap? "

I think that in a lot of cases for older entrepreneurs this may be the case. There is no question that is a lot cheaper to start an internet/software company...but its still not free :)

I've been working with a lot of young entrepreneurs (20 -25) in the area and one of, if not the biggest hurdle I keep hearing is money. Its a fact that the younger you are the less money you usually have.

This is quite unfortunate considering I have ran across some amazing young entrepreneurs with some great ideas, but are still in need of raising funding which is never easy.

I'd like to see more processes come out like Y Combinator, CRV Quickstart, etc that could help these types of young entrepreneurs.

posted on Tuesday, December 12, 2006 at 6:11 PM by Brian Balfour


What I'd be interested in is some discussion on starting up software companies outside the US.

I get a littlefrustrated seeing so much talk about Silicon Valley and Venture Capital. From where I sit, it's a world away.

posted on Tuesday, December 12, 2006 at 10:49 PM by Nick


I totally disagree with this post. Here's my argument

http://markeseremet.blogspot.com/2006/12/im-moving-to-san-francisco-tomorrow.html

posted on Wednesday, December 13, 2006 at 12:44 AM by Mark E Seremet


There are talented people all over the world, but few places where it's easier to get funding than Silicon Valley. Now, "easy" doesn't mean you'll just run into a VC on the street who'll throw money at you, but there's a culture of risk tolerance that you won't find in places whose economies are historically banking, not tech. The San Jose Mercury article mentioned is pretty insightful article and even quotes some Bostonians from Harvard...

posted on Wednesday, December 13, 2006 at 3:16 AM by Steve Leung


Dharmesh, like you I too like Boston a lot (culture, education, etc). I don't think the your post should be viewed as a "traitor", more a "wake up call". I agree 100% with your observation.
From where I am now, I can tell you that it's easier to raise 1st round funding in not only in Silicon Valley but also China (particularly Shanghai). My take is it's a bit of "herd mentality" where investors prefer to place their bets on the next "big" thing/idea.
I respectfully disagree with Christian Knott's premise that "big companies are the engines of entrepreneurship" or for that matter innovation. If they are, they won't be sending their employees to attend Sloan's and others business schools' entrepreneurship programs. My experience suggests smaller, nimbler startups out-innovate larger companies. The problem is getting enough capital and establishing good network (of both clients and potential VCs) to break out into the big league and…I won't say IPO given the SOX burden.

posted on Wednesday, December 13, 2006 at 3:38 AM by Chris Hong


Dharmesh,

Good points, as ever. I'm in the middle of starting a new venture in the Southeast that needs funding, so I'm going through this right now.

I agree wholeheartedly with the first comment in this thread -- Silicon Valley has severe myopia and is definitely a whirlwind. There are also all of the issues surrounding cost of living, hiring good people (there are many of them but competition is fierce) etc etc.

However, there is one area where I think Silicon Valley has a huge advantage: mindset.

If you take a job with a startup in Silicon Valley, the average response from someone else in the area would be "cool, what are you working on?". If you joined a huge established company in Silicon Valley, local friends would be dumbfounded and ask "but why would you do that?".

Anywhere else in the country the exact opposite is true. Working for a big company is still very much respected whereas a startup is seen as high risk without much reward.

I'm in Raleigh. Thanks to Duke, UNC etc there is an abundance of smart people -- one of the highest concentrations of PhD's anywhere in the US. We have lots of big companies to poach from -- Cisco, Lenovo, IBM etc. There is a big VC here -- Intersouth ($0.75B across all their funds), a number of well regarded smaller VCs and quite a few Angel groups.

What is missing is the entrepreneurial spark. The more time I spend here, the more convinced I become that the spark is heavily influenced by community mindset. And that mindset is not nearly as favorable outside Silicon Valley.

When you're thinking about becoming a first time entrepreneur, you face a lot of hurdles. Basic support and encouragement from the people around you is a big factor in whether or not you take the plunge and start something. If the broad response to "I'm starting my own company" is negative, you are far more likely (as a first timer) to walk away.

And it's a factor that compounds. If every person you try and hire away from a "real" job is getting the same kind of feedback from friends and family, it makes it that much harder to assemble your team. The same applies to all your support services -- the bank is that much more skeptical, healthcare harder to find etc etc.

Even if you jump in and start something there is a compounding friction-effect that works against you as you try and move forward, and it's caused by the negative perceptions associated with startups.

Of course, I'm ignoring my own theory and ploughing ahead regardless. We'll see how that turns out :-)

posted on Wednesday, December 13, 2006 at 2:41 PM by fewquid


Agreeing with others, I'm finding Seattle to be a great place for startups. Microsoft and Amazon attract significant talent to the area. After working for the big guys, people looking for a change start or join local startups. My sense is that the talent pool in Seattle is bigger than probably anywhere in the U.S. other than the bay area. Additionally, the valley is an under two hour flight to SFO/SJC if necessary. Cost of living here is cheaper than the valley (and Boston) so I think that helps as well.

posted on Wednesday, December 13, 2006 at 9:40 PM by Hillel


I know I am late to the party here, but I juts recently subscribed to your blog, which I love by the way. Anyway, I read the same article in the emrcury news and had a take on it as well. Please take a read.
Why Does So Much Tech Innovation Come From the West Coast

Thanks for a great read.
jimmy

posted on Thursday, December 28, 2006 at 8:47 PM by Jimmy


I think some one needs somebody to push him/here from the screatch.

posted on Wednesday, January 03, 2007 at 12:36 PM by Lawrence


I was born in Washington DC. My East Coast relatives are convinced that I blew it by getting educated in California. My Midwest relatives refer to California as home of the "fruits and nuts". You cannot drag a positive comment out of them about the West Coast - not even with the Jaws of Life.

I've lived in California for most of my life now. Both Southern California and Northern (and, believe me, it is as if they are 2 distinct countries, North and South, they can be so different).

Anyway, there is something I've seen as constant here in la-la land.

Optimism.

How else can you fall flat on your face and still get up the next day? Optimism. We have an over-abundance of it out here. I simple adore this attribute of the great state I'm blessed to live in.

We attract some of the best talent for reasons outside of money and success. We attract people because it's a POSITIVE place to live, with smart people, open beliefs and beyond great weather (do not discount the weather attribute, it is huge).

You fail at something out here and your friends are loading your in-box with referrals for your next gig. My experience with my East Coast counterparts is that failure is considered a contagious disease and you are avoided and possibly shunned. My Midwestern buddies are full of sympathy and woe. Only the West Coasters have the guts to make fun of you and support you in your next crazy endeavor.

That is down right appealing to me. And to a whole bunch of other people as well. What would you rather be surrounded by; people who are rooting for you or people who are tut-tutting your every move, constantly notifying you of all the dangers and pitfalls?

There is a great line from George who posted on Dan Primack's blog, "Finally, there is that old New England fear of being wrong, whereas, Californians are only interested in being right." http://www.pehub.com/wordpress/?p=409

*Exactly* We focus on the positive and are utterly fearless (sometimes ridiculously so!) of the negative.

Amen.

posted on Tuesday, January 09, 2007 at 12:58 PM by Alexis Lakes


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