Answer by Auren Hoffman on Quora.
Starting a company in the San Francisco Bay Area is becoming less and less important. Especially if you are starting a B2B business, there are a ton of great reasons to pick a third-tier market.
If you have a choice, where should you start your next tech company? Most people will immediately say Silicon Valley followed by New York City. Those are the obvious top markets.
Lots of great second-tier markets also come to mind, including LA, Austin, Seattle, Boston, DC, Tel Aviv and London. These markets are also very good choices and attract their share of venture capital. But for some startups, locating in a third-tier market can be a shrewd strategy.
Unfair spoils go to the top dog
There is a huge advantage to being the hottest company in your location. You attract the top talent, get tax breaks, enjoy lots of local PR, and other perks. Massive spoils go to the company that is #1 in its location.
But being top dog is incredibly difficult to achieve in Silicon Valley, where billion dollar companies dominate the corporate landscape. And being the top company in Silicon Valley more than one year in a row is basically unheard of. It’s even really hard to earn that kind of status in second-tier markets. But it is often very doable in third-tier markets. The 300th hottest company in Silicon Valley would likely be the first hottest in almost every third-tier market. And the top company in a third-tier market is likely to be the employer of choice for many years running.
Recruiting talent is much harder than people realize.
Every startup founder in Silicon Valley will tell you their biggest challenge is finding and retaining talented people. When you’re the top startup in a market, you get your pick of talent. And while there is much less available talent in third-tier markets than first-tier markets, if you are the number one company, you’ll get the top draft pick in your region. In fact, you may even attract some talent from first and second-tier cities who want to return to their hometown to be with family and friends.
Third-tier markets also enjoy significantly lower costs for office space and other expenses. This is a major leg up compared to San Francisco and New York, where space is scarce and rent is through the roof. You can also save on other overhead costs like insurance, catering services, and utilities. Local vendors will be more appreciative of your business too, as you’ll likely be one of the bigger clients in town.
There’s no shortage of great third-tier markets that are fertile for building great companies, like Charlotte, San Antonio, Milwaukee, Detroit, Pittsburgh, Buffalo, Calgary, St. Louis, and others.
One might reasonably worry that it’s more difficult to raise capital in third-tier markets. To some degree, that is true, as traditional venture capitalists tend to reside on Sand Hill Road, in Boston, or in Manhattan. But especially if you have a network in Silicon Valley (or, even better, have had an exit), raising money outside the Valley, while tougher, may not be the gating factor.
Off the top of my head I can think of three billion-plus dollar exits in third-tier markets:
- ExactTarget – Indianapolis (sold to Salesforce.com for $2.5B)
- Omniture – Salt Lake City (sold to Adobe Systems for $1.8B)
- Zappos – Las Vegas (sold to Amazon for $1.2B)
Clearly, it’s possible to thrive without living in a big market.
It’s also worth noting that a founder’s personal connections to venture capitalists are more important than setting up shop in their backyard. A founder in Salt Lake City who has a strong network of investors and PR people in Silicon Valley will be able to work with them from afar. Geography is not a prohibitive obstacle.
Admittedly, some companies need to be in a big market. It makes sense that a fashion startup should be located in New York or LA (at least until avant-garde fashion reaches Milwaukee). But others, like enterprise B2B companies, don’t require much PR and can grow at a steady pace regardless of location.
For most startups, the benefits of a third-tier market outweigh the negatives. Looking for an atypical place to grow could get you ahead in the game.
This question originally appeared on Quora: How important is it for a tech startup to be in Silicon Valley?
