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Technology Outside the Valley: The Debate Rages On

Posted on October 31, 2007

After reading Paul Graham’s essay suggesting that to really make an internet company work you need to move to a start-up hub (i.e. the Valley) I was immediately compelled to write something on the issue. I thought better of it though and continued to think it over.

On the one hand I was part of a successful start-up in Chicago (FeedBurner of course) so I know great companies can be built outside the Valley but on the other hand it is undeniable that the Valley has an order of magnitude more companies (and VC money) and has been home to perhaps some of the most successful companies of all time including Google.

What is it about the Valley that seems to produce start-up talent? Is the ratio of success to failure the same as in other areas of the country (and the world - need some data here)? Is there simply easier access to capital in the Valley? Do Valley companies get more publicity?

These are all questions I have pondered over and over again in my couple years in Chicago. In fact, these questions were partly involved in the forming of TECH cocktail. Frank and I just couldn’t accept that there weren’t interesting technology companies forming in Chicago. We believed that there were a lot of interesting ideas and that they simply weren’t getting the publicity that the Valley companies do.

Through running TECH cocktail in Chicago I have seen that there are, in fact, a lot of great ideas and entrepreneurs in the area. The issue I do see people running into though is funding. While there are a handful of great VCs in the Chicagoland area it seems that capital is still hard to come by (look at Mosaic/Netscape, PayPal, etc. - developed at the University of Illinois/by U of I alums but took funding from west coast VCs and, thus, had to relocate).

However, I wonder if that is completely a bad thing. Perhaps in areas like Chicago, New York, Boston and Washington D.C. only the very best of new companies get funded. This could lead to a higher success to failure ratio over time which may be more important than the sheer number of start-ups started (which the Valley wins hands down).

While being agile and not forcing the original game plan when the market tells you otherwise is important in a start-up there are simply a lot of companies that startup simply because they have an idea for a cool product. They may not be sure if anyone will use it, if they can even make money, how they will make money, etc. but they are able to get VC and start-up anyhow since the Valley is more apt to make those kinds of bets.

The way I just framed that makes it sound like a bad thing but is it? Some of the most interesting companies ever to emerge in the technology/internet space were started by simply trying to improve something or by creating a great product. The making money part was figured out along the way. Google is, of course, one of the best examples of this. Perhaps Google may not have been able to get off the ground in another city where investors are looking for solid companies and not R&D projects that may turn into companies at some point.

This is an interesting debate for sure and the only conclusion that I can come up with so far is essentially what Scott Heiferman says in his response to a recent piece in NY Mag about the issue (originally found via Andrew Parker).

Silicon Valley Companies succeed because of who they are, how they are, why they are… not where they are. It’s just been a coincidence. The non-SV companies haven’t had the right who/how/why. A company that NEEDS to exist — a company with a vital purpose to serve millions of people’s real needs — will attract the people to bring it to life — and it can exist anywhere.

I have seen this to be the case. FeedBurner was needed and thus succeeded (wow, that was a cheesy rhyme) even though it was based in Chicago. Even though it was based in Chicago… Why should I even feel the need to say it that way? There were a lot of great things about Chicago that made FeedBurner what it was/is.

One of my favorite things about Chicago (and NYC, Boston and any place outside the Valley) is that it is outside the hype which allows entrepreneurs to focus on building a solid company and not on the blog, parties, etc. In Chicago no one really cared about FeedBurner (I could wear my shirt around town and no one even noticed) whereas in the Valley people would have known who we were from the logo right away. That may seem bad but it was actually good. It always kept things in perspective for me (i.e. not everyone knows about RSS or even cares about what it is).

Keeping that perspective by living and working outside the echo chamber helped me to do my job much better and, I would argue, helped to make the company stronger.

Of course the drawback to that is that there aren’t a huge amount of parties, networking events and other meetups where you get to chat face to face with other entrepreneurs and potential partners and customers. Those interactions are extremely helpful and the Valley has a lot of them. Again, this is why we started TECH cocktail in Chicago and now more and more events are popping up there. The ecosystem is on the rise.

In the end of the day I do believe you can build a great company anywhere. The key is simply that you a) have a great company and b) that you know the right people. Charlie O’Donnell recently posted his thoughts on that from the NYC perspective and I would say that, while at times his thoughts are a little harsh, they do make a lot of sense for NYC and for other cities like Chicago. A top notch entrepreneur will find a way to get things done and, while it may be a little harder than building a company in the Valley, there are a lot of benefits to starting companies outside the Valley.

Who knows, perhaps the harder the ramp up is the better thought out your company will be before you really push things post funding.

Additional side note: One of the biggest complaints in areas outside the Valley, second only to money, is the lack of top notch engineering talent. The first thing to note here is that there is a shortage of engineers everywhere, including the Valley (they have a lot more engineers but they also have a lot more companies). The difference between the Valley and elsewhere is this:

In the Valley there are so many new companies starting that it is hard to retain top engineering talent. There is always someone trying to steal them away. In places like Chicago, however, there aren’t a ton of start-ups so if there are engineers who want to work at start-ups they are likely to join your company and stick around (of course in the latter situation your biggest threat will be larger companies who can pay more but don’t have the upside you do and, perhaps, the engineers may not value the options you give them highly enough and simply opt for more cash from a larger company).

In the end of the day you will probably spend less time hiring since you have far more retention.

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8 Comments so far
  1. Dave November 2, 2007 5:36 am

    This is an interesting debate. I wrote a piece on this last month, which Paul Graham was kind enough to help me with. Although quite a few brits are moving out to the Valley, what struck me most were the words of Saul Klein: he’s quite right in pointing out that many of the big tech developments have occurred outside the Valley hub.

    http://www.director.co.uk/MAGAZINE/2007/11%20Nov/place_in_sun_61_4.html

  2. Eric Olson November 2, 2007 10:42 am

    Great piece Dave. Thanks for sharing.

    I’d agree with Klein in that a lot of innovations have been made outside the Valley, perhaps even some of the biggest of all time, but it seems like after the innovation has been made the entrepreneur is then lured to the Valley to get the money they need to get the business going.

  3. Josh November 2, 2007 11:34 pm

    Great piece Eric. I think about this often too. IMO, I think it is only a matter of time before more VC funding flows to cities like Chicago, Boston, DC, NYC, and the like.

  4. db November 3, 2007 9:52 pm

    A good idea and a good core team wins. Do you even know where Kelowna, BC is? How much did the clubpenguin folks haul in?

  5. David Evans November 7, 2007 8:56 pm

    I was at Webinnovators last night here in Boston, which had 350+ people in attendance, ranging from entrepreneurs, lots of VC, some media folks and a serious group of engineering talent. It feels like Boston circa 1999, but in a good way. Optimism, good deal flow and a cohesive group of people dedicated to keeping the 617 area code the vibrant startup community it’s always been.

    The whole Valley-centric argument will be moot in a few years, right now it’s fodder for blogs and bored reporters.

    Remember back in the day, software companies were based in the Vally but most of the development talent was inside the 128 ring here in Boston. Times change and the pendulum of power tends to swing towards the strongest attractor. Right now that’s the valley, people need their Mecca. Maybe it will be Chicago, who knows.

  6. […] Bay Area, on the other hand, has been sliced and diced and analyzed by so many people that one more voice won’t hurt.  The usual answers […]

  7. Peter Christensen November 9, 2007 6:25 pm

    I’m a budding Chicago startupper. I wrote a response to this on my blog (too long for this comment). Please take a look:

    http://www.pchristensen.com/blog/2007/11/09/whats-so-special-about-the-valley/

    I’ll be at Tech Cocktail next week, can’t wait!

  8. Somewhat Frank November 18, 2007 11:56 pm

    Amazon Kindle Going E-Book, Facebook Looks To Buy, Barack Cleantech VC Fund?, Workaholics Help, Design Trends …

    Somewhat Frank Weekly Tidbits from around the Web gathered by Frank Gruber for the week ending November 18, 2007….