Can You Build a Successful Company Outside of Silicon Valley?

Let me say up front, “I like Silicon Valley a lot.”  I like the people, the energy, and the innovation, but I cringe when I hear entrepreneurs say they have to move to Silicon Valley to build a successful company.

Rubbish!

“Tim, if I want to raise venture capital, don’t I need to go to where the money is?”

My answer is perhaps.  But I do not concede the point that every tech startup needs to raise venture capital to be successful, and I will come back to that later.

If you are convinced you need venture capital, Silicon Valley certainly gets a big piece of the venture funding pie.  From the data below provided by Pricewaterhouse Coopers, we can see that Silicon Valley received 38% of the funding in Q1 2013:

PWC

But my argument is that obtaining venture capital funding is NOT the definition of success.  It may be a milestone, but it isn’t success.

Instead let’s look at an arbitrary, but somewhat agreed upon, definition of a successful company, one that has an exit greater than $100 million.  Here is a chart from Mark Suster showing these exits over the past decade:

$100 million exits

By my calculation, it looks like only 502 total exits greater than $100M out of the thousands of venture backed startups – those aren’t exactly compelling odds!

“But Tim, my odds of being one of those ‘successful companies’ goes way up if I am in the Valley.”

Really?  My gut tells me that isn’t the case, but you probably want some data.

I went to my friend, Michael Shea who owns Shea and Company, a technology-focused investment bank based in Boston.  On his website is quarterly data for publicly disclosed M&A transactions in the software space – yes, I know this doesn’t include things like life sciences and hardware, but it is a decent proxy for overall activity.

In looking at the data for the prior 12 months, there were 29 transactions greater than $100 million and 20 of those from companies in the United States.  And how many of those came from Silicon Valley?

FIVE, that’s how many, or 25% of the exits.  And by the way, SIX of the exits came from areas outside of the top 10 regions receiving venture capital.

Before you skewer me and say that I didn’t look at enough data, you are absolutely right.  My point isn’t to show you Silicon Valley is less successful at producing great outcomes, because I am sure that isn’t the case.  I would expect if we looked at all of the data, the percentage of funding would be similar to the percentage of exits greater than $100 million.  My point is that being in Silicon Valley doesn’t appear to improve your odds versus companies located in other regions.

Now, back to the point about “needing venture capital.”  Here is some “interesting” data, courtesy of CB Insights:

tech-acquisitions-funding-status

Yes, plenty of companies need venture capital, and plenty benefit from it – but clearly it isn’t mandatory for every company.  And, if you can find your way to success via bootstrapping, you, your co-founders, and employees will own 100% of the equity.

 

About Tim Huntley

Tim is the COO at Paired Health, an early-stage healthcare IT company helping hospitals extend care out into the community. He is the former CEO of Ganymede Software.