I monitor the Lean Startup Circle group on Google, and a member asked for some suggestions on how and where to find a contract development team. The discussion quickly turned to relocating to where the team is (the member who asked for advice was in Denver); Silicon Valley came up a few times, and one person even suggested relocating to India. My suggestion was to stay right where he was, find a qualified developer locally to run development (I found some good resources in the Boulder area, and other members in the area offered their help), and go from there.
So, where should you locate your startup? (I'm assuming that your business will be technology-based.) If your customer base is concentrated in one geographic location, the answer is simple--go where your customers are. However, if your customers are spread out all over the place, should you stay put or move? It depends on who you (and your partners) are and what your expertise is. If you have the experience to develop at least a portion of the product or service yourself, and you're comfortable managing a development team, you can locate wherever you're comfortable and where you can find the other business and technical resources you'll need.
If you're not a developer or engineer, you need to have at least one person on your team who can run development. That person should be a full member of the team, not a contractor or consultant. No matter how good or committed a contractor is, they're always thinking about the next client and the next project. The work is always done better when the person who does it has skin in the game. It may not be as hard to find that person as you think. If you live in or near a major city, there are always developers that might be interested, or who might know someone qualified who would be interested. Search on Google with your city's name and terms like "startup" and "venture" to find local groups and events where like-minded people congregate, or use a service such as Meetup.com.
That's fine, you say, but why not move to Silicon Valley? I spent more than 25 years living and working there; I consider it my home. You'll find experts in just about every skill set you can imagine. I love the weather; not too hot, not too cold, and you're no more than a few hours from the beach or the mountains. Now for the downside: Silicon Valley is an incredibly expensive place to live, work and run a business. I would easily have to pay 50% more than I pay now for a condo comparable to the one I rent in a suburb of Chicago. If I wanted to buy a home, I'd pay at least three times as much in Silicon Valley for a home with comparable square footage and yard space. Taxes are very high, yet the quality of schools is poor, and parents pay big premiums to live in cities that have good schools, such as Los Gatos and Palo Alto.
Just about everything else is more expensive as well: Food, gasoline, utilities and so on. Office space is much more expensive. People have to earn more money in order to have a decent quality of life, so salaries are much higher. It all adds up to a much higher burn rate than in other, less expensive places to live.
I've never understood why venture capitalists push their investments to move from lower-cost areas such as Texas and Chicago to Silicon Valley. Yes, investors can keep closer tabs on their investments if they can drive over to them, but airfare is truly not that expensive, and teleconferencing is effectively free. If I could run my business successfully at a 30% to 50% lower burn rate simply by staying right where I am, why would I move?