Wednesday, June 29, 2011

Should I base my start-up in Chicago, or move to Austin, Portland or Silicon Valley?

I'm in the early days of working on an Internet services start-up, and one of the questions that I'm wrestling with is where to base my business. In the early days, it's very easy to move from one city to another; once my business has multiple employees, many with families, it'll be much more difficult (and more disruptive) to move. I haven't yet come to a decision, but my thinking may be of value to some of my readers who are also going through the process, or who may do so in the future.

Let's start with Chicago, since that's where I'm currently based. Specifically, I'm located in a far northwestern suburb of Chicago, not the city itself. As a practical matter, I'll have to move to Chicago or to one of the near suburbs, such as Evanston or Skokie, to find the talent I need. Chicago has just about everything a technical startup needs--excellent colleges (University of Chicago, Northwestern, Illinois Institute of Technology and University of Illinois at Champaign-Urbana) for talent, a culture with plenty of night life and social activities to attract young people, and reasonably priced office space. It's also got some angel investors and venture capitalists, but by and large, they're significantly more risk-averse than investors in Silicon Valley. Investors in Chicago like to see a start-up making money before they invest, which goes against the whole purpose of seed funding, which is to help new businesses get to the point where they can generate revenue. If you need to be generating revenue in order to attract the necessary investment in order to generate revenue, you're not being offered seed money.

Another problem with the Chicago financing community is that there's a big hole between angel investors and when most local venture capitalists will participate. Even if you manage to get angel investment, it's extremely difficult for growing businesses to get the next round of funding. The amount needed is too high for the local angels, and the risk is too high for local institutional investors.

There are two other issues that make Chicago less than ideal for start-ups (I'll deal with weather in the section titled "Potential Natural Disasters"). The first one is political corruption. Chicago is the most corrupt major city in the U.S., and Illinois is the most corrupt state in the U.S. Last Night's "Daily Show" gave an amusing, but accurate, look at the situation, but for now, consider that you're more likely to go to prison if you get elected Governor of Illinois than if you commit murder in Chicago. This corruption adds billions of dollars each year to the cost of government (which results in higher taxes), and to the cost of running businesses (in the form of those same higher taxes, plus payoffs, contributions to political campaigns, requirements to use union labor when non-union labor is just as good and is much less expensive (even with benefits), and other expenses.)

The second issue is the risk-averse nature of the Chicago community. Just as investors look to minimize their risk by focusing on revenue-producing businesses, Chicagoans would much rather take a job with a start-up, with a guaranteed income and benefits, than start a business themselves. Taking the personal and financial risks involved with a start-up simply isn't ingrained in the local culture, as it is in Silicon Valley.

Potential Natural Disasters: This is where I'll discuss weather and similar problems. For Chicago, the issues are winter weather in general, with blizzards in particular, along with floods and tornadoes in the spring and summer.

Another option is Silicon Valley. The universities (Stanford, U.C. Berkeley and U.C. San Francisco, along with many smaller colleges), existing base of trained developers, engineers, marketers, lawyers and financial experts, and deep financial resources in the form of angels, super-angels and venture capitalists, along with the local culture that supports and encourages start-ups, make Silicon Valley the best place in the U.S. to start a business. Some Chicagoans brag that there's more money in the Chicago Merchantile Exchange than in all of Silicon Valley, but if the people who are investing in the CME won't invest in start-ups because they don't fit their "risk profile", their money is worthless.

Silicon Valley's Achilles' heel is the cost of doing business. Everything in California costs more than just about anywhere else in the U.S. Taxes are higher, and housing costs more, as does medical care (and the insurance to cover that medical care). All of those costs mean that salaries in Silicon Valley are higher than just about anywhere in the U.S., yet the standard of living isn't any better. So long as I can find qualified people in another location, I can save 30% to 50% of my operating costs by basing somewhere other than Silicon Valley.

Potential Natural Disasters: Earthquakes, floods, mudslides, droughts and firestorms. Silicon Valley (and much of California) has earthquakes all the time; most of them are too small to be sensed. However, everyone waits for "The Big One", a magnitude 7.5+ earthquake on one of the major fault systems that's overdue. Any big earthquake has the potential to disrupt transportation, electricity and natural gas supplies for days, weeks or even months. It also has the potential to take many lives. The one big positive is that California's building codes have been upgraded many times, and few places in the world are better prepared for earthquakes. In the coastal areas of California, including Silicon Valley, winter is the rainy season, and that's when the state gets floods and mudslides. The summer is when California gets firestorms, usually in some of the state or national forests.

Austin, Texas is a good alternative. Austin is the capital of Texas, the home of the University of Texas at Austin, and it houses Dell's and Freescale Semiconductor's headquarters as well as major facilities for AMD and Intel. It's also a little circle of liberalism inside a huge red conservative state. Austin has a young, creative population, as perhaps best illustrated by the city's annual SXSW conference every spring that attracts techies, filmmakers and fans from around the world. Austin is a moderately-sized city, but it has technical and business resources that belie its population size. It's also small enough that a start-up isn't likely to get lost or ignored. Finally, Austin's cost of living is a bit lower than Chicago's and much lower than Silicon Valley's.

Austin has a small angel and venture capital community, but it's not as developed as Chicago and nowhere near the size of Silicon Valley. It's also largely dependent on the University of Texas to provide an ongoing supply of young talent.

Potential Natural Disasters: Summer weather in general, droughts and tornadoes. An oppressively hot day in Chicago would be considered cool and comfortable in Austin, where daily maximum temperatures near or even over 100 degrees Fahrenheit are common. Texas is in the midst of a severe drought, and the state suffers a drought every few years; combined with the heat, this causes pretty miserable conditions.

I've also considered Portland, Oregon. I haven't been there for many years, but it's a beautiful city with a strong technical community (Intel, Tektronix, Agilent, Nike and others). Portland State University is based in the city, and both Oregon State and the University of Oregon are two hours away or less. It's also less than 150 miles to Seattle, where Amazon, Microsoft, Nintendo U.S. and many other technology companies are based. Portland's a young person's city, with lots of night life, easy access to the Pacific Ocean, and a deep commitment to the environment. Surprisingly, Portland's cost of living is almost identical to Chicago's.

Portland's angel and venture capital community are similar to Austin's, with one big difference: Portland's location--driving distance from Seattle and two hours from Silicon Valley by air--makes it possible for Portland start-ups to attract funding from both areas, as well as local investors.

Potential Natural Disasters: Volcanoes, earthquakes, tsunamis, floods. When I lived near Portland, Mt. St. Helens erupted (not the devastating eruption that blew off the side of the volcano). Both Mt. St. Helens and Mt. Hood are active volcanoes. Earthquakes occur due to faults and plate lines off the Pacific coast. Portland is much less seismically active than Silicon Valley, but like California, Portland and the rest of the Pacific Northwest are awaiting their own Big One, which is likely to trigger tsunamis due to the underwater location of the faults. Perhaps the biggest weather problem with Portland is its almost continuous rain for eight months out of the year. Unlike other cities, the rain is more like a mist, and the sun comes out so rarely during the rainy season that weather forecasters predict "sun breaks". When the sun finally comes out and stays out, however, Portland is spectacular.

So, those are my options: Chicago, which has a lot of things going for it but also has some serious drawbacks; Silicon Valley, which has much more going for it but is an incredibly expensive place to live and work; Austin, which is a great city with an excellent cost of living, but is incredibly hot in the summer; and Portland, which is also a great city with an excellent cost of living, but it's rainy and overcast eight months of the year.

What are your thoughts? What other cities should I consider, and why?

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