Just How Important is the Valley? Let’s Look at some Data.

From Tony Wright dot com

[Edit: Added the raw data in a table at the end]

Some of the smartest startup brains I’ve ever met have said that if you want to be in the startup game, you MUST be in the Valley. There are plenty of justifications out there for it, and many/most of them make a fair bit of sense. Recently, Paul Graham posted another great essay on the topic, and said:

The second idea is that startups are a type of business that flourishes in certain places that specialize in it—that Silicon Valley specializes in startups in the same way Los Angeles specializes in movies, or New York in finance. [1]

What if both are true? What if startups are both a new economic phase and also a type of business that only flourishes in certain centers?

I don’t know the truth of Silicon Valley’s gravity (or more importantly, how that gravity is trending) but the idea of it doesn’t sit right with me. Emotionally, I found myself wanting to agree with Aaron Swartz and Glenn Kelmann rather than Ron Conway, Mike Arrington, and PG (which is pretty much the only time that’s ever happened).

So as an exercise in digital outsourcing, I took some public lists of technology acquisitions in 2007 and 2008 and paid some nameless person in some nameless town a few dollars to research the locations of those companies when they were acquired. The results surprised me. Here’s the spreadsheet, if anyone wants to fiddle with it (in hindsight, I should’ve used the CrunchBase API– if someone wants to dive in and do this, I’d love to see it).

Highlights, Acquisitions in 2007 / 2008
225 total acquisitions on the list (110 in ‘07 and 115 in ‘08)
175 (77%) were in the USA
63 (28%) were in the Valley
Top states beyond CA were NY (19), WA (14), MA (11), TX (6), IL (5), NJ (5).
Israel and the UK were dominant internationally

Removing Acquisitions with Prices under $20mm or Undisclosed
(This was in response to the thought that the non-valley acquisitions were the small one)
110 total
91 USA (82%)
28 in the Valley (25%)

The Really Frakkin’ Interesting Bit
In 2007, 45 of 110 (41%) acquired companies were in the Valley. In 2008, only 18 of 115 (16%) were.

Now, 1 year does not a trend make. And, this is some pretty amateurish research and number crunching. The numbers that I really want (which is really hard to find) are the denominators. In other words, how many valley startups spun up in these years versus the rest of the world? Does the Valley meaningfully change the chances of startup founders making it? And how have these numbers changed over the past 5-10 years?

My theory?

The core things that REALLY matters to build a v1 software startup are (in order of important):

• having the will to build one
  Silicon Valley used to have a pretty serious monopoly on people who wanted to be technology entrepreneurs. I think that’s changing– the number of people who are getting their feet wet with entrepreneurship outside of the Valley seems to be skyrocketing. People don’t want to be doctors and lawyers any more– they want to own their own companies. And as entrepreneurs in non-Valley locations see exits, it inspires a new crop in their home town.
• building something that people really freakin’ want to have
  The Valley offers no edge here– in fact, some people wonder if the “echo chamber” doesn’t actually get in the way of understanding the rest of the world.
• having the team/resources/cash to get your product to market
  THIS is where the Valley has always dominated. But I think that’s changing. We’ve all seen how cheap it is to start a software company nowadays (though you might still need VCs to GROW it).In terms of teams– clearly if you’re going to be recruiting lots of geeks, you want to be in the Valley. Or do you? I’ve heard that WordPress has a virtual team all over the world and they seem to be doing okay. With all of the great information on software development and startups and with the fabulous open-source projects out there, maybe it’s getting easier to get to be a great hacker outside of the Valley. And, just as the cost of building a startup has gone down, the manpower necessary to build a v1 product has gone down as well. So MAYBE you need to move your startup to the Valley when it’s time to ramp up, but I’m not convinced you need the Valley to collect two or three motivated hackers.
• Note: I think distribution magic and TAM (total addressable market) are hugely important for magnitude of startup success… But that’s a different post.

There is no doubt that Silicon Valley wins. Even a paltry 16% of 2008’s acquisitions is a staggering number for a little cluster of cities in northern California. But it’s not as big a monopoly as I might have guessed. Maybe that 1 year trend is starting to show that the institutional dollars in the Valley aren’t as important as they were in years past (or heck, maybe those funds are looking beyond their traditional borders). And maybe all of those great technologies that allow us to connect with people around the world are helping entrepreneurs connect with the energy and relationships that the valley brings the the table.

Again, Big Dislaimer: This is quickly googled data, outsourced research, and quick-n-dirty spreadsheeting. And, of course, acquisitions are an imperfect measure of success. AND, each startup/market/region is different. Bad science all around. Just a conversation starter, really.

Raw Data: