Why it pays for startups to move to Silicon Valley

Why It Pays for Startups to Move to Silicon Valley
Why It Pays for Startups to Move to Silicon Valley

Summary

Locating in tech hubs often raises a startup’s odds of success, research suggests. And that’s especially the case with Silicon Valley.

Can U.S. startups improve their chances of success by moving to a tech hub?

A recent paper suggests the answer is often yes, but certain locales offer bigger benefits than others.

Silicon Valley, in particular, is the best destination for startup companies because it has what the paper calls an “entrepreneurial ecosystem"—that is, an extensive network of organizations from venture-capital firms to other startups that help foster new ideas and innovation.

Specifically, the study found that startups increase their odds of achieving equity growth via an initial public offering or an acquisition by 277% by moving to Silicon Valley versus remaining at home. Such a move also boosts their probability of getting venture financing by around 218%, and receiving a patent by 60%, according to Jorge Guzman, an associate professor at Columbia Business School and the paper’s author.

Other hubs

While moving to other tech hubs, such as Denver, Los Angeles, Boston and New York, also benefits startups to varying degrees, the benefits in most cases aren’t as big as those conveyed by moving to Silicon Valley, the paper found.

“Silicon Valley simply has the highest level ecosystem under any measure—venture capital, patenting and startup formation," says Guzman.

Guzman analyzed 405,536 companies between 1988 and 2014 that registered their business in Delaware but had headquarters located in other states. He then identified companies that relocated their headquarters to other states within two years of the enterprise being registered. He chose this subset of companies because previous academic research had found that firms registered in Delaware are more likely to file for an IPO, receive venture capital funding or get acquired.

He used several techniques to control for the fact that the highest-quality firms may be the most likely to relocate to tech hubs around the country. He used machine-learning algorithms to estimate a firm’s growth had it stayed in its original location. He also compared firms that moved to the same tech hub at different periods, and he identified variables that could offer alternative explanations for a firm’s decision to relocate, such as the founder’s age, state income-tax rates and even weather patterns.

Key metrics

Guzman also sought to understand what component of an entrepreneurial ecosystem matters most to startup growth. He looked at indicators such as the amount of venture-capital dollars, patents per capita and entrepreneurs per capita. He found that patents per capita is the metric most strongly linked with startup growth. This suggests that local idea generation is more important than the availability of financing or the presence of other startups, he says.

The startups Guzman studied relocated over a decade ago, and many new tech hubs have emerged and grown in other areas of the nation since then. Still, Guzman believes that Silicon Valley may continue to hold an edge over other areas because the region remains an innovation center. In his paper, he cites a 2022 study from PricewaterhouseCoopers and CB Insights that found the share of venture capital going to Silicon Valley has remained at about 50% for over a decade.

“Silicon Valley really is the exemplary location for innovation," he says.

Lisa Ward is a writer in Vermont. She can be reached at reports@wsj.com.

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