Why Companies are Leaving Silicon Valley: The “Ideal” Location for Startups

Silicon Valley has earned itself the reputation of being a startup heaven, with major tech giants like Apple, Google, and HP establishing their headquarters there. Located in the South San Francisco Bay Area of California, the location has been attracting a plethora of new startups, and is a global center of technological innovation. Recently though, companies have been opting to move to other locations such as Texas and Florida. Here’s why Silicon Valley may not be such a heaven after all.

Silicon Valley is one of the wealthiest regions in the world, with it providing many benefits that give incoming entrepreneurs a head start compared to many other locations. From its established business infrastructure, flourishing marketplace, and big entrepreneurial environment, entrepreneurs have a huge amount of resources that are easily accessible. It’s incredibly easy to find and connect with mentors that can help you with your specific needs, and knowledge is seemingly everywhere (1). Moreover, the region boasts a large amount of capital funding, with more than $25 billion of the $69 billion invested by US-based venture funds landing in Silicon Valley and the Bay Area—more than the next three cities combined (2).

Despite this, California is seen by U.S. CEOs as bad for business. In Chief Executive magazine’s 2021 survey, it found that the factors most valued by these CEOs are:

1. Tax Policy
2. Regulatory climate
3. Talent availability

and with California’s exorbitant tax rates, California ranked as the worst of all 50 states for business (3). Taxes are a major factor in the cost of doing business, affecting business decisions, job creation and retention, and plant location. A state with higher tax costs will be less attractive for business investment as higher taxes lead to diminished profits, and this decreases economic growth. Furthermore, California ranked 49th in most entrepreneur-friendly states in a ranking published by the Small Business & Entrepreneurship Council (SBE Council). In contrast, Texas was ranked first in both of these surveys (4). California is the most heavily regulated state in the country, having 395,608 regulatory restrictions in 2020 in comparison to the national average of 135,000 (5). This makes it difficult for businesses to comply with all of the rules and gives them less economic freedom. Economic freedom is vital for businesses to grow and prosper, allowing them to own property that is protected, freely make decisions, and participate in open and competitive marketplaces. According to a report posted by the Fraser Institute, California is ranked 47th in terms of economic freedom, while top states include New Hampshire, Florida, Virginia, and Texas (4).

For the first six months of 2021, the number of companies relocating their headquarters out of California to other states is running at twice the rate for 2020 (4). Texas is becoming its own tech hub, with Austin being a “Silicon Hills” alternative due to its high availability of labor, quality education, and capital, a favorable tax environment, and lower operating costs (7). Industry leaders such as Dell, Oracle, Uber, Airbnb, and Yelp are already relocating to or opening new facilities in Austin (8). Furthermore, companies are considering Florida as a new base, another location that is growing as a tech and startup hub due to its sunshine, affordable real estate, and low tax rates. Reddit co-founder Alexis Ohanian moved from San Francisco to Florida several years ago, and according to the New York Times, New York-based Goldman Sachs is considering moving some of its operations to Miami (7).

Ultimately, while Silicon Valley is currently seen as the place to be for aspiring entrepreneurs and tech business leaders, it may be wise to consider other tech hubs before moving.

Sources:

1. Seth, Shobhit. “Why Is Silicon Valley a Startup Heaven?” Investopedia, Investopedia, 31 July 2021, https://www.investopedia.com/articles/personal-finance/061115/why-silicon-valley-startup-heaven.asp.
2. Pardes, Arielle. “Is Silicon Valley Dead? Not According to Venture Dollars.” Wired, Conde Nast, 14 Apr. 2021, https://www.wired.com/story/silicon-valley-dead-not-according-to-venture-capital/.
3. Rehman, Fareeha. “Companies Are Moving out of California, Here's Where They Are Going.” NewsNation, NewsNation, 6 Sept. 2021, https://www.newsnationnow.com/us-news/west/companies-are-rapidly-leaving-california-study-finds-heres-where-they-are-going/.
4. Vranich, Joseph, and Lee E. Ohanian. "Why Company Headquarters Are Leaving California in Unprecedented Numbers." (2021).
5. Hubbard, Kaia. “Which State Has the Most Regulations? | Best States | US News.” The 10 Most and Least Heavily Regulated States, US News, 3 Nov. 2020, https://www.usnews.com/news/best-states/articles/2020-11-03/which-state-has-the-most-regulations.
6. Rastegar, Ari. “Seven Reasons Austin Is Surpassing Silicon Valley as the next Tech Hub.” Bizjournals.com, Austin Business Journal, 18 Feb. 2020, https://www.bizjournals.com/austin/news/2020/02/18/seven-reasons-austin-is-surpassing-silicon-valley-as-the-next-tech-hub.html.
7. Folger, Jean. “Why Silicon Valley Companies Are Moving to Texas.” Investopedia, Investopedia, 10 Sept. 2021, https://www.investopedia.com/why-silicon-valley-companies-are-moving-to-texas-5092782.
8. Gentile, Dan. “These Are the Tech Companies Leaving Their Bay Area Offices.” SFGATE, SFGATE, 6 May 2021, https://www.sfgate.com/tech/article/2021-05-tech-office-lease-sf-twitter-salesforce-16151686.php.