Once, I said that Startup valuation could be compared to real state pricing, similar houses have similar prices, right? It is simple to explain why a house costs more in San Francisco than in Austin. People make more money in SF than in Austin. Consequently, they are willing to pay more for housing. Plus, there are fewer housing options; more people want to live in SF. On the other hand, I agree that the relevance of a company's location is harder to understand. A company acts in many places at the same time; you could think, so why its address matters so much? Let's go deeper into this subject to learn why. I can point 4 main factors that explain why the location is so relevant.
The first reason is market maturity. If you are in a region that has many successful startups, the market will respect your company more than a startup from a new ecosystem. I have to agree with them. It is hard to evaluate the firsts startups from a small town because you have no local businesses to compare. Consequently, you have to compare it with startups from different cities and it is a problematic comparison, considering early-stage startups. Indeed, for early-stage startups, the first rounds of investments are usually to keep the basic needs of founders, both professional and personal which might be remarkably different for different cities. Also with such a small historical picture, investors have less information evaluate the startups, and less information means more risk. For more mature startups, investors should question why they are still working in the countryside and not going for business in the big centers, where you can find much more opportunities. A startup won’t be and unicorn by acting in a market that is too small.
The second reason is a consequence of the first one. It is usually cheaper to survive in the cities far from the big centers. Since founders’ expenses are the first significant piece of the budget of an early-stage startup, they need more money. It is much more expensive to run a business in The Silicon Valley than in most of the cities on the planet. San Francisco has the most expensive living costs in the world, so wages must be higher. Moving to a cheaper city is not an option in most of the cases. Even though it is more costly, most of the startups are in places like that because they can find better opportunities there.
The third reason explains some of those opportunities. San Francisco has more startups, but there are also more investors. All the big funds are in The Silicon Valley, for example. I can affirm that it is not hard to schedule a meeting with them; I have done that in the past. It follows The Law of Supply and Demand. Investors fight for investing in the next unicorn. Since there are more investments available, it is more expensive to invest.
There is also a fourth reason, which I learned myself while experiencing the Silicon Valley way of doing business. San Francisco and the Valley are the wonderlands of startups. Plus, all the big tech companies that are there. This proximity open doors for who is starting. These hidden opportunities are the reason why founders from the entire world that the risk to bring its Head Quarter to San Francisco. The Secrets of The Silicon Valley are worth an entirely new discussion.
This is a high-level explanation for why the location matters so much. Combining The Law of Supply and Demand, market maturity and business costs you can support the real state comparison. Those reasons, especially the fourth one, explain why most of the unicorns are at The Silicon Valley.