"Silicon Valley is the best place to start a tech company in so many ways." - Niklas Zennström

For an industry that prides itself on “being in the cloud”, tech startups still care quite a lot about where to open shop. It’s common knowledge that Silicon Valley is the incumbent Shangri-La for new tech companies, with Seattle, NYC, Boston and Austin itching to become the next area with a HBO nerd comedy named after itself.

But how big is the Bay Area hold on startups? Are there clear and rational advantages to operating in the Bay, or big cities at all, or are companies following the hype at a detriment to themselves, while stomaching the highest operating costs in the country?

The ping-pong/foosball/pinball office stardard, at an average cost of $69.71/sqft per year in SF.

The Question

A crucial component of answering "Does living in _______ make good financial sense?" is to answer first, "Is my startup more likely to succeed if I live in _______?"

Success is subjectively defined, so here we're only going to look at one defining metric: whether or not a company goes public.

Frequency of Initial Public Offerings (IPOs) is a nice and simple metric because IPOs are easily obtainable public data, are binary in nature, and by and large a definite goal of many, if not most, tech startups.

The Data

I pulled data from the Reuters Thomson One Equity Database. Unfortunately, you need an account to access the data.

I filtered the database for American startups who had Venture Capital (VC) involvement in the last five years, including data on their headquarters location and VC investiture.

This query gave me data on 12,115 companies, which was narrowed to 8,107 companies that classified their primary industry as “Information Technology”, the lingo in finance for tech.

First Impressions

Silicon Valley’s startup popularity was as expected. It has the lion’s share of tech startups, with 34.3% of all companies in the data set being located in the 94000-96000 zip code range.

The most popular cities for starting tech companies were as follows:

The most popular zip code was 94107, which consists of the Dogpatch, Potrero Hill, SOMA and South Beach neighborhoods of San Francisco. Small young companies swarm the area; the average founding year for companies in 94107 is 2008.

What about IPOs?

Back to our initial question. In the last five years, 2.01% of the dataset, or 163 companies, managed to IPO. Not a shocker. Many companies do not reach the IPO stage.

Here's a shocker though. Compared to the 2.01% national average,

San Francisco saw only 1.04% of its companies IPO.

Not a typo. As the leave-you-in-the-dust frontrunner for tech startups, SF somehow manages to score well below half the national average for going public.

Here are the IPO rates for the rest of the most popular cities:

  • New York, 1.13%
  • Palo Alto, 1.127%
  • Boston, 1.48%
  • Mountain View, 2.52%
  • Austin, 2.6%
  • Seattle, 1.76%

How do we make sense of this?

The Analysis

The rate of IPO seems to be all over the place, with many of the popular locales being much below the national rate.

First things first. Despite San Francisco's lackluster performance, the Bay Area, as a whole, is still doing well above the national average, with an IPO rate of 2.37%.

Now, for some number crunching to reinforce the above.

I performed logistic regression on the probability of IPO, with presence in both the Bay Area and in SF as independent variables. With 1% two-tailed statistical significance, presence in SF has a huge negative impact on your chances of IPOing, but is somewhat ameliorated by the positive impact of being in the Bay.

The Takeaways

The naïve takeaway is that being located in SF hurts your chances of being successful enough to going public.

What are some possible explanations? One could be that the recent tech boom flooded SF with young new companies that simply haven’t come to fruition yet. The average age of SF companies is much younger than the average age of all sampled startups, at only seven years compared to ten.

But that may not be the whole story; it also could be that larger startup concentrations imply higher competition for resources, whether it be venture capital attention or investment bank attention, thus capping the rate at which they can IPO.

A more dismal outlook is that the popular cities like SF and NYC attract not just good talent, but also bad talent. If there's a lot more bad talent that dilutes the average quality of these companies, one would expect the rate of IPO to be lower as well.

The truth is, our cursory statistical approach towards cracking entrepreneurship decisions is, well, cursory. There are so many factors for which the analysis could not account, and equally as many approximations taken to be realities, including the central premise that IPO's are a definition of success.

The Cocktail Party Primer

  • Going public, as imagined, is indeed rare for tech startups
  • Numerically, being in SF is bad and being in the Bay Area is good
  • All the popular startup hubs have different rates of IPO
  • Working hard, being smart and getting lucky are still probably more important than locale

At the end of the day, the redeeming truth is that there is more to Silicon Valley than IPO rates distributed across a couple thousand zip codes. As LinkedIn cofounder Reid Hoffman once said,

"Silicon Valley is a mindset, not a location."

Completely absent from this entire post are all the intangibles that include, indeed, a unique mindset that one really can't quite grasp without firsthand experience.

So give Random Directions a thought or two, but don't base your startup's relocations plans on us just yet.