For years, many entrepreneurs dreamed of starting up their businesses in Silicon Valley. They craved the glamour of a location where so many successful companies had come before. But, now that's changing: Startups are abandoning traditional tech hubs.
For evidence, look no further than last year's news from the United Kingdom. This development has been coming for a long time.
So, what happened in London?
The startling event happened in April in East London. Stirling Ackroyd, one of London's most exclusive commercial rental agents, announced that the number of registered tech companies in East London’s "Tech City" had dropped by 10.1 percent.
Now, a similar trend is occurring worldwide, and it should come as no surprise. The reason is not that companies have come to hate traditional tech hubs; it's just that they're so expensive. The startup company Experiently, which has moved out of London, said it had to pay £3,000 per month, or between $4,500 and $5,000. That's the cost of a new hire.
Many tech hubs which claim to be welcoming for startups are actually pricing their target market out of the area. It’s a fact that so many companies are now finding these areas unaffordable.
I encountered similar problems when beginning my own first startup. All I wanted was affordable office space, but what I found were prices that would have required me to seek out additional investment.
I turned them down, and you can too.
Rent can have an impact on your company's value.
The negative effect of paying so much for rent far outweighs the benefits of surrounding yourself with other tech startups, and enjoying the ego boost from having a nice, cushy office.
Consider, for example, what your investors are going to think: One of my friends decided he would begin his startup in one of the tech-heavy areas of New York, where the rent was four figures per month that of a typical small office.
When the time came for him to seek out another round of investment, the first thing those investors looked at were his outgoings; and there they saw this enormous amount of money leaving the organization every month.
That departing cash heavily impacted his company valuation. This resulted in his raising far less money because many of his investors wanted to invest in innovation, not helping him cover his rental costs.
The message here is that a company may end up being valued at far less simply because it happens to operate in an expensive area.
Still, 'location, location, location' can matter.
These days, you may wonder why location actually matters. After all, it’s not all that common for people to actually come to your office. Everything gets done online, in this day and age. So, you may actually have no need to be picky over location.
On the other hand, there are benefits to positioning yourself close to other startups. I quickly discovered that it was easy to get help on practically anything when I had other startups around me. I was able to ask them about various issues and more easily seek their advice about networking events.
Another thing for me was the surprising lack of competition. I was working in a coworking space during its growth phase, and we entrepreneurs never saw one other as "competitors." Everybody was there to help the next guy (or gal) grow for the better. Each company functioned in the tech niche, but each was in a different category, so there were never conflicts.
The message here is that the companies you surround yourself with can make a big difference.
A cat and mouse game
The events in London aren't something that will never happen again. In fact, they're events that will drive the creation of yet more tech hubs. Consider how crushing rents in Silicon Valley led to Silicon Alley in New York.
Consider, too, how still more tech hubs have since branched off, with states like Texas reaping the benefits.
Elsewhere in the world, the same thing has happened. The UK became unaffordable, for many, so France and Estonia suddenly became more attractive. As new tech hubs thrive, their prices rise and more startups leave to create their own tech hubs.
This latest event in London is part of an overall trend that shows no signs of abating. It’s driven by market forces and the gentrification of previously untrendy areas.
In your opinion, where is the best place to start a new company? And, if you've been priced out, will you abscond to a new startup locale?