Is California Still the Best Place for Tech Companies?

Hollywood, red-carpets, sun, and beaches… These are some of the things that come to most people’s minds when you mention California. Despite the recent success of “Silicon Valley,” we’re sure tech startups aren’t really the first thing people think about when talking about California.

If you talk to a California resident, you’ll get something along the lines of, “tech companies should probably relocate somewhere else that’s cheaper.” On the surface level, this makes sense – if you manage to lower operating costs, you’ll be able to raise your bottom line.

There’s no fundamental reason why a tech company needs to be located in Silicon Valley, right?

Operating in California requires money

The biggest downside of starting a business in California is the price of the commercial real estate and housing in some of the biggest markets, such as San Jose and San Francisco. Tech giants like Google and Apple have billions of dollars at their disposal, so they don’t have any problems paying the rent.

Moreover, according to Bloomberg, Facebook will actually pay its employees ten thousand dollars to relocate and live near their headquarters.

The cost of an entire industry working in this place is simply enormous. A recent study conducted by Zumper revealed that for every billion in venture capital that comes into California’s economy, rents are raised up to $99 on a monthly basis.  

However, there has to be a good reason why so many aspiring entrepreneurs from Baltimore, Detroit, and other cities are traveling to California, trying to start a company.

What makes California so good for startups?

The reality is this – if you’re starting a tech company outside California or New York, your chances of success are much, much slimmer. Here are a couple of factors that make California so appealing to young tech entrepreneurs:

  • It takes less to raise venture capital

In the United States, venture-backed companies account for around 11% of all employment. Venture capital is pretty important for small businesses and the US economy as a whole. And it just happens that some of best performing funds are located in California.

  • It increases the odds of being bought

If you’re located in a tech hub, you have much higher chances of networking with notable executives and engineers in your industry. Simply put, being a part of the tech community considerably increases your chances of being bought in a shorter period of time.

  • It increases your chances of success

The last thing on our list is fairly simple – starting a company outside of big tech hubs in the country significantly decreases your chances of success. The percentage of companies established between 2007 and 2010 in either New York or California who’ve received a second round of funding is roughly 15% higher.

Pros and cons of starting a business in California

Everything has its pros and cons, including the question whether to launch a startup in California. In addition to things we discussed earlier, here are a few pros and cons of starting a tech company – or any business for that matter – in the state of California.

  • Pro: Access to large markets

From Southern California to San Francisco, California is home to a few million consumers. Starting a business in California will give you access to a huge market, which is crucial for a small tech company.

And that’s not all. Unlike other states, California’s market tends to purchase services and goods no matter the economic climate. While there’s no new recession in sight, it’s better to be safe than sorry.

  • Con: Complicated regulations

California’s laws and tax codes are at times too complicated for growing businesses. For instance, in order to get a license for your business in California surety bond is a must-have.

These bonds work as a protection for the public and guarantee that you’ll comply with the state regulations. The smartest thing would be to ask a local professional to help you with legal issues.

  • Pro: High earnings

The state has more than 3.6 small business owners. Although starting a business has its challenges, there are simply too many opportunities when you’re operating your business in California.

For example, the state’s disposable income on average is almost $2,000 higher than the US’s average, according to BND data. Moreover, an average small business owner earns at least $60, 000 annually.

  • Con: High minimum wages

Minimum wage hikes could possibly hinder your growth. At the moment, according to data from the Department of Industrial Relations, the minimum wage in California is approximately $10, 50 per hour.

If you’re trying to watch your expenses – just like many other new tech companies do – this can be more than limiting. But with a proper budget plan, you can actually determine your best course of action.

The bottom line

Every company is unique in its own way. And while we’re not claiming you should pack your bags right this moment and head off to California, you have to realize that the state will simply increase your chances of success.

It’s not like tech entrepreneurs outside California are any less talented or hard-working, not at all. But the environments outside tech hubs like Bay Area are fundamentally different.

Until entrepreneurs in secondary markets acknowledge some of the shortcomings of their markets and find a way to address them properly, things are going to stay the same. The matter of the fact is – if you want to build a tech business where you live, you have to be prepared to pay a heavy toll.

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