Being in Silicon Valley as a Founder – Pros and Cons

Many founders working on early-stage startups seem to want to move to Silicon Valley. The biggest hurdles are usually visa and money. But is moving to SV actually worth it? I’m not a SV veteran, I’ve only been here since 2008, but over the past years I’ve spent a fair amount of time living outside of SV. I believe this helped me gain some perspective on what Silicon Valley can and cannot provide to founders.

Common Misconceptions

Let’s first look at things that people believe to be advantages of being in SV, but which in my experience also have a flip side. I see these as not inherently positive or negative, but depending on your situation they may be worth considering.

Raising (seed) money is easy. It’s true that the amount of capital available in SV is huge, but raising money is not as easy as you may think (or as the press makes it out to be). One reason for this is that lots of startups are competing for the money. Expectations of what companies are required to show are constantly shifting. Manu Kumar has an excellent post on how seed rounds are looking more like series the A rounds a couple years ago. To have a shot at raising a seed round in Silicon Valley you better have a post-MVP product with traction and promising metrics. Having a pitch deck or an MVP without customers doesn’t usually cut it. So, SV is a great place to raise money only If you’re at the right stage.

Lots of events and communities. You can attend startup mixers, meetups, hackathons and pitch competitions all day long. You’ll have beers with founders who are usually looking for co-founders or trying to sell their product. In my experience going to these events is mostly a waste of time. The time is better spent building your product and talking to users. Also, don’t expect to meet any influential people at such events. Most of them are too busy to attend and have realized that there is little value to be gained. 

The best talent is in SV. Silicon Valley companies and famous bay area universities attract people from all over the world. True, but that doesn’t immediately benefit you or your startup. Sought-after people have dozens of excellent opportunities and you would need to offer something pretty special to attract someone to your company over the other gazillion startups out there. Expect to pay salaries or hourly rates that are 3-5x above the rates in other parts of the country (or world). You may actually be able to attract better talent in areas where people don’t have as many options as they do in SV.

Positives

Karma really exists in SV. I’m constantly amazed at how helpful people are, particularly those that I expected would be too busy to reply to me. I’ve asked favors of influential people who had absolutely zero reason to talk to me, but they still did. This is something that newcomers, in my experience especially those from a sales background, seem to have a hard time getting used to. They try to strike a deal whenever someone asks them for a favor. I think this culture is pretty unique to SV and I haven’t seen anything comparable in other cities or countries.

Selling to startups is easy. I often hear people discouraging startups from selling to other startups. I disagree. It’s bad if your total available market consists of startups only, but there is nothing wrong with having startups as early adopters and then moving upmarket. In accelerators like YC it’s extremely common that startups start out selling to the other cohort and alumni companies. There’s no better place to sell to startups than SV. Getting meetings is relatively easy, and companies are open to trying out and implementing new solutions, helping you to iterate quickly on your product.

It’s easy to relate to people. Living in other parts of the world I found it very difficult to explain what exactly I am doing to others. In some places I got tired of explaining and settled with “I’m an engineer and work for a software company” or something similar. Most people just aren’t familiar with the concept of a startup. In Silicon Valley you could probably strike up a conversation about churn rates with your barista (not that I’ve tried…) and she’ll tell you that she’s working on her own mobile app during break time. Knowing that people understand what you are doing is a very comfortable feeling. Not being able to talk to anyone about your problems can be quite depressing.

Negatives

High burn rates. Medium rent for a 1BR apartment in San Francisco is about $2,500 to $3,500 (source) and increasing. There are cheaper options, such as living in the east bay, but since almost all meetings happen in SF you would be commuting all the time. That time/money may be better spent on your product and commuting is among the most significant factors of work and life dissatisfaction. If you’re in the early stages and haven’t raised a big chunk of money then these are serious expenses. Startups are a marathon, and lowering your burn rate may just make the difference between making or not. The Airbnb story is a good example of this.

An influx of people who want to make a quick buck. Even in the relatively short time I’ve been in SV I’ve seen the crowd in SV change. Many of those who used to go into Finance are now going into startups hoping to make a quick buck. I’m all for more people getting into the startup ecosystem and bringing positive change, but it also seems like startups in SV have become a more hostile environment as a result. Legal disputes between founders and people trying to trick each other with strange non-standard equity clauses seem to become more common. As startups are entering mainstream media the situation will likely worsen, and SV is the place that will feel it the most.

High Pressure. At Stanford we have something called the “duck syndrome”. On the surface it looks like you are gliding along effortlessly, but in reality you’re vehemently paddling underneath. Talk to any startup founder in Silicon Valley and they’ll tell you how they’re “crushing it”.  In reality most founders work crazy hours and things aren’t going nearly as well as it may seem. But you’ll never find out about that. As humans we tend to compare ourselves to those around us. In SV this can lead to extreme stress and pressure. Founder depression is common and not to be underestimated.

For anyone who has made the move, I’d love to hear your experience.

 

Why SaaS is in trouble

One of my favorite (fictitious) stories is The Dentist Office Software Story by Fred Wilson. The takeaway is that software is a commodity. If a  product is not defensible people will leave when someone builds a better mousetrap. A recent example of this is companies moving from Hipchat to Slack. Slack is the better product, and the cost associated with leaving Hipchat was low. Many people have written about how to create defensibility (e.g. marketplaces, brands and data network effects) so I won’t talk about that. If you’re interested in the topic I recommend reading what Formation 8 writes about platforms as well as things written by USV and Fred Wilson in general.

But there is something about the The Dentist Office Software Story that doesn’t quite ring true. In the last part of the story an open source movement replaces the sexy YC SaaS startup. How often have we actually seen this happen? Not very often. Most industries are still dominated by, often non-defensible, SaaS products. That’s about to change, and the reason are containers.

The main selling points SaaS had over open source software was ease of deployment and automated software updates. Most end-users are not technical. They can sign up, perhaps enter their credit card, and they’re good to go. My mom can do that. Well, deploying software using pre-built containers has the same benefits. Lots is happening in the space and soon running a container will be easier than signing up for a SaaS product. Just imagine that with the click of a button you can deploy an application within your internal company infrastructure (which can still be in the cloud). You don’t need a credit card or create new credentials. But that’s not all. There are other things that containerized open source software has going for it.

You own the data

When you enter data into your favorite SaaS product you essentially give it away. Most SaaS products don’t give data back to you and some may use it to lock you in. Even companies that are not evil and want to provide access to your data may not have the resources, legal ability, or infrastructure to do so. APIs are a good step towards this, but you have no control over what exactly an API provides or when it changes (Hi Linkedin, I’m looking at you). Giving your technical team access to raw data opens up a whole range of possibilities. Migrating to another product, integrating with other services (both internal an external) and running custom analytics and reporting are some of the things that become much easier when you own your data.

Then there’s the issue of data privacy. You may not feel comfortable giving away confidential information to a third party.  At least that’s what I feel when someone asks for access to my email account. Sometimes compliance requirements prevent you from giving data to someone else.

Trust and Transparency

Signing up for a SaaS product means you’re taking a leap of faith. How long will the company be around? What does the product development roadmap look like? What happens to your data? How good will the customer support be?  Getting honest answers to these questions is close to impossible. No SaaS company will mention in their welcome email that they will be out of cash in 2 months. But that’s what I’d like to know. Branding is a way to convince potential customers that answers to these questions are positive. It acts as a proxy between the truth and what companies want potential customers to believe.

With open source there is full transparency. You know how popular a project is, what issues have been filed, and who’s working on what. If the project has one main contributor, no updates within 2 months, and no commercial backers you can be pretty confident that you’re entering unstable territory. With open source you can make decisions based on facts, not assumptions. Communities around open source software also tend to be much stronger than those around commercial products.

End of the SaaS management nightmare

Have you worked with a company that uses and manages dozens of different SaaS services? These days that seems to be the norm rather than the exception. Connecting these services, integrating data, managing who has access to what and keeping track of all of it is a nightmare. Yes, companies like IFTTT allow you to connect products, but that’s just adding to the overall complexity.

Containers have the ability to solve this problem from the ground up. All products hosted within your infrastructure can go through the same authentication layer and have the same login. They all write to and read from the same central data repository. Think of your own internal Google Apps, but with all apps you can imagine.

The road ahead

In the future many more businesses will be deploying their software internally. As container management becomes simpler it will become accessible to non-technical users. This is almost ironical considering that the “new” model looks a lot like  old model in the Oracle days before SaaS came around.

That doesn’t mean cloud services will go away, just that their main offering won’t be software. They may become hubs of data offering value-added services that rely on scale. For example, by connecting your own data to a cloud service you may receive additional features (like recommendations) that require access to the combined data of many users. Many SaaS companies will need to rethink their business models, or the last part of the Dentist Office Software story will come true in many industries.

For entrepreneurs this is a great time to start an open source movement that challenges one of the big SaaS companies out there. Open Source adoption has never been so easy.