The New Start-Up Formula: Start in the Valley, but Expand in Other Locales

Deven Parekh, Managing Director, Insight Venture Partners

Deven Parekh, Managing Director, Insight Venture Partners

The traditional start-up success formula is changing rapidly. There is no longer any safe approach of creating and expanding your business in the Valley. Many rapidly scaling tech start-ups are seeing a burgeoning opportunity to increase revenue and gain customers by choosing to expand outside the valley. According to a study by real-estate website Redfin, the greater San Francisco area lost more residents than any other city in the US in the last quarter of 2017. This exodus will only accelerate as organizations embrace this new normal.

"Driving growth is never easy, but you increase your odds of success when you can invest less, but get more"

At Insight, our experience with our portfolio companies that have expanded across geographies demonstrates that businesses that open offices outside of Silicon Valley lay the foundation to capitalize on strong and profitable growth. More cities represent strong choices for burgeoning tech start-ups to expand. This choice can provide a needed driver to spur innovation through a diversity of perspectives that ultimately deliver stronger growth and operating performance.

A Shift Is Happening

The Silicon Valley ecosystem is historically one of the best places for tech companies to be located, but it isn’t the only hub for growth and innovation anymore. Companies based in Silicon Valley are now expanding their footprints to cities like Chicago, Austin, Miami, Denver, Boston, Salt Lake City, and others around the globe. These cities are becoming incredibly “tech-friendly” and provide benefits that the valley struggles to deliver.

Google and Facebook’s office expansions beyond their Silicon Valley headquarters show that tech giants are also opening offices outside of the Valley. Google, who opened an office in Pittsburgh in 2006, started the national expansion trend, while Facebook followed suit ten years later. Taking advantage of the computer science talent at Carnegie Mellon and other Pittsburgh area universities, Google and Facebook see the value of expanding outside the Valley.

One of our portfolio companies, Udemy, is a global online marketplace for learning with an extensive library of courses taught by expert instructors. Udemy is headquartered in Silicon Valley, but also has offices in Turkey, Ireland, and a recently opened office in Brazil. Through their global presence, Udemy has achieved significant scale, offering 65,000 courses in over 50 different languages to 20 million students. This international expansion has increased their global footprint significantly, and as a result, two-thirds of Udemy students are outside of the U.S.

Cultural Expansion Sparks Growth and Innovation

Innovation solves big challenges with disruptive ideas and technologies. It shapes industries and helps companies stay ahead of the competition. It creates efficiencies in business processes and services, and it accelerates growth by propelling investment in new talent, capabilities, and expertise. This type of innovation is turbo-charged when ideas and concepts from different vantage points are brought together—something we’ve seen firsthand operating Insight Venture Partners out of New York City versus the West Coast.

Setting up offices outside of Silicon Valley can also create new business opportunities to solve different challenges that may not even be apparent to people in the Silicon Valley bubble. Think about how different demographics, emerging local trends, and specific local challenges can spur innovation. Companies can create a team with diverse perspectives and backgrounds that is constantly creating new products for emerging needs. By adopting practices of the best and brightest minds across cultures, companies can open the door to allow new ideas to emerge.

For example, opening offices in New York City provides an inherent melting pot made up of different types of people from different backgrounds. Ethan Agarwal, Founder and CEO of Aaptiv, an NYC-based fitness startup with the fastest-growing mobile fitness product on the market and one of our portfolio companies, believes there is an added benefit to an NYC-based company. He says, “As a fast-growing tech company with a product that can be used by anyone, anywhere, we see tremendous value being headquartered in New York City. Where the population is just as diverse as our userbase because it gives us access to employees and members with the different perspectives needed to build, test, and improve our product.”

Operating Advantage

When expanding a company’s presence outside of Silicon Valley, it also allows businesses to take advantage of both lower operating costs for the company and reduced living costs for employees. Not to mention, many companies and employees will see lower taxes. In our portfolio, we have fast-growing software companies located in former barren start-up locales like Texas and Utah. These organizations will tell you that operating outside of Silicon Valley is an advantage.

With lower operating costs, these companies can more confidently spend money on growth accelerators—like talent and space. Driving growth is never easy, but you increase your odds of success when you can invest less, but get more.

The Value of Expanding Beyond the Valley

There’s no question that Silicon Valley is disrupting the globe with its innovative ideas, but companies who are expanding to other markets are finding added value and benefits. The convergence of trends such as lower operating costs, the opportunity for international growth, and the evaluation of products amongst a diverse audience all make a strong case for this recent expansion outside the “valley.”

The death of the Valley as the US innovation hub may be a bit premature. But, it is clear that forward looking tech organizations are realizing it may pay to expand beyond their initial location. For those companies with the vision to see the value of investing in locations outside of the Valley, an opportunity to accelerate growth awaits them.

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