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Innovation Geography: The Beginning of the End for Silicon Valley

Will a lack of affordable housing hinder the growth of creative start-ups?
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(Photo: Revol Web/Flickr)

(Photo: Revol Web/Flickr)

Another day and another article about the housing affordability crisis in Silicon Valley. Beyond the regulatory red tape constraining supply, the San Francisco-San Jose region is a job-creating juggernaut. But where, oh where, will the growing workforce live? According to venture capitalist Peter Thiel, in Los Angeles:

The shadow of Silicon Valley, he said, is a good place to be. What he has seen is Los Angeles' proximity to the Bay Area drive an exchange of workers and investors — himself included — that doesn't flow to far-off fellow mega-cities New York and London.

"I'd definitely be short New York and long L.A.," he said. ...

... Thiel, a libertarian, doesn't support government subsidies for tech start-ups. But, asked what would help L.A.'s start-up economy to grow, he reiterated a point that he's long made: Creating affordable housing should be the top political priority as it relates to tech because a lack of it hinders growth of the most creative start-ups, which typically compensate employees with stock more so than cash (leaving them in a tighter spot to pay for housing).

For big tech start-ups, New York and London are beyond the pale. Granted, a start-up could be anywhere. But the money is in Silicon Valley. Los Angeles and even Portland, Oregon, enjoy a geographic advantage. For migration, you go where you know. The same is true for the flow of venture capital.

Beyond the economic geography, Thiel is concerned about housing. Already, high valuation start-ups struggle to stay above water in Silicon Valley. The evidence:

The majority of tech start-ups that have gained a $1bn valuation in the past decade hailed from outside Silicon Valley, according to research that casts new light on the global growth of fledgling digital companies.

The research into “unicorns” – fledgling tech groups that are valued at $1bn following an initial public offering, sale or publicly-declared funding round – found that 60 per cent of major internet or software companies were created outside California’s Bay Area. ...

... Others, however, were sceptical of the findings. Hussein Kanji, co-founder of Hoxton Ventures, a London venture capital firm, said that the vast majority of tech companies still emerged from the US and that the likes of Google and Microsoft are often the most likely buyers of significant tech start-ups.

He added that many overseas tech groups grew by establishing ties with American investors, while companies such as China’s Alibaba and Denmark’s Zendesk have established significant offices in the Bay Area.

“I agree the world is far more flat and tech companies can come from anywhere, but it would be hard without a presence in Silicon Valley. When these companies grow, they often end up moving to New York or the Valley, and they end up looking much more like American companies in identity,” said Mr Kanji.

Kanji's so-called skepticism reinforces the trend Thiel describes. A unicorn needn't be in Silicon Valley. The majority of unicorns are not located in the region. But unicorns do need to have some connection to Valley investors in order to build up the requisite trust. You go where you know and money follows.

Peter Thiel is wrong to be bullish on the tech scene in Los Angeles. Unicorns will thrive in places where talent collides with cheap housing, as long as there is a link to Silicon Valley venture capitalists. The world is far more flat than Thiel realizes.