Why Silicon Valley being expensive maybe a competitive advantage

... focus and constraints create a better outcome

One of the things I have often wondered is that Silicon Valley is so expensive, but still, world-beating startups emerge out of here more than anywhere else. In some ways it’s counter-intuitive since early-stage startups have limited capital, so won't their interests be served better by being in a low-cost area? This also came up recently in a conversation with a highly respected founder in India who earlier had a highly successful career in the Valley.

We always talk about the cost advantage that building a software company from a low-cost area. You can invest your VC dollars into many more things or if you are bootstrapping, you are able to get sustainable much faster and you can reinvest the profits into growing the business. If you are still tinkering and discovering product-market fit, being in a low-cost area is a huge benefit. It’s also well suited for a lot of startups that may not become unicorns but are profitable, successful businesses that throw up a ton of decent cash for their owners. The advantages are well understood - but some of my experience has been otherwise. Based on the two startups I did - one in the Valley and one in India, I decided to write about some of my learnings.

Cycle-time is a more important metric than runway: One of the most important things is that even though the same $$s buys you a much longer runway in a lower-cost area, in more expensive and dense ecosystems like in SF/Valley/NYC/BLR, you can get feedback faster, iterate quickly and get to product-market fit faster. This unlocks the opportunity to raise more capital, and increase runway. Potential customers also have less time and fewer resources, so they are more willing to try new technologies and give quick feedback instead of hiring another person to do some custom work. In many cultures like India, customers and partners never say NO - they will at best say a slow i-mean-no-but-say-will-keep-saying-yes-without-doing-anything so as to not hurt the other person.

Lack of resources makes you focus on productivity: Just given the inability to easily hire and build resources, people get creative and highly productive. Everything has to be built for scale and minimal operational involvement since you do not have bodies to throw at every problem. I recall all of our finances at Taro used to run in about 2 hours and under $400 per month - much less than what I had spent on it during earlier ventures. This instills discipline and a maniacal focus on productivity early on which helps the company scale revenue without adding employees. Revenue/employee (or an equivalent metric) is a really important metric to watch for companies and see the real quality of product-market fit.

Increased productivity leads to less baggage: Since companies are able to keep the number of employees low early on, it’s easier to keep the team together and align on the mission of the company. This leads to much less time spent on 'management' vs 'building'. Should you end up needing to pivot, it’s also a lot easier to do it if you have fewer but more motivated employees.

Focus on quality of revenue: The fact that companies have more resources at an early stage means that there's a higher incentive to say YES to all customer or market demands. A lot of companies in lower-cost areas start to looking like services companies or services-enabled and this is because services revenue is extremely profitable due to the cost arbitrage. However, this dilutes the focus and makes it far harder to stay competitive as companies scale since ultimately the leadership bandwidth is limited and is being split into multiple areas. There are some inherent advantages of services though - and used in strategic ways, it can be extremely useful - maybe the topic of another blog post.

Ruthless prioritization at all times: When resources are scarce, it builds a culture of ruthless prioritization — something very critical for a company to scale. At every point, you have to pick your battle since you have only so many soldiers in your army. A lot of startups in lower-cost areas expand too quickly outside of their core mission really quickly. In lower-cost areas, sometimes perverse incentives prevail: sub-scale unprofitable startups start resembling sub-scale conglomerates - imagine the number of alignment meetings it takes to get anything done. Snowflake and Zoom at > $50B valuation still have only one core product - something to think about.

Brutal performance management: When resources are really expensive, companies are forced to keep and reward their top performers, and manage their low performers out. This increases the overall quality and stature of the team and lets them do real damage. When resources are cheaper, there’s a higher tolerance for keeping people in 'an alternative role' since they are good enough. Many times this is unjust both to the rest of the team as well as to the person themselves - they are unable to grow and it lowers the overall quality bar for the team.

You need to be exceptional to thrive: While there's a lot of progress in Silicon Valley, there's a lot of turbulence under the hood. There are companies dying, new ones getting reborn, remaking, and rebuilding themselves. The high-cost basis forces higher quality ideas to win. All this activity is good for the ecosystem as a whole. In a low-cost center, an average idea or product can survive by cutting costs and becoming sustainable. This prevents talented people from investing time in something else that could be bigger and better.

Expanding after process excellence: A lot of startups do end up growing teams in lower-cost areas down the line - but by then the core processes are well established and the business mission is crisp and well understood. When costs are low, there’s a lower incentive to have highly optimized processes - whether it’s engineering, tracking issues, customer support, or success. It’s a lot harder to expand to a higher cost area than a lower-cost area.

A lot of the same arguments probably apply to start a company in a recession - when resources are not plentiful. The benefits of focus early on in a startups life are well documented.

Given that, starting up in a lower cost area have a lot of inherent advantages as well - maybe next time, I should write about that :)

QuibTok or QuTube

The big startup news of the week was the Quibi shutdown after having raised a boatload of money. Silicon Valley shrugged off the indictment saying this was not 'the valley way' - "Don't raise before product-market fit" and "improve your product iteratively", most of the $$ behind Quibi was not VC (a lot of media capital as well as Madrone, from the Waltons family).

However, we have to give Jeff Katzenberg and Meg Whitman props for trying — they managed to build a vision, raise capital and spend it quickly (low cycle time). A lot of bad ideas that wasted a lot of money were reborn decades later (Kozmo / Webvan vs Doordash / Instacart) and became hugely successful. Maybe, in ten years, short-form produced content will become popular again. I'm glad they tried and failed instead of not trying at all.

Another idea ahead of its time: cloud gaming and a great overview by Polygon - and some of the basic physics challenges they continue to face. The only way to break out is if the user experience is 10X better. Fascinating story, including a Silicon Valley flameout (Onlive) - and another that survived and thrived (Gaikai) by maintaining a lower profile.

Startups

Leadership & Personal Development

  • Find out why some people get burned out but others don't. What was interesting to note is that there are two kinds of stress - bad stress (distress) and good stress (eustress). Some very relevant tips though if you find yourself stressed and burned out.

  • The Chief of Staff role has become very fashionable, but what does a CoS actually do? Is the startup CoS doing the same things like the one in politics? This article does a great job of explaining and putting them into perspective.

  • True leaders hold their teams accountable: the fascinating recounting of Dan Rose's experience at Amazon where the leadership asked him to "clean up the mess".

  • Finally, somebody decided to tell the truth about what they really did as a consultant

Engineering and Products

  • I found another set of very useful data science and data engineering resources. A lot of them are free - for anybody who likes to live and breathe data, it’s worth checking out.

  • Read this fascinating thread: "It doesn't matter how good your engineering team is if they are not given something worthwhile to build" (unrolled)

  • This is such a powerful idea - the guarantees, SLAs, and architecture used should be relevant to the business and help it succeed. Simply copying "best practices" from the largest companies in the world is not always necessary.

  • For all of us who grew up solving the Traveling Salesman Problem (TSP) - a more optimal solution was just found.

  • I found this example of Architecture Design Records in Hacker News, and it was interesting. There are lots of micro-decisions made all the time, and they are not tracked easily (most live as comments in an unstructured form). Are you aware of a library that can parse it and make it usable?