Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a university professor in the University of Toronto’s School of Cities and Rotman School of Management, and a distinguished fellow at New York University’s Schack Institute of Real Estate.
A new study explores startup migration and the benefits it brings.
The San Francisco Bay Area has long been America’s, and the world’s, premier startup hub. The very idea of a high-tech startup was born there in the late 1950s, when a group of young techies launched the seminal firm Fairchild Semiconductor (which spun off a host of companies, including Intel).
Anywhere from a third to half of the founders of Silicon Valley’s high-tech startups are immigrants from outside the United States, according to recent studies. It’s not just that startups and entrepreneurs move to the Bay Area of their own volition. The stories of Silicon Valley venture capitalists insisting that entrepreneurs and companies relocate to the Bay Area as a condition of investment are legion.
But how often do startups and entrepreneurs actually move to Silicon Valley? And what does moving mean for those companies, and for the U.S. economy more generally? That’s the subject of a new paper by Jorge Guzman of Columbia University.
To answer these questions, Guzman studied data on nearly 500,000 startups founded between 1988 and 2014. In order to identify high-growth startups, he focused on Delaware corporations—that is, corporations that are registered in the state of Delaware because of various advantages of being listed (though not necessarily located) in that state. (Although Delaware companies represent just 4 percent of all U.S. firms, they make up half of the companies financed by venture capital, and are 50 times more likely to be taken to market via an IPO than other firms.)
The study examines the rate at which these high-tech, high-growth startups move, zeroing in especially on startups that move to the San Francisco Bay Area, and the effects of those moves on different dimensions of the startups’ success, including their ability to patent their innovations, attract venture capital, and generate a successful exit through an IPO, merger, or acquisition.
The study generates a host of interesting findings, not only about the effects of startups moving to the Bay Area, but also concerning the types of startups that move in general.
For one, startup migration is not as common as you might think, especially given the fact that so many leading-edge startups are founded by immigrants who came to the United States from foreign countries. Only about 10 percent of startups actually move.
Startups that move perform better than those that don’t. Whereas movers make up 4.2 percent of all firms, they account for 8 percent of startups that patent, 6.5 percent of those that raise significant venture capital, and 10 percent of those that achieve significant growth in their equity.
Startups that migrate are not only better performers to begin with, but the act of moving brings considerable added benefits, as well. Startups that move to Silicon Valley are about 3.5 times more likely to attract significant venture-capital investment; 4.5 times more likely to generate significant equity growth; and nearly five times more likely to generate innovations (in the form of patents) than non-movers.
The study finds that increasing returns from moving accrue to startups that rank in the top 60 percent on firm quality, with the bottom 40 percent realizing no appreciable gains from moving. In other words, it is higher-quality firms that seek to move from lower-quality to higher-quality startup ecosystems, and in turn accrue the lion’s share of the economic benefits from moving.
It may be the case that venture capitalists encourage startups to move to be close by, but Guzman’s results also show that there are substantial productivity benefits that come when startups move to the Bay Area. And these productivity advantages are not just for these startups, but for the economy more broadly.
If the benefits of moving are so significant, Guzman asks, why do so many startups choose not to move?
To some extent, the reason has to do with founders’ personal costs of moving their firms. Using machine-learning techniques and data from sources including LinkedIn, Crunchbase, AngelList, Wayback Machine, and Whois, Guzman modeled the characteristics of 100 startup founders who moved to the Valley, compared to 100 startup founders who stayed put. Considering a wide range of characteristics and counterfactuals, Guzman’s models suggest that those who don’t move their firms tend to be older entrepreneurs who have accumulated more local wealth in the form of housing and, in some cases, the income of their spouses. The high personal costs of relocating lead older founders, in particular, to keep their firms where they are, even though the firms and the broader economy would likely benefit from them moving to a more productive ecosystem.
Ultimately, there are very real benefits for startups that move to the Bay Area. But—and this is a very big “but”—the positive effects of moving to Silicon Valley have declined significantly in recent years, according to the study, particularly in the wake of the tech and dotcom crash of 2001. “The patterns before and after the dot-com bust are striking,” Guzman writes. “While there was a large benefit of moving to Silicon Valley during the boom years, this benefit becomes negligible in the bust years.”
Still, as of yet, this has apparently had little effect on companies’ decisions, since the Bay Area’s overall share of U.S. startups has continued to increase in recent years. And it remains the case even as real estate costs have skyrocketed and the region has been plagued by an escalating new urban crisis.
There is, indeed, growing evidence of leading-edge startup ecosystems rising outside the United States (something I’m currently researching with my colleague Ian Hathaway and will be writing about here next month). One possibility, heightened by the Trump administration’s inhospitable posture toward immigrants, is that more and more of the immigrant entrepreneurs who fuel startup growth may simply be staying home.