High Cost vs. Low Cost Startup Economies

By PAUL O’BRIEN
Special Contributor to Silicon Hills News

Having spent a couple years now in Austin, and the previous 12 in Silicon Valley, a frequent topic of discussion over drinks or dinner is the question of how entrepreneurship works. Not “Startups” per se, at least not in the context that we think of them when reading about all the innovation on TechCrunch; rather, mere entrepreneurship and the fact that people are wired to work for themselves.
It’s really an intriguing topic when you consider entrepreneurship where you live. As a country, we’re excited by the hype machine that fuels entrepreneurship in California but generally speaking, the economy there is NOT entrepreneurial. It’s simply too expensive. Other than the funded ventures served by the exceptional amount of capital available to the brilliant innovators there, people generally don’t work for themselves, at least not compared to the ambitious entrepreneurs of a place like Austin; who I’d bet, are not unlike the individuals creating opportunity in your city.
There are countless comparisons of one city to another; one economy to another. People love to posit and debate what makes one community thrive while another fails or why a city churns out billion dollar ventures while another rarely crosses that threshold. My thoughts here are along the same lines but I’ve come to a conclusion of late that I think is unique and worth considering.
If we distill down all of the variables driving an economy, we can conclude that there are only two types of entrepreneurial markets in the U.S.: High Cost vs. Low Cost.

The High Cost Startup Economy

High cost markets are flush with experience, new talent, and ideas BUT require greater investment in business simply to get started. As a result, the “ideas” which receive investment are already fleshed out by experience, ambition, collaboration, and a network of peer professionals BECAUSE no one can afford to start a business without being so capable and taking an idea to market worth investment. This gives such markets (think San Francisco, Los Angeles, and New York) a tremendous advantage and the opportunity to go for big risks; you see this in the billion dollar valuations of Silicon Valley, the dominance of the entertainment industry through LA, and the center of commerce in New York.
Of course, I’m generalizing.

The Low Cost Startup Economy

Lost cost markets are also flush with experience, talent, and ideas but it takes virtually nothing to get started. Consider the expensive cities on the coast vs. middle America – It costs $185 per hour to get a Ruby on Rails developer in San Francisco. What requires $750k in capital investment there takes only $250k elsewhere. As a result, a few things happen:
Startups from those big cities get a lot of attention; much of it for no reason other than how big they seem. After all, a $750k investment is newsworthy! Isn’t it? No one bats an eye at the same exact startup in another city raising only $250k. What a pittance!

PR = traction

The flaw in that happening is that PR = traction; for good ideas and bad. Capital buys time and resources and in our increasingly outsourced economy, even though it costs more to hire talent in those expensive cities, $750k applied to some overseas developers goes a LONG way further than $250k. Time = opportunity.

Time = opportunity

Entrepreneurs in middle America try to replicate from the coasts… let’s do it like they did… without appreciating everything that goes into making those economies work – A great idea, some money, and we’re set! The problem is that other factors are easily overlooked: experience, ambition, collaboration, and a network of peer professionals, PLUS the PR impact of being in those high costs markets. Inexpensive markets can’t replicate what happens in those expensive cities so why are we trying? Rather, learn from their examples as what works there, in those market dynamics, won’t work the same way elsewhere.

What’s an idea worth?

Are “ideas” new? Are ideas worth anything? How does your city feel about big ideas? Expensive cities seem to fully embrace the perspective that there is no new idea and that it’s about execution. After all, ideas in high cost markets really aren’t even ideas by the time we hear about them, they’ve been vetted, tested, and in development by experienced individuals. They work that way because of that first, and the next, considerations but important to evaluate is that in that, no one is testing an idea; everyone, all the investment, development, advisors, investors, and entrepreneurs, are focused on executing, scaling, and growing. What’s happening where you live? Are people validating ideas or scaling businesses?
Perhaps most important, in low cost markets, entrepreneurs with ideas can easily, and therefore all to often, try to go it alone. If not alone, with few others, from the sense of independence that smaller towns and middle America seems to encourage. Silicon Valley, for example, isn’t an entrepreneurial environment – it’s a startup environment. There is a BIG difference. Entrepreneurs have a bit of the lone wolf in them whereas startups are never sole proprietorships. Entrepreneurs can’t and shouldn’t do it all themselves. There is NO reason to Learn and Discover (my 3rd point) how to scale when the rest of the country already knows so much about your industry, marketing channels, segments, etc. High cost markets put more emphasis on Agile principles for the very reason that they must leverage one another because it’s too expensive to do anything but get the dang thing out and get some proof – and then iterate, iterate, iterate. The high cost of a market forces people to appreciate that time and resources are valuable and though expensive, I don’t have the time to discover something with which I’m unfamiliar – I’m going to focus on what I know well and collaborate with others who can contribute what I need.
So ask yourself and please share with me, how much of this rings true about where you live. Don’t consider the access to talent, experience, education, or even capital that drives your economy; simply consider the cost of doing business where you live. How much of that cost determines how your economy works and drives how entrepreneurship might excel with your support.
The mere cost of markets creates different cultures and expectations and rather than learning from one another we try to emulate things. Expensive markets try to attract and retain the talent from inexpensive markets while inexpensive markets try to replicate how expensive markets work. It’s a failed approach which in and of itself needs innovation if we’re to foster entrepreneurship in the United States.

About the author: Paul O’Brien “has held many formal roles, from VP of Marketing for Zvents and Outright, to managing interactive marketing for HP and designing online advertising for Yahoo! He is most proud of having been featured in the Michael Miller book, Online Marketing Heroes, as one of the 25 leading online marketers as well as appearing in Internet Retailer, KGO Radio, Webmaster Radio, and DM News.”

Editor’s Note: This post originally appeared on Paul O’Brien’s SEOBrien website. It is reprinted here with his permission.

Comments

  1. Really like this analysis, Paul. The fascination with ‘BIG’ startups is perhaps misplaced given the relative costs to start up businesses in different parts of the country. It also may have something to do with proximity to the major media markets, which NYC, LA and San Fran have in spades.

    • Thanks Dave, that’s exactly where the line of thinking is going. Is ‘BIG’ appropriately evaluated based on the investment or valuation when impact the various markets alone have on a business can mean the difference between a billion dollar valuation and a million. Of course, that’s only really true at an early stage but that’s the context we’re exploring here.

  2. Spot on Paul. I see so many entrepreneurs wait to get started until their product or founding team are perfect. You need to start somewhere and build traction. Going outside of the Valley presents a great opportunity to find people who may align themselves to what you’re working on for resume building, because they believe in what you’re doing, or just for a small paycheck. Engineers in Austin or even Kiev may not get the attention of a Vally VC, but they can get you started on the road to traction. Traction and revenue get you the UX genius or back-end rockstar you’ve always had your eye on and it can also get you the attention of a VC you would like to work with. Starting too late or paying too much can lead you down the path to failure or worse- another startup solving your problem first and succeeding. Great article Paul!

    • Love the last point Stephen, “Starting too late or paying too much can lead you down the path to failure or worse- another startup solving your problem first and succeeding” Thanks man

  3. Jeffrey S. says:

    I think this is great. As I continue to explore this world of entrepreneurship and get to know more and more about the start-up “community” I am really intrigued with a lot of the points you bring up in this piece. I am a big fan of the “launch quick and iterate” philosophy. You can spend months and months working on tweaks that you think will make your product perfect….but without getting the actual thing out there and testing it, you will not know. I think you DO need to get the dang thing out there…learn…and repeat. Is this easier to do in a High v a Low cost spot? I think it depends. Drive, determination and persistence can often level the playing field between the two. Another thing to consider is the ability to stand out versus get lost in the crowd between the two settings.

  4. Well said. I think drive, determination and persistence don’t just level the playing field, they make all the difference.

  5. James Foster says:

    Great piece Paul. The intriguing thing to me is the competitive advantage that then exists in the lower cost markets, often coupled with fewer tax & regulatory burdens and boosted with economic development community support systems.
    With shifts in media becoming increasingly less regional and with the cultivation of collaborative cultures within the historically independent minded middle-American markets, those advantages aren’t so exclusive to the coastal markets any more. Leveling the playing field with regard to media PR, business collaboration and talent pool leaves business costs as the next differentiating factor
    – Advantage middle-American low-cost markets.

    • Brilliant James. Exactly why I moved to Austin. The future is here and in markets like what we have here. The challenge is in recognizing BOTH the advantages and challenges the come from being a low-cost market. Without collaboration, the likes of which is demanded of entrepreneurs in high-cost markets, entrepreneurs elsewhere will continue to move at a slower pace as they test and learn what others already know. And collaboration doesn’t mean a co-founder; we’re referring to truly opening a venture up to all of the implications of working with others – collaborating with partners, industry experts, valuing exceptional Sales professionals (and their books), working with marketers who can do in minutes what it takes others weeks to figure out, etc. Even, collaborating with competitors as industries aren’t born of one brand – entrepreneurs working WITH competitors to create awareness for, interest in, and coverage of what their doing serve to elevate everyone.

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