Silicon Valley or Bust? 8 Things to Consider for your US Start-up

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A few weeks ago I read an amusing account by a German entrepreneur, Steli Efti, who moved to Silicon Valley to get his start-up off the ground, http://venturevillage.eu/moving-to-silicon-valley. His take is endearing but naive in the extreme. How nice to be an entrepreneur with a dream; sell everything you own in whatever European country, get a work visa, jump on a plane to SFO, start a tech company in sunny Northern California, get acquired by Facebook and become a gazillionaire. Easy right?

Steli’s advice from his five year experience:

1. Do market research;

2. Build a web site;

3. Market web site;

4. Visit Silicon Valley and network – a lot;

5. Hire a local;

6. Make sure you prepare correctly.

Hmmm…… Needless to say Steli’s start-up failed.  From his advice above I’m not sure how much he learnt along the way either.

Now I’m not saying I have the panacea for all entrepreneurs considering a start-up in Silicon Valley but I hope my list might provide a more pithy starting point for those contemplating such a move. So here are a few key pieces of advice from my own move to Silicon Valley, which by the way is what people who don’t live there call the San Francisco Bay Area.

First of all think long and hard before moving your business to Silicon Valley or to California for that matter. At first glance it looks too good to be true; loads of like minded techies and entrepreneurs; angel and venture capital to boot; the weather’s great; good schools; great lifestyle. Look a little closer however and the decision is not so easy.

1. The Idea. If you’re seeking funding for your new business, in order to attract investment the concept underpinning your start-up needs to be extremely compelling, easily understood and at the forefront of tech trends. It should utilize advanced modern technology, as well as being in an area that VCs are betting on for the future. It will need to be a business capable of global rollout and be in a market large enough to support multiple businesses all valued at over a few hundred million dollars each. That said, the spate of funding rounds, recent tech IPOs and headlining acquisitions, suggests the goalposts have moved from the hundreds of millions into the billions of dollars realm.

2. Visa. Can you get one? This is probably the most crucial step. If you can’t get a visa you can’t move to the USA – End of the dream. It’s not an easy process but there are numerous routes to take. You can do it yourself but my advice is to engage a specialist immigration attorney. The cost is well worth it. You can most likely identify the type of visa you can most easily secure at the outset and usually agree a fixed price with your attorney. This is the first step of many, which should result is securing Green Card permanent residence status. From there, the next step is becoming an American Citizen to take the process to its conclusion.

3. Location, location, location. Do you really want to be in Silicon Valley?

My take is Silicon Valley is from around San Francisco Airport south to San Jose. Its home to loads of the famous Silicon Valley names like Apple, HP, Google, Adobe, Facebook, AMD, Netflix, Yahoo, Intel, Symantec, Oracle and the list goes on and on and on. Its worth noting that San Francisco is becoming more and more the home to new tech start-ups too. My rule of thumb would be – no kids then San Francisco; Kids then the Bay Area. But be warned San Francisco and the Bay Area are expensive and the traffic is a nightmare, wherever you end up. If you decide to rent a home in a nice area be prepared for bill shock and be ready to move quickly. Family homes rent in days.

A less appreciated issues, when dealing with other parts of the world from the US West Coast, is Pacific Time (PST). PST puts you at the end of the World’s day, so no matter how early you rise and how much coffee you drink, if you’re dealing with Europe, you’ll always be playing catch-up.

4. Tax. This is a huge issue. Moving to the USA comes at a price. On the corporate front, regardless of where you incorporate your new C corp Inc. if your office is in California, you are liable for California state taxes, as well as federal taxes. Yes, there are exotic tax arrangements, with equally exotic names like the Double Irish and the Dutch Sandwich, that can be implemented to mitigate taxes but these are costly to set up and only really useful when large revenues are generated outside the USA. It also seems these are under threat http://arstechnica.com/business/2014/01/silicon-valley-attempts-to-slow-new-global-tax-avoidance-reform-proposals/.  Be aware there are 9 states that do not have state taxes; Alaska; Florida; Nevada; New Hampshire; South Dakota; Texas; Tennessee; Washington and Wyoming. Some of these like Texas, Nevada and Florida have thriving tech scenes.

On the personal front, if you are a resident of the USA you must pay income tax on your worldwide income and if you live in California guess what? Yep, you pay personal California tax as well as federal tax. And let’s not forget if you’re a high earner and  you’ve lived in the USA for a few years and then leave, you are liable for Expatriation tax on the increase in your net worth during the time you resided in the US.

And that’s not all. Let’s say you you sell your business while resident in California. Currently, you are liable for federal Capital Gains Taxes (CGT) of c.24%  as well as State taxes of c. 14%. Ouch!

5. Getting Funded & Silicon Valley Cartels. Attorneys, Accountants – CPAs, Angel Investors & networks, Venture Capital Firms, advisors etc. Travel down Sand Hill Road, Menlo Park and around a few city blocks in San Francisco’s financial district and you’ll find the highest concentrations of Venture Capital firms’ office on the planet. You’d be forgiven for thinking that because you know where they are they’re more easily accessible. Sadly nothing could be further from the truth.

I’ve found that there are numerous cartels, small and large, made up of angel investors who work with certain VCs, who in turn work with certain advisors and professionals. Breaking into these groups is difficult but its really how Silicon Valley ticks. During my search for funding for a WhatsApp like service back in 2011, which at the time had many key advantages over WhatsApp, and other OTT messaging apps, I  was told by many VCs that regardless of my technical advantages, because Sequoia Capital had just invested in WhatsApp few Valley VCs would bet against Sequoia Capital.

The volume of business opportunities presented to Silicon Valley-based VCs and angel investors is huge and ever increasing. They’re flooded with thousands upon thousands of shiny new tech start-ups seeking funding every month. Even the largest VC or most prolific angels are unlikely to back more than a fraction of 1% of the opportunities they review. Unless you are lucky enough to have a personal introduction your chances of securing a meeting are practically zero.

If you do get funded at an early stage, Seed or Series A, you can expect the terms of the investment to be massively weighted in favor of the investor. Be prepared for founder share vesting, which is far less prevalent in Europe. This means you could well get funded but then get fired by your VC or Angel partner and end up with zip. Early stage funding has been greatly benefited by changes to US law to allow crowd-funding. Great sites like Kickstarter, Crowdfunder and Angel List provide more equitable routes to early stage funding but its never easy.

6. Networking tactics. Its a scrum in the Valley! There are loads of mixers and events up and down the valley every single night. If you jump in you’ll get to know those who’ve been on the scene for some time and the newbies. Everyone’s got a pitch and everyone’s trying to connect with the money guys and talent. If you’ve got kids and decide to live in the Bay Area schools are a great place to connect. The more expensive the area, in which you live, the more senior the employees (parents of classmates).  The key difference between the US, particularly Silicon Valley, and Europe is that networking US style is encouraged and aggressive so go for it. This is the way in and you’ll find groups of types, and races that tend to stick together and that’s okay.

7. Talent. This is a simple supply and demand issue. There are too many tech companies in the Bay Area competing for too few engineers and other talent. If you’re an engineer and are looking for a job you’re in the right place for the big bucks. Sadly, if you’re looking to hire engineers it’s a chore and its expensive.

8. Credit Rating. When you move to the US, regardless of the credit rating you leave behind, you are a ghost and you’ll find it extremely difficult to get any credit whatsoever. Opening accounts of all sorts is extremely important. Don’t go nuts making credit card applications until you know you’ll not be refused. Too many hard credit enquiries damages your rating but you need at least 10 credit accounts operating for over two years to get a decent credit score. Expect credit card limits to be pretty small $500 – $5,000 tops for the first few years. Never miss a payment and use credit wisely because you’ll need a good rating for all sorts of unexpected things like private schools, home rentals, office rentals, visa renewals to name a few.  A great free site to track you rating is CreditKarma.com.

If you’re considering a move to the US from Europe, and particularly to the San Francisco Bay Area I hope the above helps in some small way. I have really just touched the surface and I’m sure I’ve missed something that will no doubt come up to keep life interesting for you.

In future posts I’ll try to delve into each of these issues in more depth so watch this space.

OJ

 

Ps. I advise on business start-ups, relocations etc. as a consulting entrepreneur so please don’t hesitate to contact me to find out how I might be able to help.

Author: Oscar Jenkins

Dynamic entrepreneurial leadership career as a Senior Executive of successful technology start-ups, turnaround situations, and high growth companies. Combines astute strategic, business, and financial skills with a 20+ year track record of multi-million dollar profitable revenue growth. Progressive, decisive innovator, highly valued for insightful corporate vision and strategy development. Expert at translating board-level strategy and objectives into actionable plans, and then providing decisive leadership to multi-functional teams. Highly regarded for developing relationships and developing executive teams and staff. Key professional attributes include: • Financial Management • Technical Product Development • Complex Negotiations • Corporate Leadership • Turnaround Management • Recruitment / Retention • Start-ups & High Growth • Mergers & Acquisitions • Fundraising • B2B & B2C Sales and Marketing • Multifaceted Digital Marketing • Stockholder Relations Specialties: Start-ups, fundraising and technology.

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