Should early stage startups move to Silicon Valley for customer development?
Founders of early stage companies are often enticed by the Silicon Dream, the startup equivalent of what Hollywood signifies to young actors. However, founders should carefully consider whether moving to Silicon Valley benefits the company. And a company can benefit from the move if it serves the three Cs — customers, capital, and competencies.
This is the first in a series of three posts that discuss the three Cs and focuses on the importance of early stage companies working close to their customers. The second one looks into whether foreign startups should try to raise money in the Valley. The third one explores when should companies rely on Silicon Valley as a source of talent. The posts have been inspired by the European Entrepreneurship course at Stanford and I write them as a founder of BudgetMatador, a web app for collaborative financial management.
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Great companies are founded on the capacity to satisfy the needs of their customers. In startup-land, a company’s ability to do so is defined by the product/market fit. Paradoxically, this is both a self-evident platitude as well as a cold hard truth that many first-time founders fail to fully appreciate.
More specifically, budding entrepreneurs don’t understand the importance of ensuring the product/market fit by personally finding out about the problems, practices and priorities of customers — the initial phase of customer development. After all, *not* speaking with customers is a good way to stay in the comfort of groupthink and not risk your ideas being shot down.
Many say (e.g. Founders Institute, Teleport) that in the era of digital nomads, you don’t need to build your startup in Silicon Valley. However, certain kinds of companies need to be there for the purposes of customer development. In terms of discovering and validating customers, Silicon Valley might be among the few places in the World where they can succeed. Let’s look at three cases of when an early stage startup should seriously consider setting up shop in the Bay Area.
1. Accessing the US market. Most obviously, operating out of the Valley provides immediate access to the sizeable American market. Companies should consider an early presence in the US if they want to work closely with American customers in order to determine their product/market fit. However, that could be achieved in many other, more affordable tech hubs across the US, or even places that are simply home to your customers.
2. Developing sophisticated enterprise solutions. SV is not simply a way to enter the US, but it also serves as a gateway to international markets. That’s because corporations have innovation offices in the Bay Area, which are designed to learn about and adopt novel solutions. For instance, Feedzai, a fintech fraud detection company, shows how operating from SV can be game-changing. While banks in the European home market would not even consider a newcomer as a vendor, the same companies in the Valley were primed to buy from a startup.
By the same token, companies in highly technical spaces (e.g, artificial intelligence, virtual reality, autonomous vehicles, etc.) downright need the sophisticated customer base in the Bay Area for lift-off. Advanced tech companies are better positioned to understand and make use of complex products. Moreover, the concentration of tech companies in the Valley is exceptionally high, so it’s the place to sell advanced solutions.
3. Creating consumer apps. As much as the corporate customer base is sophisticated, the consumer base is open to innovation due to a high rate of early adopters. Before Uber morphed into global businesses, their growth was fuelled by access to early adopters in the tech community. Yet this approach comes with risks — what if the Bay Area techies are so much ahead of the curve that it does not reflect potential traction in other markets? Your company could go belly up.
In short, founders should not romanticize SV as the gateway to success. To the contrary — operating out of SV is really expensive, so moving to the Bay Area has to be well justified. If being present at the epicenter of tech propels your growth, do it. If it’s not crucial to your business, you might be better off serving your customers in places other than SV.
