Where to build your next tech startup? Toronto vs. San Francisco.
(Part 1 of 2)
I am a tech entrepreneur. My last business was AdParlor. We quickly became one of the largest Facebook advertising companies in the world — managing spend for Walmart, Netflix, Groupon and many more. We did all of this with one office (in Toronto) although I spent about 1/3rd of my time in San Francisco.
After being acquired by Adknowledge in 2011, we opened up several more offices including New York, San Francisco, London & Singapore. I am now on an adventure to build my next company and debating where it should begin: Toronto or Silicon Valley/San Francisco. I have thought a lot about this question and wanted to share my analysis, and get some feedback.
Feel free to jump to the conclusion at the bottom if you would like. :)
Cost, loyalty, and quality of developers
Let’s start with one of the easiest metrics to quantify. The cost of a developer in each of these cities. Taking a look at salary data on AngelList — we can see that average developer salary in San Francisco makes ~$120k USD.
On top of the $120k — there are two additions that I would like to take into account. First, most companies in San Francisco have to offer a ridiculous amount of perks and benefits in order to compete. Three free meals a day, travel stipends, yoga/gym memberships, free flights home, games rooms, and a never ending supply of free drinks and snacks are just a few examples. Let’s call it (+$30k) for these perks and benefits. Secondly, given the number of opportunities available at big tech companies as well as other startups, the average tenure of a developer is somewhere between 1 to 1.5 years. I have associated a cost to this quick turnover (+$40k) which is very conservative.
In total, I would estimate the average cost of a developer in San Francisco to be $190k USD ($120k salary + $30k perks and benefits + $40k cost of turnover)
Now — let’s take a look at the average developer salary in Toronto. On AngelList, a majority are in the <$59k USD segment. From experience and a few other data sources, let’s call is $65k CAD (equivalent to $50k USD)
One of the great benefits of being in Canada is the government SR&ED credits. The calculation can be a little complicated, but at a high level you will get back about 54% of that developers salary (35% of salary * 1.55 overhead)! In this example — the SR&ED credit would be (-~$27k). There are definitely still perks and benefits required for Toronto based developers, but I would put it at half (+$15k) of what is offered to their counterparts in San Francisco. Additionally, developer loyalty is 3x what it is in SF given the marketplace and how conservative Canadians are — so I would peg the cost of turnover at (+$10k).
In total, I would estimate the average cost of a developer in Toronto to be $48k USD ($50k salary + $15k perks and benefits + $10k cost of turnover -$27k SR&ED)
Comparing these numbers — $190k USD for a developer in San Francisco to $48k USD for a developer in Toronto — we are looking at a ~4x difference. In other words, you could hire 4 developers in Toronto for the price of 1 in SF!
Of course, we need to also look at the quality of these devs. The truth is, many of the developers coming out of the University of Waterloo are some of the best in the world. While a portion of these great developers move out to the valley, there are many who prefer to stay in Toronto.
Hiring Developers — Winner: Toronto 4x > San Francisco
For many startups, raising money will be an important step in the growth of their business. The Toronto VC community has improved dramatically over the past few years — with smart money being invested by BDC, OMERS, iNovia, Georgian Partners, Rho, Real Ventures, and many others. However, VC investments in Toronto pales compared to Silicon Valley. Regardless of which data source and which metrics (# of investments, average investment size, $ available at various stages) you look at, Silicon Valley wins by 20–30x! Think $1 billion invested by VC’s in Ontario versus $30 billion invested by VC’s in California.
There are many reasons why Toronto is several steps behind Silicon Valley in building a tier-1 VC environment. SV keeps feeding high quality angel investors back into their ecosystem — with the many years of large successful tech companies and big exits. SV also wins at the early-stage and the late-stage levels with a record number of VC companies with large ambitions and record-breaking funds. Everybody knows that SV is where you go if you want to build a billion dollar business — and the investors there are the ones that can help you make it happen. There is a virtuous circle of positive outcomes in SV that continues to build upon itself.
One question which I always think about is: Can I raise money from Silicon Valley investors while being based in Toronto?
There are many examples of Canadian tech companies who have raised large rounds — with significant contributions from US VC’s. However, most of these companies were very far along in their business with significant revenue/traction. Additionally, the CEO’s of these companies typically spend a lot of time out in the Valley developing relationships and closing these rounds.
The last time I was in Silicon Valley, I met ~20 friendly VC’s who I had interacted with during my time at AdParlor. I asked two very simple questions:
- “If I were to start another company, would you invest in me?”
- “What if I started this business in Toronto?”
The answer to my first question was primarily a ‘yes’. Of course, there is a big difference between saying yes and actually writing a cheque. :) Many VC’s were adamant on me solving a problem that I witnessed at AdParlor and/or staying in the marketing/advertising space.
The answer to my second question was about 50/50. Some VC’s would have no problem investing in me if I were to be based in Toronto given that I have had an exit before. While the other half would want me to be based closer to them. Given this — I will use the lower end of the 20–30x scale. While being able to raise US money in Toronto is possible, nothing can beat being physically present in the valley to network and build relationships with the big US VC firms. Keep in mind that most rounds have multiple investors. VC’s bring in their VC ‘friends’ to invest with them. The US ecosystem is much bigger, hence each US VC has more ‘friends’ they could bring in, making it easier to raise a large round.
Raising Money — Winner: San Francisco 20x > Toronto
Other quick-hit topics
There are MANY other factors to dissect, but in the interest of keeping this post readable — I am going to nail the next few out in a paragraph each.
Recruiting Talent — While there are definitely more people ‘who have done it before’ in San Francisco, there is intense competition for talent over there. Everything from engineering to product to growth hacking. For the same reason that turnover is so high, recruiting talent is also very difficult. There is always going to be another company with faster growth, better benefits, and giving out more equity in SF. There is much less competition in Toronto, and it is relatively easy to hire someone if you really want them on your team. Winner: Toronto
Serendipitous interaction in the valley — Every time I spend time out in Silicon Valley, great things just seem to happen! I bump into outstanding, smart, and helpful people without even trying. In 2009, the early AdParlor days, I decided to move out to Palo Alto for 3 months. A last minute craigslist search to find a place to live landed me a roommate who was an early Facebook employee! That is just not going to happen for you in Toronto. Winner: San Francisco
Partnerships with the Tech Giants — Depending on the type of business you are building, it is often important to build relationships with the tech giants (google, facebook, twitter, uber, airbnb, dropbox, square…). It may also be that your primary customer base is tech companies (i.e. building a payments api for SaaS companies or a plugin for mobile gaming companies or…). In these cases, it obviously makes sense to be out in Silicon Valley/San Francisco. Winner: San Francisco
Feedback, Advice & Ideation— In San Francisco, you will find some of the smartest and most innovative tech minds in the world. You will find a high volume of these types of people, ready and willing to help. Often the right friend/investor/advisor who has some experience or intelligent thoughts on your business can have a huge impact on your startups trajectory. Finding someone who can be thoughtful about your business, provide constructive feedback, or can introduce you to someone who can help, is much more likely in San Francisco. Winner: San Francisco
Distraction vs. Heads down building product — When out in the valley, you could go to networking events and tech conferences all day, every day! There are endless events and activities to keep you busy and feeling productive — while you are probably distracting yourself from what is important — building a great product and talking to customers. The great thing about Toronto is that there are way less distractions. If you know what you need to build, it may be a better place for you and your team to stay focused. Winner: Toronto
Cost of living — The cost of living in San Francisco is no joke. Unless you want to live in the Tenderloin, a decent 1-bedroom place is going to cost you ~2–2.5x what it would cost you in Toronto. That is money that could be put into your startup. Winner: Toronto
Exit Opportunities — Another benefit of being in Silicon Valley is the exit opportunities. While the tech giants will definitely acquire companies from all over the world, it makes it much easier to build those relationships when you are in the valley — thus increasing your likelihood of a significant exit. The majority of the interested buyers for AdParlor were in SF or NYC — no one serious in Toronto. Additionally, in San Francisco, you have a much higher chance of a soft exit (acqui-hire) scenario if you find yourself in that position. Winner: San Francisco
Conclusion — Which city wins? What am I going to do?
My thought process is still a work in progress. I am hoping this blog post will inspire a healthy debate. As of now, after thinking about all these factors for a long time, here is what I have concluded:
For the ideation and fundraising phase, it is better to be in San Francisco. When you know what you need to build and are heads-down hiring and executing, it is better to be in Toronto.
Three important exceptions/notes:
- If your business is reliant on other tech companies for partnerships or if they are your customers, then you should stay in San Francisco.
- If you are able to raise enough money (and have enough traction/excitement around your company) such that you can recruit and afford top talent in San Francisco, it would make sense to stay in SF.
- Finally — even when/if you decide to build your startup in Toronto, you should always keep a San Francisco presence in some capacity (shared working space, a biz dev employee, flying out frequently…) to take advantage of the serendipitous interactions and networking opportunities.
Myself and my co-founder are currently in the ideation phase, so I will take my own advice. We plan to work in a co-working space in San Francisco for the next 3 months. Not sure where we will be after that. Who knows what will happen. The uncertainty of the startup life…