Twenty five years ago, The Death of Distance was authored. It took a couple more decades of tech development, and then covid, to finally have the author's conclusions come true: Covid has suddenly drastically changed the importance of location in startups.
- Preseed/Seed VCs were mostly in bay area and nyc, and we funded founders locally. So founders had to found there to access capital and the best coaching.
- Founders then hired most of their team to work at headquarters.
- Office space, team meetings and board meetings were all there in that headquarters
- When a hired exec in a startup decided after a few years to found the next company, they founded it in the same location: bay area, nyc, etc.
- Growth VCs fund whatever the preseed/seed folks funded that have big traction, regardless of location. Growth VCs don't decide location of the funded startups, the preseed/seed VCs do.
Now after three years of Covid:
- Preseed/Seed VCs are dispersed all over. Many VCs have moved during covid out of the bay area/NYC. The founders we funded before covid have scattered too. The founders we fund now are dispersed. The quality and experience of the founder matters vs their location.
- Founders opened hiring nationally at the start of covid, finding the best talent regardless of their location. Now startups have critical mass of employees scattered around the country, and increasingly, the world.
- So now when those hired execs found their next startups, they will found them where they are, distributed around the country and the world.
The BigTech acquirers are similarly distributed now, so we are not seeing a difference in ability to get acquired with these new distributed startup teams. BayArea BigTechs are starting to scatter their HQ too: Tesla, Oracle, etc.
The tech needed for a productive distributed team had been building for decades pre-covid, and has gotten way better in the last three years. The payroll systems for paying workers distributed across the US and the world are all getting much better, so it is becoming as easy to have an employee in South Bend or Rwanda as in Palo Alto. Lines of code per engineer are holding steady in the new world, and sales quotas are seeing similar productivity/attainment. Yet costs are slightly lower per employee with distributed teams, and in this downturn, the salary differentials are likely to get much bigger. And with no fixed office space with long leases, founders are having a lot more flexibility in right-sizing their teams when the market flips like it did in 2022 from "max growth no matter how much you burn", to the current: "grow as fast as you can at breakeven." All costs for a founder now are variable vs fixed costs so they have max flexibility.
Towns that used to be in flyover states or in the "rise of the rest" as Steve Case calls them, have a great opportunity...if they seize it. There are a few things they can do:
Their economic development folks need to flip their mindsets from only granting millions to attract companies to put manufacturing jobs in their county, to also doing what it takes to attract tech workers, one at a time. The tech workers are making a single family decision, but as they progress to founders, are often influencing many jobs in a market, and influence whether other tech workers and founders pick that town too. And with each tech job driving 6 service jobs, getting some tech workers to flip to your town gets your job growth flywheel spinning. Then when the cohort of founders and tech workers in your town hits critical mass, it gets way easier for other tech workers to choose your town too. Once you have a critical mass of startups in your town, your startups grow faster, and you get more new founders founding there. So the network effects kick in. We are seeing this in Bozeman, Indianapolis, Boulder, Columbus, etc. And more towns are about to flip like South Bend. The nudge to get a tech worker to pick a South Bend don't have to be significant:
- perhaps fund a tech workers' student loans for 3 years. If they stay after graduation for 3 years, they likely are going to stay a long time.
- perhaps incent founders to open remote offices in your town by funding $10k of the salary per tech worker there for three years.
You just need to seed the flywheel with some light nudging, then the network effects will take over.
Then have someone who helps your tech workers and founders to find each other. Will Price in Bozeman has a slack channel for those who work in bozeman tech, and hosts meetups at his offices on a regular basis.
Then have one recruiter in the career services office in your college in your town to focus on helping students stay in town for internships and new full time roles. They may mostly be working for startups in other towns, but if the cohort locally is big enough, the network effects kick in. The more that stay will cause ever more to stay, and a number of those will become founders. Economic development folks can help here too with $5k-10k of funding for summer internships. If a cohort of students stay for the summer, they are much more likely to stay after graduation. If startups can get free interns, they will hire them, and many will earn full time jobs after school.
There are huge implications for the vulnerable as tech workers scatter into more towns across the country. In the bay area pre covid there were 1M more jobs than housing units, so housing costs were very high. If 160k tech workers relocate elsewhere, then the 6 service jobs per tech job relocate too, so you have jobs and housing match, and housing gets affordable.