Earlier this year, a bus full of top venture capitalists pulled into Flint, Michigan.
Flint doesn’t come to mind when you think about “tech.” But with cheap real estate and reviving downtowns, Flint and other Rust Belt cities attracted the VCs.
They looked for the next home of innovation beyond California.
In fact, tech royalty is no longer just looking. The likes of Google, Tesla and Amazon have already moved part of their business elsewhere.
All of this shows that Silicon Valley may be losing its status as the world’s technology hub.
I spoke with my contact Eric on the ground in Silicon Valley. This article is a summary of our conversation about tech firms leaving the area.
Let’s begin with reasons behind this migration.
Taxes and Real Estate
California has an 8.84% corporate tax rate, which is one of the highest in the U.S. Most other high tax states are in the Northeast and Upper Midwest.
For comparison, Colorado’s tax rate is 4.6% and North Carolina is at 3%. Texas has no corporate income tax at all. This alone makes western and southern states good places for expansion or relocation.
So far, most tech giants have put up with California’s taxes and regulations to tap into Silicon Valley’s pool of talent.
However, California’s costly real estate hits employees hard. Many can’t afford to buy a house. Instead, they are forced to pay outrageous rent.
In August of 2018, median rent for a two-bedroom apartment in the San Francisco area was $3,089. That’s almost double the national average!
Migration Has Started
Tech companies are already seeking out places with better business environments for expansion.
In 2016, Tesla finished Gigafactory 1, a new factory near Reno. Nevada gave Tesla tax breaks to lure them across the border.
Last year, Google opened a new campus in Ann Arbor, Michigan. This puts Google closer to car manufacturers as they develop software for self-driving cars.
Amazon’s search for its second headquarters has gained more media attention. They plan to add 50,000 employees at their new location. That’s more than the 40,000 they have in Seattle now.
Most of the finalists are in the Sun Belt or the Midwest where taxes are low and real estate is cheap.
Still, no big company has moved its headquarters from the West Coast, at least not yet. That is why the media and investors have largely missed this story.
Where Will the Money Go?
In search of new locations, tech companies will look for two things: talent and local support.
Skilled workers are one of the biggest competitive advantages in the tech industry. As such, companies will migrate to cities near top research institutions.
The University of Michigan provides Google with a young and dynamic workforce in Ann Arbor. Other university cities with vast pools of talent and startup cultures include Raleigh-Durham, Austin, and Nashville.
Migrating companies will also look for incentives from local governments.
As a way to lure in tech companies, many state and local governments are promoting a startup-friendly culture.
Pittsburgh started PGH Lab, an accelerator that pairs startups with local government.
The state of Nevada has launched its own venture capital fund, Battle Born Ventures, to promote local startups.
As more cities compete for innovation, Silicon Valley will have a hard time retaining its edge.
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