Does where you start your company matter? Statistically, it may. Jim Karsten pulled data from CrunchBase to look at where startups are based and the likelihood of an acquisition. The results show that 41.2% of startups that we track are based in Silicon Valley, but that those startups account for 53.3% of the reported acquisitions. A startup based in Silicon Valley has a 6.9% chance of being acquired. New York startups come in second with a 4.9% acquisition rate.
It’s not clear exactly what data was pulled (years, transaction size, etc.), although there are more details here. We’re running our own analysis of the data over the last few years (back to startups founded in 2004 and later, to take into account transaction sizes and to include international data) and should have a deeper dive available soon. But until then, the data is clear – all else being equal, start your company in Silicon Valley. Although we strongly suggest that before you relocate your family and employees you wait for our more detailed analysis.
More from John Cook, who’s hopelessly in love with Seattle. Also worth reading is Redfin CEO Glenn Kelman’s rant last year about Silicon Valley working too hard (my response, his last word).
The bottom line is this. If you have the means, start your company in Silicon Valley. It’s the big leagues. Like I said last year to those crazy Seattleites that keep saying they’re basically a suburb of Silicon Valley: “If staring at lakes and skiing after work are important to you, don’t pretend to be surprised when your startup doesn’t cut it.”
i like twertles!
Mike = Pwned
Looks like in fact it IS better to have a company in Washington if you want to be acquired.
I think you should read the post and comments that Michael linked before you make broad generalisations like that.
When I first saw this a couple days ago, one of the comments was quite insightful. I’ve reposted it here for you.
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Interesting — but it looks like you’ve made one of the statistical mistakes written about here: http://bit.ly/19CJAd
The short version is, California’s percentage is more probable because there are more data; Washington’s is less likely because there are fewer data.
Using the formula provided in the post, the percentages at a 97.5% confidence interval appear as:
{”CA”=>[2739, 188, "5.98%"],
“NY”=>[692, 34, "3.54%"],
“MA”=>[386, 20, "3.38%"],
“TX”=>[323, 19, "3.80%"],
“WA”=>[317, 26, "5.66%"],
“FL”=>[254, 3, "0.40%"],
“NJ”=>[227, 8, "1.80%"],
“IL”=>[180, 9, "2.65%"],
“VA”=>[164, 7, "2.08%"],
“CO”=>[133, 7, "2.57%"],
“PA”=>[131, 2, "0.42%"],
“GA”=>[117, 2, "0.47%"],
“MD”=>[94, 4, "1.67%"],
“NC”=>[80, 1, "0.22%"],
“AZ”=>[77, 1, "0.23%"]}
(See methodology at http://gist.github.com/128830)
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with the same guys follow up being…
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Yep. Lowering the confidence interval causes each item to gravitate towards the raw percentage – which will definitely (I think) be a higher value than the lower bound.
I’d bet consumers don’t spend that much time scrutinizing the percentages of ratings – they look, read reviews, and make a decision. To me, this seems less jarring than putting the “1 out of 1″ item (or state) above the “99 out of 100″ one.
But I guess the good news is that (sampling questions notwithstanding) even using a statistical *lower bound*, Washington stacks up very well against California.
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So, the likelihood that Washington is better than California is in contention to say the least.
Would be cool to have stats from BC and ON on here. I’m sure there’s stats out there.
Verrry cool though.
BC and ON are not part of the US States. If you’re going to includes those, might as well toss in places like Israel too.
51st state. we discussed this before.
There are many other candidates:
http://en.wikip...internationally
Re Relocating – The US don’t make it very easy to relocate family and employees. I don’t think there is a startup immigration path.
Correlation does not equal causation. The data are not at all clear that “all else equal, start your company in Silicon Valley.” For all we know the companies in California are disproportionately deserving of investment.
right.
Which would mean investors should try to look outside Silicon Valley for more value.
Mike, there’s a big problem with your interpretation fo the stats here. You have sorted your data by number of acquisitions; sure there are more (covered) start-ups in California and NY, and so a higher number of them will sell, and they certainly make up for a larger share of the totals. However, if you are talking about odds, you’d need to sort your data by Acquisition Rate, at which point your story doesn’t hold anymore: if this is strictly about odds of being acquired, then you have a much better chance in Washington (8.2%) than you do in CA (6.9%).
Tyler: yup, Canadian provinces would be cool to have as well.
“You have sorted your data”
No, that other dude sorted the data. We’re re-running it ourselves.
Your “A startup based in Silicon Valley has a 6.9% chance of being acquired. New York startups come in second with a 4.9% acquisition rate.” is plainly false though.
If you want to be taken seriously, you should change that to “A startup based in WA has a 8.2% of being acquired. Sillicon Valley comes in second with a 6.9% acquisition rate”.
It’s right there in the data!!!!! Of course then you’d have to change the title of this article, and it’d be exposed as being false…
I saw that right away as well in reading the beginning of the article. The chart is interesting and useful to look at but the article doesn’t really follow it.
Uh…Mike?
“A startup based in Silicon Valley has a 6.9% chance of being acquired. New York startups come in second with a 4.9% acquisition rate.”
How about taking another look at the data? WA is FIRST, at 8.2% acquisition rate. THEN CA at 6.9, and then NJ at 6.6%.
Where did you get the idea that Silicon Valley was in first place, and that New York was in second, when the chart clearly shows completely different data?
A few months ago I wrote a post on the same subject on my open source ERP blog. My answer, which is valid for ERP companies, was NO, they should not move to the valley. For Web2.0 companies, I’d say – YES, if you can, head down to the valley.
Should open source ERP vendors head to the valley?
http://opensour...-to-the-valley/
Are these only IT start-ups? There are other kinds out there, ya’ know, like bio-tech, automotive, etc.
The data could also get interpreted that startups in the valley have a lower revenue success rate and fewer working business models and the only strategy remaining is an acquisition before landing in the deadpool.
Since when is the primary goal of startup to get acquired? I thought companies are about finding a business model. Oh wait, that might just be my “out of valley” thinking model…
Well, the IPO window has largely been closed since ‘01 for tech startups. but you’re right, this doesn’t take into account those startups that just soldier on profitably and don’t take an exit.
- “those startups that just soldier on profitably and don’t take an exit.”
I think you may have stumbled upon the new TC spinoff “BusinessCrunch”. It could feature startups that become sustainable businesses by focusing on profits and…no, I don’t think anyone wants to hear about that.
“Since when is the primary goal of startup to get acquired?”
It is the primary goal of just about any startup that takes investment (angel or VC) to get acquired, because that’s the only way the investors can get their money back (or, ideally, make a profit).
Mean length of time before investors see an exit is 8ish years– these are generally businesses that have long since found their business model. These 1-2 year no-biz-model flips that you read about are actually the exception, not the rule.
Well,
Silicon Valley seems to be the 1st choice for startups….hmmm…nice weather, close to the sea….makes me wonder….
Thus according to you the goal of a start-up is to get acquired.
That might be true in Silicon Valley.
However Entrepreneurs (= french word) in the rest of the want to create and run a profitable company for many reasons.
Maybe you should look into the geography where the most successful companies have started up.
Not to forget: operational costs (including employees) are very high in California and productivity is not the best in the world (too many distractions from work).
“Maybe you should look into the geography where the most successful companies have started up.”
Silicon Valley.
Would be interesting to correlate stats and location for companies doing the acquiring part as well.
Chart doesn’t break out Bay vs Socal. CA isn’t just Silicon Valley you know. The chart claims the 42.1% for all of CA not just SV. There’s, er, several other cities here.
Makes sense. But I think its unfair to suggest its the quality of the startups themselves – it probably has more to do with just pure density, economy of the area, proximity to the buyer’s headquarters, networking opportunities of the founders etc.
good point. we’ll take that into account in our deeper dive.
one thing that burns me about this post is the regionalistic tone about moving to silicon valley to be successful.
there are a lot of brilliant people out there trying to carve out something viable in economically depressed places like Detroit that are already at a disadvantage
one of the awesome things about the web economy is that region really doesn’t have to be a factor in success, that you can make something out of very little resources in disadvantaged areas and give folks hope no matter where they are
waving the silicon valley flag around really doesn’t help. i mean you’re encouraging smart folks to move to a state that has the 6th largest economy in the world and is bankrupt, how’s that for an example?
This proves the point. Enthusiastic, ambitious people from depressed places like Detroit usually leave those places the first chance they get – just to escape their soul-crushing lifelessness. Most who stay behind lack the drive you need in startup employees.
If you’re rich enough to live in Silicon Valley then you don’t need start a start-up to make you rich.
I’m not rich. Hence I don’t live there.
Who says you are doing a startup to become rich?
@Aaron,
If your primary motivation for creating a start-up is to get acquired you’re (probably) not creating i just for the passion of doing it. This TechCrunch post is about acquisition percentages by geography.
The full data from Tony’s second post on the subject (you link to the first above) is here –
http://igeejo.c...hbase_stats.txt
via http://www.tony...-data-included/
Two others notes:
1) Already mentioned but one assumption being made is that acquisition is the success metric. Since the IPO market has been relatively closed for tech startups, this is likely a fair assumption but an assumption nonetheless.
2) As you do your analysis, it may be interesting to compare or break out the IPO’s of the dotcom era versus the acquisitions of Web 2.0 (but this may require two separate examinations). Again, this assumes IPO’s during the dotcom and acquisitions during Web 2.0 are the success metrics.
Just because something was historically correct doesn’t mean it will be correct in the next 5 years. Looking outside of the Valley there are some cool companies creating valuable stuff outside of the Valley. Lastfm, Moo and Spotify were/are in Europe, Zappos is in Nevada.
The number of start ups is probably disproportionate as well, if you have 100x the number of total start ups you’ll get more acquisitions there. If all of a sudden more start ups as a proportion were being started in boulder or in NY you would assume that in a couple of years the number of acquisitions from those locations would grow as well.
I don’t think the Crunnchbase data is complete enough to draw these kinds of conclusions.
CB coverage of startups outside the silicon valley is rather spotty. I worked for a startup in Boston that was acquired for $300m 2 years ago and it was never mentioned on CB.
Yea there are several acquisitions I know of that aren’t in CB.
Also when the purchase amount isn’t disclosed sometimes the acquisitions aren’t a ’success’ either…
Maybe outside the valley, entrepreneurs like to keep their own company because profitable…
The question is if these results are due to networking opportunities.
Putting this in other words, if Twitter would have not built in the Valley but in Israel for example, would it still be such successful and trendy?
Looks like u really need to understand statistics better… read Malcolm Gladwell or better still Nicholas Taleb
I was thinking the same thing. Black Swan and Fooled by Randomness should be required reading to anyone compiling statistics.
If recent press is true, acquisition rates in emerging market countries could beat any American city in the next cycle.
Willing to move to a third world country, learn a different language, navigate a shady political environment? No?
We’re all where we are for lifestyle reasons.
Here’s my take on this data (especially for Canadian startups): http://startupc...on-matters.html
As you mentioned, this definitely requires a much more in-depth analysis. Be worth to add the death rates as well as the other exit mechanisms and overall survivability (long term revenue generation)…
PS. Please get rid of MG, his bias is beyond ridiculous and verges on slander.
It is not surprising considering that Silicon Valley is a great brand itself and epitomizes life-changing innovation, technology vibracy and passion. So any startup that located in Silicon Valley simply enjoy the marketing of the mainstream and online media, as well as attention of the investors more than else where. It is also a rare place where startup that change the world but without a viable business model can get very high valuation and huge investment, defying irrationality. In addition, it is also the place where failure and risk-taking are encouraged. These are not something that happen in other part of the world. All these traits differentiate it from many place that try to replicate the valley’s success but fail eventually since culture play a critical role.
Hi Michael, Great report, I love stats like this, thanks for delivering. I’d like to payback the favor and contribute:
Location: Phuket, Thailand
Start Ups: 1 idiot
Acquisitions: 0
Acquisition Rate: 0
I’d be interested to see that data mixed with the number of VC’s in each state, I think proximity to VC’s is the biggest factor here.
My boyfriend and I work for two different start-ups in Madison, WI. There’s a lot of talk – especially for his company – about geography and the success of a start-up. There’s a definite reason to have this conversation, for individual businesses, but also for the overall economy:
Richard Florida recently reported that Paul Graham argues that “If startups end up being like the movie business, with just a handful of centers and one dominant one, that’s going to have novel consequences.”
So it might be good for everyone if the next big thing wasn’t started in Silicon Valley.
I’m surprised nobody asked to see Deadpooled companies broken down by US states.
Well, not that it matters, but I owned an internet start up that I sold and I’d have to say that if nothing else, Silicon Valley ties is an important part. If you’re a digital media or entertainment play, it is not going to be your only market, but my most powerful (so to speak) contacts in terms of value to my business are in the Valley, and that’s based on fact. They know the market overall better, the broader moves, etc. I work in transmedia now (internet/media/entertainment) but my tightest, most workable contacts from an entrepreneurial standpoint are all in the Valley.
It’s easier if you live there to make contacts, but not impossible.
Mike,
I like that you ask these these broad questions occasionally but all you’ve done is asked the question here. Where are the conclusions from your preliminary analysis?
Maybe save yourself some work? Here are some of the conclusions you’ll have once your number crunchers re-cut the data:
- It was clear even without the data that Silicon Valley would see a majority of the startup M&A activity because of reasons cited below and possibly others
- It begins with where VCs are located, and they began locating in Silicon Valley because CA is a dominant economy, there is a top talent pool coming out of Stanford, the weather is usually nice, etc
- All things being equal VCs would prefer to have their portfolio companies local which is why much of their investment is focused in Silicon Valley
- VCs build portfolios that have inherent M&A potential and talk to each other about M&A exits all the time therefore there is increased likelihood that more M&A will occur where there are more VCs
- Because VCs were there years ago funding companies that are now big, (Yahoo!, Google, Oracle, etc.) even more M&A exit opportunities exist (and doing local M&A is, again, easier)
- Success breeds success – entrepreneurs and investors tend to knock on the same doors that have had success in the past
- It doesn’t really matter whether Silicon Valley is #1 or #2 in M&A and we regret potentially alienating readers for sounding like we care so much here at TC
- If we were still in the days of the horse and carriage we would strongly suggest moving your family to Silicon Valley to increase your chances of success, but with the invention the airplane a VC and management talent can go pretty much anywhere
Mike, fantastic essay and thanks very much for the plug but — dude, please — don’t put me down in the column opposed to hard work. Hard work is the only reason Redfin has survived this far and it is, for someone with my compulsions, an end in itself.
Yes the Redfin essay quoted another CEO about the fishing and skiing, even as I registered it as “something I still barely understand.” But it also discussed Silicon Valley’s work ethic — its youth cult, its obsession with the new — as what I felt I had lost when I came here. On the bright side, I still believe that being in Seattle gives me the space to think a little differently, but maybe that’s just how it has affected me.
What I don’t get about your point of view now is why acquisition is judged as an unalloyed, inarguable good. What really set Silicon Valley apart when I was there was the size of people’s ambitions: instead of getting bought by Google, entrepreneurs wanted to start the next Google. Hopefully that’s still true.
Could you write a post about where to start a tech company that is most likely to make its own money and go public? I bet that would be in Silicon Valley too:
http://blog.red...50_at_home.html
Hey Mike– Would love you see you guys work in lifespan of company. I’d recently read that the average VC backed exit takes 8 years, but we certainly read a lot about these quick-flips in the last couple of years.
I think a lot of these exit-haters (”why is selling the goal? What about a business model, profit, yadda, yadda”) are thinking that the no-profit 1-2 year flips are the norm. I’d wager that they aren’t and that MOST companies that sell have a nice revenue/profit. growth curve.
Anyhoo, just an idea. I’m really psyched that you guys are taking the data farther than I could with my posts and Jim’s first pass on CrunchBase analysis. Cheers!
I believe the ‘correlation’ of acquisitions can likely be attributed to connections rather than location.
Lots of companies are CA start-ups due to funding sources. Those funding sources come with connections, and it is those connections which often guide an acquisition.
Therefore, a start-up can be based anywhere, but if they have the right connections (and of course a great product/business) they have a higher likelihood of being acquired.
Of course, on the surface, these statistics can be read as ’start-up in the valley if you want to be acquired’ when in reality working and making the right connections will get you much further.
Arrington: “If staring at lakes and skiing after work are important to you, don’t pretend to be surprised when your startup doesn’t cut it.”
What a ridiculous attitude. I could be equally as ludicrous and say, “If you must bask out in the sun all day and don’t care about staying inside to get work done, move to California.” After all, if all Seattleites are lazy ski bunnies, all Californians must be dumb surfer dudes, right?
michael, i would love to hear your perspective on botech (boston tech sector). our brand image has taken a beating and this data is not good news.
I moved to Silicon Valley to build my startup and was fortunate enough to sell it here. Having been part of Y-Combinator I have a number of other friends who have also sold their companies.
There are a huge number of factors involved in the sale of a business. M&A is notorious for something that is not driven by perfect information but many other factors too.
The first criteria for selling your business is someone actually knowing about it, meeting you in person and liking the company and the team. All of these are easier to do in the valley. Events, parties and networking mean that over time you start to know (and be known by) many more people than you would if you were remote.
The number two factor is literally completing the sale process. Like any sale process there are a number of things that can knock it off course or interfere with it. Physical proximity, in-person meetings and being in the same time zone are factors that are extremely important to keeping a deal on track.
A factor which I did not anticipate but which turned out to be very important is also that the legal resources in the valley are trained and tuned to deal with the nuances of tech acquisitions. We started talks with a company whose lawyers were from a non-tech state and things were excruciatingly painful and expensive.
Valley lawyers know how to do these acquisitions, what to worry about and what not to. In addition they often have working relationships with the other side’s lawyers so everything simply goes smoother.
“Deals fall through” is the number one mantra in YC re: acquisition. Since it’s easier to execute when you’re nearby and have lawyers who know what they’re doing it does not seem surprising that Silicon Valley has higher success rates.
The implicit assumption in this is that most of the acquirers are also located in Silicon Valley.
It would be interesting to see a second chart showing their geographical distribution.
It’s interesting how everyone appears to interpret the data in their own way. I reacted more inline with Tony Wright. We all know Silicon Valley is a hot bed for startups. What we may not know, what I didn’t know before compiling the stats, is just how many startups are from other regions, especially the Seattle area, and that startups are sprouting up everywhere.
A co-founder and I recently sold our company. As we begin another startup, we’re looking for 2 or 3 people to round out the group, people who have worked together and founded modestly successful startups in the past. Being from the Kitchener-Waterloo area in Ontario, kinda in the middle of nowhere, we considered whether a move to Silicon Valley was necessary. Now we are open to other opportunities.
Btw, Tony Wright should get kudos for initiating the data compilation. Check out his blog at tonywright.com. And thanks to Crunchbase for making the data available.
There have been some great points made – proximity to research institutions, acquirers, legal expertise, tech-social opptys, desirable climate, etc. which all help explain the phenomenon. The crucial element in an acquisition is sustainable competitive advantage and the most clear indicator of that is IP. The McKinsey innovation graph does a pretty good job of should the global distribution, diversity and momentum of IP generation. Please have a look:
http://whatmatt...novation-nation
Some other supporting evidence can be found in this recent NYT article:
http://www.nyti...tion&st=cse
While each and every comment here revolved mainly around one topic: “statistical data and its accuracy”. I think there is one crucial point everyone forgot to mention: how important is being acquired really is?
After reading this article and a few related ones, I began to think of startups in a new different light: the light of independence! Why do we assume it is always great to be acquired while there is a potential for growth and maturity without the acquisition? Google is a great example here.
I wrote a post which I think you’d all find intriguing since it encourages the opposite of acquisition for many stated and proved reasons and given examples.
I’d be very interested to hear your opinions concerning my arguments.
Regards..
Would be interesting to add Israel to this statistics.