Why San Francisco is tech's utopia

@CNNMoneyTech October 17, 2011: 6:29 AM ET

NEW YORK (CNNMoney) -- If Facebook founder Mark Zuckerberg didn't live near San Francisco, would he have ever worked with Sean Parker?

That's the question Paul Graham, founder of influential tech incubator Y Combinator, posed recently to a room full of New York tech entrepreneurs.

"Facebook in 2004 needed Sean Parker," Graham said, referring to the Napster co-founder who became Facebook's first president following an encounter with Facebook founder Mark Zuckerberg on the streets of Palo Alto. "To make a startup hub, you need lots of people interested in startups. If you don't have density, the chance meetings just don't happen."

With its tech-friendly culture, pool of engineering talent and extensive network of angel investors and venture capitalists, San Francisco and its suburbs have long been a mecca for tech entrepreneurs. But Graham was pushing a broader point: In his mind, startups that launch anywhere else give themselves a serious handicap.

Do tech companies need Silicon Valley to succeed?

Sure, there are some high-profile counter-examples: Amazon (AMZN, Fortune 500) has done just fine in Seattle, Microsoft (MSFT, Fortune 500) remains rooted in nearby Redmond, and IBM (IBM, Fortune 500) is thriving from its Armonk, N.Y., home base. But the exceptions are notable because they're exceptions.

Follow the money trail, and it leads straight to Silicon Valley. A full 51% of the $7.6 billion venture capitalists invested last quarter went to California-based companies, according to research firm CB Insights. Massachusetts was a far-distant second, capturing 16% of the total.

Take a look at private-stock exchange SecondMarket's list of the most-watched private companies, an unscientific barometer of which startups have the most buzz. Half of the top-10 companies are based in California -- six out of 10 if you count Skype, a Luxembourg-based venture that has its U.S. headquarters in Palo Alto.

"The ecosystem here, in the Bay Area, is the most highly developed," investor Mitch Kapor said in a recent presentation to a group of fledgling entrepreneurs. "There's kind of a critical mass of each of the different kinds of people: people wanting to do startups, people wanting to help people do startups, and so on."

San Francisco isn't the only option, in his eyes, but it's the main arena: "There are other self-sustaining ecosystems, like in New York, for startups. They're just a lot smaller."

For ventures that launch elsewhere, Silicon Valley's lure can draw them in like moths to light. Julia Hu recently made the Boston-to-California switch for her startup, Lark, a "silent" alarm clock system that links to the iPad.

Hu already had one foot in Silicon Valley, thanks to a major deal Lark struck last year with Apple (AAPL, Fortune 500), which is now Lark's exclusive retailer. When her fiance landed a job at Yahoo (YHOO, Fortune 500), Hu decided it was time to head west.

"I moved for somewhat personal reasons, but also knew that capital was much more available for early-stage startups," Hu said.

Another recent transplant is Angela Benton, who moved herself and her location-based mobile recommendations startup, Cued, from Charlotte, N.C., to the Bay Area.

Benton is the co-founder of NewMe, a tech accelerator for minority-led companies that recently wrapped up a three-month immersion program in San Francisco. CNN's Soledad O'Brien chronicled the NewMe experience for "The New Promised Land -- Silicon Valley," a Black in America special that will premier November 13.

"For me it just made sense to be based out here," Benton said. After completing the program, Benton moved to the Bay Area to work on her startup and continue building connections. "There's a lot of momentum from the relationships we developed over the summer."

Watch the trailer for The New Promised Land: Silicon Valley

That's one of the biggest challenges NewMe's participants and other tech entrepreneurs face in launching outside the major tech hubs. Most of NewMe's founders hail from elsewhere: Detroit; Washington, D.C.; parts of North Carolina and Massachusetts. Geography shouldn't be the make-or-break factor in a company's success -- but it can be. The money, connections and mindset the Valley fosters sometimes provide the edge that separates successful ventures from failed ones.

"If you go out to a bar here, just listen to people talking, they're talking about their startup," TechCrunch founder Michael Arrington, now a venture capitalist, said of the local scene. "If you're an actor, you go to Hollywood or New York. If you're a startup, being here gives you the best advantage, I think, in terms of having support around you."

That's one reason Graham says he won't be expanding his Y Combinator program to New York -- or anywhere else outside San Francisco -- any time soon.

"The thing the Valley has going for it: startups there are the cool thing to do. In most areas of the country, if you start a startup, people treat you as through you're unemployed," he told the local crowd. "In New York there's already something else that's cool to do and competes with you guys for programmers. You know what I'm talking about: finance. As long as NYC remains the finance hub, you'll always have that dragging you down."

CNN's Soledad O'Brien is covering the NewMe Accelerator journey in "The New Promised Land -- Silicon Valley," a Black in America special, which premieres Sunday, November 13 at 8 p.m. ET. Watch the trailer on CNN.com, and check out CNNMoney's full coverage of NewMe.  To top of page

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