High business costs in the San Francisco Bay Area provide an opportunity for Wales to attract high-tech investorsPosted on 09/01/2013, in International Business Highlights, News, with 0 Comments
By Jeff Nead in San Francisco
With a GDP of $535 billion, the San Francisco Bay Area – which incorporates Silicon Valley – ranks 19th in the world when compared to national economies.
In February, Welsh businesses will be heading there to pursue opportunities for international trade and investment. Organised by the Welsh Government, the trade mission will spend six days in the area focusing on sectors such as IT and software, life sciences, biotechnology, clean technology, professional services, digital media and entertainment.
Here, Jeff Nead, a partner at San Francisco headquartered consultancy Glodow Nead Communications, looks at how Wales could capitalise on the Bay Area’s success.
Silicon Valley, now one of the San Francisco Bay Area’s most globally visible economic and cultural institutions, has been for many years the undisputed American capital of tech entrepreneurism and industry.
Household names like Apple, Google, Hewlett-Packard and Facebook got their start and maintain headquarters there today.
Entrepreneurs, engineers and businessmen seeking to make it in tech are drawn to the Bay Area’s support systems, energy and opportunities for networking, employment and innovation.
The Valley’s metropolitan counterpart, San Francisco’s South of Market (SOMA) neighborhood, has a strong draw in the tech scene for young talent attracted to the city lifestyle and SOMA’s many successful software, social media and venture companies.
While it is a tech mecca, living and working in the Bay Area is also a famously expensive commitment for businesses, individuals and families. High property and income taxes coupled with higher real estate and gas prices make for significant overhead for employers and steep cost of living for employees.
This year, California’s voters approved Proposition 30, a tax hike intended to prevent deep cuts to public education. The measure increased the state’s sales and income taxes; a 0.25% point increase in sales tax for four years and increased income taxes for top earners making upwards of $250,000 a year.
Proposition 30 was opposed by numerous business interest groups and political and fiscal conservatives as an ineffective tax on wealthy Americans which would discourage job creation in a recession economy and unnecessarily burden the economic class best positioned to create employment opportunities. Some opponents feared the tax increases would frustrate investors and company executives and drive business out of California.
Though no evidence of any exodus of employers has been found, with most study results suggesting that fear is unfounded, Silicon Valley continues to be a difficult place for employers and employees alike to afford.
When real estate prices and cost of living are so high, so must be wages and overhead costs; in an already strained economy, some companies are struggling to keep up.
With these costs and the high marginal income tax showing no signs of abating anytime soon, some Californians wonder if established tech companies may be open to expanding elsewhere or even uprooting for a better tax break and lower overhead – a practical exportation of operations in the model of film studios seeking out shooting locations with favorable tax credits.
Opportunities for tech entrepreneurs looking to grow their ideas and businesses in more tax-and-rent-friendly environments have become available and increasingly popular with the rise of seed accelerator or “incubator” programs. These programs are designed to fund and support big ideas with the investment money, mentorship and legal, marketing, and workforce apparatuses needed to grow a successful business quickly.
Though the first, most famous and arguably most influential of these accelerator programs, Y Combinator, originated in the Bay Area, the model has expanded to numerous cities across the United States and globally since 2005, when Y Combinator launched.
Tech “second cities” like Chicago, Seattle, Boston, Boulder, Philadelphia, Austin and Cincinnati are now home to competitive accelerator programs to which thousands of entrepreneur hopefuls apply every year. Along with tools, connections and support, the programs provide office space at a cost considerably lower than an office at the Googleplex in Mountain View would run.
Experts from California and New York visit and lend advice, investment-seeking trips are organized to venture hubs in Silicon Valley, and participants strategize which markets to launch their ideas in.
The permanency of the business locale may be uncertain at these accelerator programs, which usually run about six months until “graduation,” but they are nonetheless leaving a tech imprint on the communities they operate in, as supportive businesses are springing up and local investors competing to encourage tech to stay in their city.
Accelerator programs in South America and Europe are also quickly becoming popular, with over 50 programs in Europe alone. One of the most notable of these to emerge is Seedcamp, launched in 2006. The achievements of programs like Seedcamp have encouraged successful examples of the accelerator model in Moscow, Madrid, Warsaw, London and Birmingham.
As accelerator programs become an increasingly important part of the tech startup scene, some cities are already emerging as alternatives and possible competitors to Silicon Valley’s tech dominance. New York’s ‘Silicon Alley’, dubbed with its own derivative nickname, continues to grow, with titans like Google establishing offices which are not just regional outposts but full-service hives of tech innovation.
Perhaps more exciting than in a massive, global city like New York, though, is the growth of tech scenes in smaller, more unexpected places like in San Antonio and Dallas in Texas (Tech Stars, Tech Wildcatters) and in Birmingham, England (Oxygen,) where new ventures are buzzing with professionals not just passing through on their way to the big time, but committed to growing the city’s own scene and reputation.
Could the high taxes and costs of Silicon Valley and the influx of money and talent from seed accelerator programs provide a push-pull way for Wales to develop into a fully-fledged tech destination?
Wales has a Digital Development Fund to provide support for new creative products and services to accelerate the growth of creative industries businesses in Wales. The fund provides grants from £5,000 to £50,000 and up to 50% of each project.
Wales also has the Newport-based Alacrity Foundation, launched by Sir Terry Matthews in 2012, which provides an intensive training environment with mentors and industry partners to prepare graduates for entrepreneurship in the technology sector. The 12-month Alacrity programme you develops product management, commercialisation and entrepreneurial skills.
Seedcamp is a London-based seed investment fund and mentoring programme, which invests annually in about 20 companies. The standard investment is €50,000 in return for an 8-10% stake. It offers startups office space at Google Campus in London, access to a network of over 2,000 mentors and a four-week mentoring tour of the US startup.
Birmingham-based Oxygen Accelerator is a 13-week intensive mentor led programme followed by 13 weeks of incubation aimed to help businesses pitch on investor days. It offers evergreen funding of up to £20,000, a loan repayable once sufficient investment has been received or the business reaches a stage of profitability where it can afford to repay it.
Join the debate in our ICT discussion forum: how can Wales grow its technology sector?
To find out more about the trade mission to San Francisco (Feb 10-15, 2013), contact email@example.com or phone +44 (0)3000 6 03000
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