Silicon Valley: What You Need to Know When Building a Presence in the Capital of Tech

Silicon Valley is, in many ways, the unofficial capital of technology. Many technology companies can benefit from building a presence in the Valley area – if done the right way.

To be in Silicon Valley or not to be in Silicon Valley – that is the question technology company founders often contemplate. Even during a year that Shakespeare himself would have struggled to imagine, a move to the Valley can be an alluring prospect.

So, does moving your company to Silicon Valley make sense? And how does it compare to some of the areas profiled in BDO’s recent International Technology Hubs publications?

Answering those questions about the unofficial capital of tech has become more difficult because of Covid-19. It remains true that Silicon Valley can equal ease of access to capital and a customer base that prides itself on being first-movers. However, is a physical presence really needed as we are increasingly moving business and funding activities online?

That is the question we look to examine in this article. To assist us, we have leaned on the BDO RETHINK model, which has been developed to assist companies react to the effects of Covid-19, build up resilience throughout their operations and realise their full potential.

Death of the Valley?

Famed angel investor Balaji Srinivasan is no stranger to controversy. His message over the summer that “San Francisco as the de facto capital of tech is done” was, to put it mildly, incendiary.

Is he right? To stay with literary nods, we believe that the rumours of the Valley’s demise are greatly exaggerated; albeit that it may be feeling somewhat under the weather. CrunchBase’s 2019 year-in-review report showed that companies in the San Francisco Bay Area raised 44 per cent of US-based seed, venture and corporate venture funding, down five per cent from 49 per cent in 2018. However, technology companies in general, and those in Silicon Valley in particular, have showed strong funding resiliency during a 2020 defined by a global pandemic. During early stages of the pandemic’s effect on the US, deal numbers rose, and Q2 2020 saw a surge of activity in the Bay Area.

While these figures are from the first half of an eventful year, and many funding rounds were later-stage deals, it indicates resistance to Covid-19’s impacts. The trend also applies to investment activities of Silicon Valley-based big tech companies.

Part of the reason is the increased focus on digital transformation built on solutions like those supplied by Silicon Valley tech companies. Furthermore, many of the qualities that make Silicon Valley so attractive remain in place.

The Capital of Capital

As in other tech hubs across the world, Silicon Valley – and the companies found there – faces short-term challenges such as cash flow issues and a need to revise runways and market projections. 2020 and the coming years also present plenty of opportunities for growth and building out market shares. Much speaks for the Bay Area’s challenges being only temporary. For one, the area is still home to many of the world’s premier technology VCs, companies, and C-level executives.

Put differently; there is little incentive to be selling your office or house in Palo Alto and moving to Miami if none of the investors or company leaders are going to be following you there. Unless that happens, Silicon Valley will remain the capital of growth capital.

Silicon Valley also has a long and storied history of drawing in talent. Something that applies equally to technical fields and business operations. Furthermore, consultants in the area, which are critical to support companies’ various growth stages, understand how to support and help optimise fast-growth companies.

Much has been said and written about the Silicon Valley mindset – and what it can mean for businesses. One example is the skillset of Chief Financial Officers (CFO). Apart from financial operations, CFOs with SV company experience are often extremely good building a team from scratch and maintaining efficient operations during rapid growth. They are accustomed to and skilled at constantly thinking several steps ahead. Some of the same qualities apply to the rest of the area’s workforce, which is often young, highly talented and flexible – and hungry for success.

Playing Devil’s Advocate

This is not to say that Silicon Valley does not have its share of challenges to overcome. For one, Covid-19 has changed much in the area – some things perhaps permanently.

As elsewhere, work has moved from offices to homes. And, if your teams are working from home anyway, what does it matter if they are in Mountainview or Montana? Looking elsewhere for engineering talent or letting engineering talent relocate may help lower expenses and enhance retention. This is especially appealing during uncertain times where a focus on extending runways is often a must.  

Talent requirements are also changing. Managers are increasingly tasked with running online project management, which can require a different set of skills.

There is an increasing challenge to the location due to the business climate.  While Silicon Valley is home to many of the wealthy backers of liberal social causes, it also features one of the highest tax rates in the country and a notoriously restrictive regulatory environment. This has caused many key industry contributors to leave the area – and in some cases the state. For example, it was one of the reasons for Tesla to locate its battery facility just over the state line in Reno, Nevada.

Other technology hubs, found all over the world, offering different, competing opportunities. FinTech is particularly strong in London and New York, and biosciences in the greater Boston area. If your company is looking for lower developmental costs and setting up in Asia’s rising markets, Malaysia, India, or Vietnam could be good choices. For cybersecurity, Israel offers strong prospects.

With this global distribution of expertise in the technical fields comes greater confidence to source capital to invest in technology ventures outside of Silicon Valley. The Bay Area is no longer the only game in town as a financing source and destination for high-risk, high-reward start-ups.

First Overseas Adventure

While the above is true, it also remains a fact that the Valley holds unique advantages. Particularly for start-ups and scaleups, being based in Silicon Valley increases brand recognition. To customers and potential investors, it implies that your company is dynamic, innovative, and primed for growth.

For young start-ups looking to launch their first products, Silicon Valley is also a vast ecosystem of potential clients and customers who pride themselves of being early adopters.

No matter where a company establishes itself, companies need to plan for long-term growth, which invariably means securing funding. This is a strong argument for setting up your company in the Valley – or making it one of the first places to open a division.

The Tax and Finance Challenges

Tech companies can overlook financial matters such as tax and potential credits, but being aware of - and planning tax and cross-border strategies are critically important – in part due to changes in the global trade landscape.

Other areas also play an important role in strategic decision making regarding opening a presence in Silicon Valley. On one side, auditory matters may be more straightforward, as there are no legal requirements for audits of financial statements unless you are a public company (though investors, lenders, or other stakeholders may impose such requirements). On the other hand, taxation presents a huge maze of rules and regulations, as doing business in the US can sometimes be compared to doing business in 50 different countries. The various states, and even cities, have unique tax rules and regulations. The idea of “economic nexus” was conceptualised over a decade before a similar concept became the foundation of the current OECD digital tax proposal and has already been upheld by the Supreme Court in Wayfair. Some states tax net income, while others tax gross receipts, and still others do not impose tax at all. California even features a “worldwide unitary” tax system that could require tax to be paid on the activities of sister companies outside of the US.

In short, the US tax system can be complicated to navigate without expert assistance. Such assistance may also help you create greater insights internally through their tax function. Understanding your organisations total potential tax liability is essential – doubly so during turbulent times.