Tech Companies Flee California (Finally)

For the last 50 years, California has been the home to a huge portion of America’s tech companies. Specifically, an oversized chunk of tech companies are headquartered in the San Francisco Bay Area (SFBA). 

Here’s a list of just some of the major companies headquartered in the SFBA: Google, Facebook, Netflix, Cisco, Apple, HP, Adobe, Nvidia, Intel, Oracle, Tesla, Paypal, eBay, Twitter, Airbnb and AMD. There are hundreds more I could list, but that would get boring quickly.

So many tech companies coexisting in one area has created a unique tech ecosystem. The SFBA probably has more software developers and entrepreneurs per capita than anywhere else in the world. And that’s led to approximately 44% of all U.S. venture capital investment happening in this tiny geographical area today.

Think about that for a second. A whopping 44% of all venture capital money is invested within an area where only 9.7 million people live — roughly 2.5% of the US population! 

The SFBA boom has been going on for decades. But I believe it has finally peaked. Housing prices have reached stratospheric levels — forcing many workers and companies out. 

But it isn’t just expensive housing and the current pandemic that are prompting people to leave. California lawmakers are also proposing massive tax increases — including a wealth tax of 0.4% per year for those worth more than $30 million. And it really doesn’t help that lawmakers are trying to make the wealth tax retroactive for the last 10 years.

The Exodus is Under Way

Back in May, I wrote a piece called “The New Work-From-Home Economy.” I highlighted the fact that big tech companies are increasingly spreading their workforces out across the country. By then, Facebook, Twitter, Shopify and others were already planning to diversify their geographical footprints. 

Since May, this trend has only accelerated. Just recently Palantir — a huge private data analytics company valued at approximately $20 billion — announced it was relocating its headquarters from Silicon Valley to Denver, Colorado. 

Elon Musk recently said he may move Tesla’s HQ to Nevada or Texas.

Even before the COVID-19 crisis, California was already losing hundreds of companies to more business-friendly states. Last year Charles Schwab moved their HQ from San Francisco to Dallas. Schwab was one of at least 660 companies to move their headquarters out of California in 2018 and 2019. 

Great for the Rest of Us

For California and the SFBA, this trend should be quite disturbing in the short-term. But for the rest of us, things are looking up. Companies are spreading out across the country, and the benefits — especially to business-friendly states like Texas — will be significant. 

Ultimately, this will be good for California too. They’ll be forced to make the state more attractive to businesses. Maybe even lower taxes and slim down their bloated budgets (California is looking at a $54 billion budget deficit this year). 

But I believe the groups that will benefit most of all are entrepreneurs and startup investors. As big technology companies spread out across the U.S., more innovative startups will also sprout up all over the country. Wealth, skills and experience will become more evenly distributed.

Venture capitalists will be forced to invest much more outside the SFBA. Angel investor communities will sprout up everywhere in response. And equity crowdfunding will play an increasingly important role in funding early-stage companies. 

I’m truly excited about the “tech exodus” from California. And while it’s unfortunate that it took a crisis like COVID-19 to accelerate it, I believe it’s going to help spread innovation and wealth creation throughout our country and the world.

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Source: Early Investing