Location has always been vital for startups, both in terms of providing ready access to human capital to help develop the startup’s proposition, but also to provide ready access to a local market to help develop momentum.

A recent working paper set out to explore what makes the United States a good place to build a startup over other equally entrepreneurial nations.  The paper explores the progress of startups in the US and Israel, and shows that startups that move to America tend to raise more money, get acquired more often, and introduce more new products than their peers that remain in Israel.

The authors decided to examine the topic after Israel has repeatedly come near the top of league tables documenting the entrepreneurial potential of nations.  They examined nearly 2,200 startups who were created between 1990 and 2014.  Around a third of them had applied for patents in the US, with several hundred registering for business with various state governments.

This data was fed into an algorithm that they believe could accurately predict whether a startup would be successful if they decided to up sticks and move to the US.

“We found that those that moved performed better in some dimensions than those that stayed in Israel,” the researchers say. “They raised more money and were acquired at higher valuations; however, they did not innovate more. This reflects the strength of the US entrepreneur ecosystem compared to Israel.”

Movement of talent

The movement of entrepreneurial talent was then further explored in a second paper, which explored the costs and benefits of moving a startup to Silicon Valley.

The authors argue that it’s largely a trade-off of networks versus resources.  While Silicon Valley has a lot of capital and other resources available, you often need a strong network in order to access it.  Staying in a smaller pond where you have a greater ability to tap into its resources can be more beneficial.

While this has a certain logic to it, it wasn’t what the data found.  Instead, they found that agglomeration was often more important than having a strong network to tap into.  They suggest that when we have a strong network, we tend to rely heavily on that network for hires, finance and so on.  While this can be useful for small-scale firms, for firms that aspire to rapid growth, it’s better to be able to tap into a diverse range of resources.

“A company should move to where the best resources are located, as long as the benefit covers the cost of moving,” the authors say. “If it is a venture capital-oriented IT, hardware or biotechnology company, this destination might be Silicon Valley.”

This has prompted many of the fastest growing companies of our age to congregate in the same places.  Rather than allowing ideas and innovation to thrive anywhere in the world, it has resulted in most startups basing themselves in the same places.

“It’s paradoxical, but it turns out that goods travel more easily than ideas,” the researchers conclude. “Big ideas travel only a 15-minute drive in Silicon Valley, so it requires almost a face-to-face level interaction for ideas to happen in the fastest way.”