6 GOOD REASONS FOR NOT STARTING YOUR BUSINESS IN CALIFORNIA
California and Silicon Valley in particular have been the mecca for startups and subsidiaries of foreign high-tech companies for decades. The reasons for this attractiveness are well-known: a unique combination of brain power, financing and quality of life irresistibly attracting the best talents in the US and beyond.
However, for all the media-fueled hype associated with everything Silicon Valley-related, California has progressively lost its edge as an entrepreneurial destination, with an acceleration of its decline in competitiveness since the 2008 financial crisis. There are now at least 6 very good reasons why an up-and-coming domestic or foreign venture should not choose California for doing business in the US.
1. The most hostile fiscal and regulatory environment in the US
Entrepreneurs desperate to escape the red tape nightmare and fiscal burden of their home countries (think west-Europeans) may be in for a major desillusion when moving to California, as the level of taxation for both individuals (except the super-rich) and companies is inching ever closer to European levels. In particular, property taxes have reached astronomical levels in major metropolitan areas such as the Bay area and the California State tax (the equivalent of our VAT) is the highest in the US. This unexpectedly high level of taxation is rendered inevitable by shockingly inefficient local bureaucracies hogging taxpayers’ dollars with San Francisco and San Jose considered among the most profligate, worst-run cities in the United States. Add to this tax overload ultra-restrictive laws governing environmental issues, building permits or consumer rights and you will be hard-pressed to consider California a business-friendly state anymore.
2. The highest cost of living in the nation
Ever since the post-financial-crisis recovery California has experienced an unprecedented wages and real-estate bubble that is making life miserable for all but the wealthiest companies and individuals. The scenario went something like this: cheap, overabundant money from myriads of financial institutions has been flooding the Bay Area since the late 2000’s causing an explosive increase in tech wages, resulting in an explosion of real estate prices further stoked by real estate investments from Asia. As a result, San francisco supplanted New York has the most expensive city in the United States in 2015. This situation is likely to endure, even if à recession hits, as most municipalities have been actively preventing new residential developments in an effort to ingratiate themselves to constituents who are notorious for being unwelcoming to newcomers.
3. The most challenging labor market for technical talents in the US
Not only are wages for technical talents outrageously overinflated compared to virtually anywhere else in the world, but these talents are few and far between in California: in 2017 over 150,000 STEM jobs went unfulfilled in Silicon Valley alone. Restrictions on H1B visas and green cards decided by the Trump administration are unlikely to alleviate the situation.
4. A catastrophe-prone environment
California’s two largest urban areas, San Francisco and Los Angeles are prone to a whole range of natural disasters including 8+ magnitude earthquakes (they both sit on major fault lines) and wildfires, as illustrated by the record-breaking “Camp Fire” of November 2018. Whereas the Camp Fire took place hundreds of miles from San Francisco, areas like the Oakland hills, less than 10 miles from downtown San Francisco have gone up in flames on a regular basis in the past decades with global warming making the risk of a catastrophic fire in a major California metropolitan area ever more tangible.
These natural calamities along with the longer-term threat of rising sea levels and persistent droughts have already had a significant impact on the cost of doing business in the Bay Area and Los Angeles with insurance premiums for residential and business real estate becoming so prohibitive that many home and business owners have given up on natural disaster coverage altogether.
5. A nightmarish traffic situation
Whereas the Los Angeles gridlock is already world famous, the traffic congestion in the Bay Area has become so bad over the last 10 years that it is seriously affecting the business efficiency and quality of life of many residents, whose daily commute time now exceeds two hours for those living in San Francisco and working in Silicon Valley. This alarming traffic situation is unlikely to improve anytime soon as local authorities, abetted by ultra-restrictive urban planning laws, have been reluctant to authorize any new road construction projects (it now takes an average of 30 years to build a major new road in the Golden State)
6. A cultural conformity less conducive to new ideas
This may be the most surprising element on this list. Contrasting with the easy-going, “live and let live” culture of 1960’s San Francisco, the Bay Area has become one of the least tolerant places in the United States when it comes to political and social ideas, rivaling notoriously narrow-minded bastions of the deep South. In lieu of religious rigorism, Northern California is increasingly characterized by an almost fanatical adherence to “progressive” ideas ostracizing those with a more conservative mindset, causing PayPal co-founder and tech luminary Peter Thiel to leave Silicon Valley and James Damore, a conservative-leaning software engineer, to be fired from Google in 2017 for daring to question, albeit in a very scientific way, some of the liberal tenets of his employer.
The unprecedented dominance of the California-based GAFA over the world economy should not distract from the fact that the Golden State has progressively lost its luster as a premier business destination in the US.
For all but the wealthiest companies and best-funded startups in the world, who can still buy their way out of the more glaring shortcomings of the California economy, states with a lower cost of living, less stringent regulation and more favorable labor market such as Texas, Arizona or Colorado to name a few, are the better option.