Is Silicon Valley becoming too expensive?

It goes without saying that the Bay Area is an expensive place for new businesses looking to set up shop. The immense success of Uber, Palantir and Airbnb, as well as rapid expansion of heavyweights like Google, Facebook and Apple creates an undeniable excitement about making it big in the “promised land” of Silicon Valley. But is there really no other place for venture capital and technology buyout as good as this?

In today’s macro-economic environment, where valuations are sky high and IPO climate hitting rock bottom, both venture capitalist and entrepreneurs are becoming more aware of the challenges associated in running their business in Silicon Valley.

"Cutting costs is becoming a norm."

For start-ups, cutting costs is becoming a norm. Fundraising is getting increasingly challenging, and some companies are forced to slash their valuations in order to raise another round of funding. VCs are being more selective about what they invest in, making fewer, bigger bets and are increasingly being forced to pull back on new investments, partly because of a slowdown in companies going public.

And even those few who manage to raise a significant amount of capital from some of Silicon Valley’s most prestigious venture capital firms, sometimes struggle to break even.

Competing with the so-called “decacorns” – unicorn start-ups valued at tens of billions of dollars, which some believe are overvalued – is becoming a rather daunting prospect.

Competition is also driving up prices for housing and commercial real estate alike in the hot Bay Area markets, making the cost of living in Silicon Valley the highest it has ever been.

The market is shifting, and it is catching many off-guard. Some even compare this moment with the time leading up to the dotcom crash. Could this be a wake-up call for both entrepreneurs and venture capitalists?

With Silicon Valley becoming too overpriced and harder to penetrate, many market players are starting to diversify geographically and do venture outside of Silicon Valley, where the costs and competition are not as severe, and the environments are friendlier, offering steady and sustained levels of growth.

"So, will it ever be possible to replicate the success of Silicon Valley outside of Silicon Valley?"

It is true that the Bay Area is still poised to remain the undisputed start-up hub, with the largest share of capital concentrated in Silicon Valley. However, we now see a lot of secondary and tertiary U.S. cities strengthening their tech infrastructure in order to create a favourable environment for innovative start-ups and venture capital firms to do business. Some even look outside of the U.S. at markets in Europe, Latin America and Asia. Differentiating geographically is becoming a prominent strategy for many venture capital firms.

It would be interesting to see how this market shift pans out, and whether new and emerging innovation hubs take off and develop enough to be able to complete with the success of Silicon Valley in the years to come.