The common belief in recent times has been that if you are launching a tech company in the US, you need to base yourself in San Francisco. The idea being that only the Bay Area has the right ecosystem, talent stream, and scale of venture capital needed to succeed.
It wasn’t until I recently ported in Denver, after 5 years working on a startup in the Bay Area, that I realized the fault in this rationale. And if I were to start a company today, it would be in Denver, and this piece explains why.
Denver is booming…
Not many people outside of Denver know this. Some of the basic indicators that something is up for tech companies in the Rockies are:
- Rapid population growth: Denver is one of the top five fastest growing large cities in the US. According to Census data, the city’s population grew by more than 100,000 from 2010 to 2017 off a base of just 600,000 (a 17% jump). For comparison — in 2017 more Americans left San Francisco than arrived and according to a recent survey 46% of local residents say they plan to leave the Bay Area in the next few years, up from 34% in 2016.
- A number of companies moving here: Denver made the Amazon HQ2 top 20 list, whilst VF Corp, the owner of retail brands such as North Face and JanSport, recently announced it is completely packing up shop and moving to Denver in 2019 from Greensboro, North Carolina and the Bay Area. Accounting cloud software company Xero moved its US HQ from San Francisco in early 2017 and Slack is presently expanding its HQ2 in Denver and is expecting to recruit upwards of 300 local staff over the coming 18 months. These examples are not unique — many other technology players, both large and small, have been opening up or relocating to (particularly from the Bay Area) Denver offices in the past few years — Gusto, Marketo, Xactly, Sumo Logic, Switchfly, Guild Education, Thanx, Accelo, Strava, Maxar Technologies, Mindflash, Localwise, and Tapingo, amongst others. The Economist recently published an interesting read on “Why startups are leaving Silicon Valley”.
- Growing venture investment: In the first 3 quarters of 2018, venture capitalists infused $1.29 billion into Colorado startups, making it the 5th state in the country for number of deals (64 investment deals behind CA (622), NY (216), MA (142) and TX (83)). Boulder and Denver are the first and sixth fastest growing regions in the country for the number of first seed financings since 2009. 2018 will inevitably be the biggest year for investment for the Denver region in history. At the same time, the role of San Francisco in venture is diminishing. In 2013, 50% of VC investment was guided into Bay Area companies; today, this is closer to 30%. In 2014, the billionaire co-founder of AOL, Steve Case, launched a “Rise of the Rest” seed fund on the basis of there being too much capital in the Valley and existing an unique opportunity to fuel startups in the locations of the future. Case calls it the “third wave of the internet” and notes “Denver is on the rise because they are keeping homegrown talent and becoming a magnet from other places for people who want to live there, partly for lifestyle reasons but also for opportunity reasons”.
Why set up in Denver?…
What is driving this movement of people, companies and capital to Denver? There are essentially 5 reasons for this tech boom in Denver (and concurrent ‘soft pedaling’ of the Bay Area):
- Lower Cost of Living
Let’s face it, cost of living is a factor that significantly impacts lifestyle. According to Nerdwallet, the average cost of living is 38% lower in Denver than in San Francisco. This data is fairly consistent with other sources. In fact, of the major cities in the US, San Francisco is the 3rd most expensive, whilst Denver comes in 42nd.
The biggest driver of this is ultimately housing / rent. Median rent for a 2 bedroom apartment in San Francisco is $3,519, compared to $1,475 in Denver. But other costs such as groceries and healthcare are also considerably lower too.
This would suggest that, all things being equal, you could maintain the same lifestyle in Denver at 38% the cost as in San Francisco. But there are two other major costs not factored into this analysis:
- Kids — If you have children, additional cost savings start to stack up. According to Care.com, child day care costs average at $11,600 in Denver versus $15,500 in San Francisco, whilst private school tuition in Denver averages $12,200 per year versus $23,900 in San Francisco. So in general, and I know the choice of words here might seem crude, but you are looking at around a 25% discount on your cost of kids in Denver. This is one major reason why 21.5% of Denver residents are under 18 compared to only 13.4% in San Francisco — it is a family-friendly city.
- Personal Taxes — in 2018, Colorado residents were taxed at a flat rate of 4.63%. California has a progressive tax system which starts at 9.3% if you are earning over $50,000 and scales up to the max tax bracket of 13.3% for top earners. To put it in context — if you have a salary of $100,000, your state tax bill in Denver will be $4,630 compared to $6,340 in San Francisco. I.e. you just saved 2% more in costs. This might not seem like a lot, but if you achieve a big exit, then the differential is huge. For example, let’s say you sell your company later on and exit with $10 million capital, you will be paying approximately $842,587 more back in State taxes in California than in Colorado!
So factoring for taxes and kids too, that 38% reduction in cost of living becomes pretty substantial. Now you might say “but surely my salary would be lower in Denver too, which would negate these gains from the lower cost of living right?” Correct but, the average annual income in Denver is $62,760 versus $77,734 in San Francisco. That is a 19% less. So with a 19% reduction in salary but a 38%+ reduction in costs, you can enjoy some nice arbitrage.
2. Great Lifestyle and Culture
It is obviously difficult to quantify and compare lifestyles across cities. That said, Denver is pretty well known for great outdoors, healthy (Denver enjoys 0.67 gyms per 1,000 population, compared to 0.39 in San Francisco), friendly and laidback culture. After all, it is the brewery (Denver has 0.84 bars per 1,000 population, compared to 0.72 in San Francisco) and weed capital of America, the gateway to the Rocky Mountains, and boasts more than 5,000 acres of parks. In 2018, US News ranked Denver #3 Best Place to live in America, out of the largest 125 cities. Many others would agree.
Denver residents enjoy unique access to outdoor activities. Driving from downtown, you can be in Rocky Mountain National Park in 1.5 hours, Boulder in 40 mins, and ski resorts such as Vail and Breckenridge in 1.5 hours. To San Francisco’s credit, it also has awesome outdoor activities within reach a 1.5 hour radius — e.g. Napa and Sonoma wine regions and Point Reyes state park—but, if you are into skiing, mountains and getting off the grid, you are looking into 4 hour+ trips to hit Tahoe, Yosemite, Big Sur, etc.
The weather is another point of difference. You will find the weather a constant topic of conversation in San Francisco given its oddities. Whilst, the city sees fairly stable average temperatures year round, oscillating between 60–70 degrees Fahrenheit, it is characterized by strange and completely unpredictable climate conditions. The city often experiences sharp cold snaps, even in summer, and a dull fog. The fog is so common that locals even have a name for it — “Karl” — and a dedicated Facebook profile. According to myth, Mark Twain once said “The coldest winter I ever spent was a summer in San Francisco.” In sum — the weather in San Francisco is generally okay, but never really great, year round.
Denver actually experiences seasons — long summer days that can get hot and winter days that can scoot below freezing and see snowfall. The secret of Denver, however, is that unlike other winter cities, it is located in an unusual climate zone labelled “high plains desert”, which basically means that half of its winter days are actually defined by stunning blue-bird sun days. In fact, despite Denver’s seasonality and San Francisco’s lack thereof, Denver experiences more sun annually — Denver is sunny 69% of daylight hours annually versus 66% of the time in San Francisco. The only major cities to see more sun in the US are Vegas, Miami, Phoenix and Sacramento. The weather only serves to support a culture of getting outside. Obviously another blessing of the seasons is the proximity to some of the best ski resorts in the country.
3. Lower Cost of Business
Setting up a business in Denver is a lot cheaper, and when you are working on a startup where “cash is king” and can be the difference between life and death and you and your investors are tracking your “burn-rate” like hawks, this a very significant point to make. There are 3 major drivers of the lower cost of business in Denver:
- Lower salaries — the bigger saving is by far on salaries. As mentioned earlier — average 2018 salaries in Denver are 19% lower that the Bay Area. Naturally, the differences in salary may vary by role, but the savings in general are big especially when staffing is typically the largest cost item on the books. The biggest factor for this difference is the high level of competition for talent in the Bay Area from the big tech players — i.e. Alphabet (Google) and Facebook pay their employees so generously that startups struggle to attract talent cost effectively. The median salary at Facebook for example is $240,000 in 2018.
- Ancillary employment costs — there are also a number of other ancillary employment costs that are lower in Denver. Recruiting and retaining talent in San Francisco is also hard. Not to say you can’t get the team you want in San Francisco, but you need to work a lot harder, invest a lot more time and energy, use more recruiters, and get fairly creative with compensation, options, and benefits packages in that more competitive context.
- Lower Rent — average rent in San Francisco downtown hovers around $81.25 per square foot. In Denver, you are looking at about $26.54 per square foot. That’s a 67% saving! Offices in the US average out at approximately 180 square feet per worker, so if you’re looking at an office of 10 people you are saving approx. $98,000 per year in rent; with an office of 100 people, you are looking at closer to $1 million.
- Lower Taxes — in 2018, the corporate tax rate in California was 8.84%. For Colorado, it was a fixed 4.63%, which is the 3rd lowest rate of the 44 States in the country that charge corporate tax. Whilst your company might not be turning a profit today, if it does tomorrow a 4% bump to your net profit is very meaningful.
4. Highly Convenient Location
If you are setting up a business that requires selling to, traveling to, or working with the East Coast, the Bay Area can be a challenge. For sales teams, a 9am arrival at work coincides with the Easterners out for midday lunch (and Londoners heading home at 5pm). So before you’ve even prepped your morning coffee, you’ve lost half your prime sales time. You can mitigate this by structuring the day to hit the East in the late morning (their afternoon) and the West in your afternoon, but it’s not ideal and often early morning conversations are the ripest. The Denver time zone provides an extra hour to the East — seems small, but it adds up.
In addition, the travel can be tough. A 6-hour flight from San Francisco to New York combined with the 3-hour time zone loss is brutal to your week. Cross-country flights from the Bay Area often require connections too. On the other hand, Denver is located more centrally as a hub and allows you to target the country with shorter, cheaper and more direct flights. Denver airport is the cheapest major airport for flights in the US, is a major hub for United and Frontier airlines, and is the 5th busiest airport in the US and 20th globally.
The point? It is a convenient location for your team if you operate a business that necessitates regular travel and cross-time zone conversations.
5. Solid access to talent & community
Whilst San Francisco has a solid labor pool of educated and tech talent, it is also defined by tough competition and a less openly supportive community and government. When it comes to people, Denver has:
- A solid workforce: Denver also has a great talent pool for tech companies. Wallet Hub recently assessed 150 cities along 11 metrics (e.g. % of population with a bachelor degree, quality of Universities, etc) and pipped Denver as the 14th most educated city in the US (7th if you count only cities with a population of 500,000+). Bloomberg also did a similar study and placed the Colorado cities of Boulder, Fort Collins and Denver all in the top 10 cities in the country for “brain concentration” (i.e. depth of highly educated people). And a lot of this talent is also in tech — according to CBRE, Denver just broke into the top 10 cities in the country for tech talent, with a tech labor pool of 99,760, or 6.2 percent of total employees.
- Less talent competition: As discussed, recruiting and retaining talent in the Bay Area is difficult. You face powerful competition from the heavyweights (Apple, Google, Facebook, Salesforce, etc), who can afford higher compensation packages. Consequently, employees not only have high expectations for their base salaries, but also bonuses, equity, and office and other benefits. In Denver, that competition is much less pronounced. It may build in future, but not for the near term.
- A very supportive community and government: There is also a really strong community in Denver to support the startup community. Denver Startup Week, for example, is the largest free entrepreneurial event in the country, run by volunteers and the Downtown Denver Partnership. In 2018, 16,356 people registered to participate in the event which featured free food and drinks and a host of talks and panels with local business folks. The Denver government also sponsors The Commons on Champa — a public workspace for entrepreneurs with free wifi, work spaces, workshops and events. The government also offers a very broad array of grants and tax and other incentives for companies setting up. Most companies I know that have a level of scale and moved here have received tax benefits from the government. The point? Denver has a very startup-friendly community and government that provides a lot of support to get going.
So that’s basically it. In a nutshell, 5 core reasons why Denver is booming and should be on your radar if you thinking about where to establish the home for your business. San Francisco is an amazing city and has a lot to offer, but the factors above are really important and must be considered, especially when embarking on the tough startup journey.