New Hot Spot For Tech Firms
Is the Old One: Silicon Valley

Matt Sanchez was just the kind of entrepreneur that the new wave of the Web boom was supposed to spawn: one untethered by geography, able to locate his company anywhere there was broadband Internet connection and a good idea.

But two years after the Yale University electrical-engineering graduate and two friends formed VideoEgg Inc., Mr. Sanchez found that he was spending more days in Silicon Valley than at the company's New Haven, Conn., headquarters. So, in December, he and four employees packed up a 12-foot U-Haul van with their servers, whiteboards and desktop computers and moved West. Since settling into an airy office in San Francisco, the Web-video-technology company has snagged some venture funding, hired an additional 22 people and signed deals with Time Warner Inc.'s AOL unit and Internet firms such as Bebo Inc.

"There's a unique set of resources in Silicon Valley that don't exist in other places," says Mr. Sanchez, 25 years old. "So if you're going to build a tech company, this is the place to do it."

From early in the Web boom, there have been predictions that the Internet eventually would erode Silicon Valley's pre-eminence in nurturing start-ups as entrepreneurs found it more attractive -- and much cheaper -- to do business online from other regions. Instead, companies like VideoEgg are now migrating to Silicon Valley and environs. The trend shows how the San Francisco Bay Area continues to possess a unique mix of venture-capital money and skilled workers that tech firms -- especially those that get to a point where they want to grow quickly -- can't afford to pass up.

Of course, pockets of tech remain active elsewhere in the country, notably around Microsoft Corp.'s home base near Seattle and also in Boston. But many companies -- typically tech start-ups headed by entrepreneurs in their 20s, often with staffs of less than five people -- are still heading to Silicon Valley. Mobius Microsystems Inc., a maker of technology that regulates timing pulses in microchips, relocated from Detroit to Sunnyvale, Calif., in March. LicketyShip Inc., an Internet firm that facilitates local deliveries, moved from New Haven to San Francisco last September. Meetro Inc., a maker of mobile social-networking software, transferred from Chicago to Palo Alto, Calif., in January, while Box.net Inc., an online file-storage-and-sharing site, jumped from Seattle to Silicon Valley that same month. Other companies are moving from overseas: Internet video company Metacafe Inc. is currently shifting its main office to Palo Alto from Tel Aviv.

"We tried to do some fund raising when we were based in Seattle, but Silicon Valley [venture] firms are just more receptive to younger entrepreneurs," says Aaron Levie, 21, chief executive of Box.net, which is now based in Berkeley, Calif., and will move to Palo Alto next week. While Box.net got some funds from Seattle investors, it recently netted a heftier $1.5 million in a round led by venture firm Draper Fisher Jurvetson in Menlo Park, Calif., according to a Thomson Financial publication.

The start-up influx is helping to revitalize Silicon Valley. Many of the new companies are moving into offices that had been left empty by the tech bust of 2000. They are also ramping up their hiring and creating jobs. Mobius, for instance, now employs 14 people in its Sunnyvale headquarters, up from one a year ago. Overall, 278 companies in the San Francisco Bay Area got either first-round or seed financing in 2005, up from 250 in 2004 and 216 in 2003, according to research firm VentureOne. The start-ups have also fired up the tech social scene -- Meetro founder Paul Bragiel recently helped to launch a bowling league for start-up executives, for example -- that helped to incubate so many companies and contacts during the 1990s dot-com explosion.

Metacafe Chief Executive Arik Czerniak says his Internet video site, which he co-founded in 2003, is smaller than market leader YouTube Inc., but has 20 million users watching 450 million video streams a month. Even with those hefty numbers, it attracted little notice until the company jumped from Israel to Silicon Valley.

"Other companies out here get a lot of press simply because they're here," says Mr. Czerniak, 31 years old. "We have to be here; otherwise it would be very hard to compete." While Metacafe maintains a development team in Tel Aviv, it is now recruiting marketing and sales executives for its new Palo Alto headquarters, where it expects to have 12 employees by the end of the year.

Kevin Efrusy, a general partner at venture firm Accel Partners in Palo Alto, which recently invested in Metacafe, says he now scouts around the world for potential investment opportunities, but when budding companies hit the point where they need to build a top-notch executive team and get more funding, they "can't afford not to be in Silicon Valley," he says. Besides Metacafe, Israel has seen several of its thriving home-grown tech companies shift to Silicon Valley in recent years, including software firm Mercury Interactive Corp., and privately held Skybox Security Inc.

Moving to Silicon Valley has its complications. The cost of doing business in the area remains steep, particularly due to high labor costs. According to a recent report from the American Electronics Association, a trade group in Washington, D.C., and Silicon Valley, high-tech workers in San Jose, Calif., made an average annual wage of $126,700 in 2004, the last year for which data are available. That compares with the national average for high-tech workers of $72,400.

Even with these higher costs, start-ups say they have little choice but to go where the most tech talent is concentrated. San Jose, the self-styled Capital of Silicon Valley, boasts 284 tech workers per 1,000 people, compared with the national average of 51 tech workers per 1,000 people, according to the electronics association report.

Mr. Efrusy says the region, home to big Internet firms such as Yahoo Inc. and eBay Inc., is also one of the few places where it's possible to recruit seasoned Internet executives.

For growing start-ups, that can mean a difference of months in recruiting. David Sikes, CEO of Mobius Microsystems, says that after the company moved from Detroit to Sunnyvale earlier this year, it took him just four months to recruit a senior management team that had experience working at companies such as Cypress Semiconductor Corp. and Texas Instruments Inc. If he had tried to recruit a similar management team in Detroit, he figures it would have taken him a year or longer.

Mr. Sikes, who previously worked at Motorola Inc., says he himself was recruited to Mobius by its founder, 31-year-old Michael McCorquodale. Mr. Sikes says he joined partly because he knew Mr. McCorquodale was relocating Mobius to Silicon Valley. He adds that he wouldn't have been as attracted to the job if he'd had to move for it.

VideoEgg's Mr. Sanchez, meanwhile, says he tried for more than a year to make his company a viable enterprise in New Haven. At first, things seemed promising. In April 2005, VideoEgg snagged some funding from an ex-eBay executive who is based in Pennsylvania. Mr. Sanchez and his team used the money to hire several engineers and to build their Internet technology, which allows people to easily put video onto the Web.

But Mr. Sanchez says he soon found it difficult to hire talented developers in Connecticut. What's more, as he began meeting potential partners and venture capitalists, he found he was flying to Silicon Valley nearly every Monday at 6 a.m. and taking the Friday night red-eye flight back to the East Coast. "Last October and November, I spent more nights in California than on the East Coast," he says.

The move to Silicon Valley in December was stressful, however, as Mr. Sanchez and his team had to bunk out of a hotel near San Francisco's airport for three weeks. (Cost: $52 a night for each room.) The company later leased office space in San Francisco. Soon afterward, it received some venture funding from August Capital. The amount of the investment wasn't disclosed. Late last month, VideoEgg received a further $12 million in venture funding from investors including August, Maveron LLC and First Round Capital.

Since then, Mr. Sanchez says VideoEgg has signed on more than 70 Web sites as customers, with about 85% of those customers now located within an hour's drive. The company has grown to 27 employees. Mr. Sanchez now sees some of the company's venture capitalists and advisers at least once a week. He and his team also frequently grab lunch with entrepreneurs at other nearby start-ups.

"I don't miss New Haven," says Mr. Sanchez. "Before, in order to take a meeting, I had to schedule it two weeks in advance and had to buy a plane ticket. Now I can just meet people for coffee. It really facilitates the business."

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