The Undercurrent of the Dallas Startup Ecosystem

There has been a lot of talk lately that Dallas is a great environment for tech startups because of (1) the very low cost of living (especially in comparison to the California or New York) and corresponding high quality of life and (2) the very high number of tech jobs. However, I think these points make Dallas attractive to larger tech companies but actually create headwinds for smaller tech companies and thus make it difficult if you are a Dallas startup.

Dallas and Quality of Life Units

Other than marrying a Texan (which gets most non-Texans like myself here), people move here because the economics just make sense. Dallas is well known for the low cost of living (especially in real estate), low crime, superb public schools, competitive salaries (even higher than Los Angeles!), and the complete lack of state income tax.

To put this into perspective, when I left California in 2003 to come to Texas, I was paying $1,300 a month to rent a 500 square foot apartment outside of San Francisco, but was able to buy a 3,000 square foot house with a mortgage payment less than my California rent. Gas was $1 less per gallon and even everything at the grocery store was cheaper. I may have been making the exact same as I would have in California, but my overall “quality of life” was higher.

For simplicity’s sake, let’s say quality of life can be measured in “Quality of Life Units” or “QLUs”. Pertinent to this post, cheaper housing, less taxes, more purchasing power, better schools and lower crime leads to higher QLUs.

I’d say Dallas offers many more QLUs dollar-for-dollar relative to other areas of the country, especially the most expensive places like San Francisco or New York City. Earn $60,000 in San Francisco? Save up and maybe one day you’ll be roommate-free. That same $60,000 (or even slightly less) in Dallas gets you much more of these QLUs than in California or New York.

Influx of Jobs and Talent

Based in part upon the higher relative QLUs in Dallas, many large companies from around the country have relocated their workforces here so that they can provide their employees with a “raise” (without actually paying them more) based on the low cost of living/quality of life matrix Dallas offers. These employers are able to offer their workforce more QLUs for the same salary.

This has led to a plethora of tech jobs in Dallas and an influx of highly educated and qualified people to take advantage. These job opportunities combined with high QLUs make Dallas a very desirable place to live and work.

But if all this tech talent is here in Dallas and the costs are low, why does seemingly every startup in Dallas have a hard time finding a technical co-founder and/or CTO? Why aren’t people jumping from these large tech companies to startups?

Opportunity Cost

The answer lies in the economic term “opportunity cost”. Think about your decision to read this article. Instead, you could have been meerkating, sleeping, swiping left/right, or anything else. The opportunity cost of reading this article is passing up whatever activity you think is your best alternative. Because of resource scarcity, whenever you make a decision, you must pass up another opportunity.

The opportunity cost of launching or joining a startup (full-time) is likely a good-paying job. This is true for all cities, right? But in Dallas, the opportunity cost is likely the highest in the nation because of the aforementioned QLUs. Restated, workers in Dallas making a decision to go into a startup are potentially giving up more QLUs than a similar person in California or New York. In Dallas, why risk it?

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Informal Client Census

At our firm, we are blessed to have a geographically diverse client roster. For example, in Q4 2014, only 35% of our clients were in Dallas with the rest being spread across the globe. And we’ve noticed a pattern that highlights an interesting difference between our Dallas clients and non-Dallas clients. Our Dallas clients are much more reluctant to quit their day job and go “all in” (i.e. full-time) with their startup. Many of them are determined to keep their “day job” as long as possible and just work on their startup at night and on weekends. This is very different from our clients in California or New York. Even worse, once they go all in, our Dallas startup clients are quicker to give up and jump back into the corporate world.

Why is this? Are people in California or New York more determined or more passionate about their startup than those in Dallas? We don’t think so. We think Dallas startup participants give up more when participating in a startup. It’s a calculation leading to higher QLU opportunity cost which presents a higher threshold to join a startup.

This is Bad for a Dallas Startup

The high QLU opportunity cost, in my opinion, slows down each Dallas startup and in turn the entire Dallas startup ecosystem.

You and your co-founders aren’t full time? Good luck asking an investor for his or her full-time money. (And btw, saying that you’ll go full time if you get funded signals to an investor that you don’t fully-believe in your startup.)

And, furthermore, when a founder finally decides to go “all in” he or she may have trouble finding a CTO or other cofounders because they too are having the same dilemma.

It also seems like Dallas startup employees care much less about stock options and incentive equity. This makes sense as they have previously been spoiled with a high salary (QLUs again) from a large tech company.

Conclusion

The lauded perks of the Dallas tech industry do not necessarily help local startups but instead may likely be hurting them – at least until they can pay close to market salaries. While this is true for most areas, there is a more severe consequence here in Dallas.

The issue here is that people talk about the Dallas tech industry as a whole and don’t differentiate between startups and large tech companies. Yes, Dallas is great place to get a solid tech job and a house, and raise a family. But, for an individual in Dallas, most of the time, life is too good and there is just too much to lose to launch or join a startup.

So what do you do if you are a startup in Dallas? If you can’t afford to offer market salaries (which is likely), then you should be more generous with your equity grants…from co-founders to consultants. You have to increase the upside in order to make up for the larger loss of QLUs.

And before I get hate mail, let me be clear: I think Dallas is a great place to launch a startup; Dallas startups are underfunded; there is no material difference in the quality of founder/CEOs here in Dallas than in California or New York. This post simply details a view that the reasons lauded for why Dallas is great for startups is likely — at least initially — hampering them.

 

Startup Issues

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