As a long-time Silicon Valley entrepreneur who grew up in the Rust Belt, I’ve got some very strong opinions here. My father worked in the steel mills as they all closed. That was due to a toxic mix of both union labor and myopic management, both ignoring the global economic reality as they were undercut on price and roundly beat on quality. First by the Japanese steel companies (NKK), then the Indians (Mittal), then the Chinese. My observations on the Rust Belt are as follows:
Summary:
Midwestern culture is remarkably toxic in ways that hinder economic productivity.
People from the Rust Belt are xenophobic and don’t travel, so they systematically underestimate global competition, and overestimate their value to the world economy.
People from the Rust Belt also do not value achievement.
The investor class in the Midwest is generally 2nd- or 3rd-generation wealth, and they mostly value age over ideas/execution.
Most middle-class people in the Rust Belt are lazy as fuck.
The regulatory & tax burden of California does not burden technology startups, and does not burden other businesses to the degree that is sometimes described.
Midwestern culture is remarkably toxic in ways that hinder economic productivity . There are several elements to this.
People from the Rust Belt are xenophobic and don’t travel, so they systematically underestimate global competition, and overestimate their value to the world economy. Every company’s management team thinks its the best at whatever they do, even when their manufacturing quality is shoddy as hell and their price is way out of line. When I was a kid, none of the guys in the mills or the manufacturing companies were allowed to even drive foreign cars, so they had no idea how crappy the end products were compared to global product. They thought that a Cadillac was just the best car made. The steel mill workers were totally blown away when visitors explained that all the German makes had been making cars out of all-galvanized bodies since the 1970s. Toyota and Honda started that in the 1980s, which was possible for them because the galvanized product was so much cheaper to buy from Japanese steel suppliers than what the US producers could make for the Big Three. The parts supplier guys (we also had Delco and Motorcraft plants in the community) had no idea just how shitty their product was compared to Bosch and Denso. The automotive industry has reached a better equilibrium of quality with the rest of the industry, but obviously the damage has been done.
Now, I see Midwestern startups try to get into global industries for SAAS, games, biotech, etc. 95% of the time they are so far behind the state of the art it’s not worth sitting through the whole pitch deck, and yet there’s almost always some spiel about how they’ve “put together a team that’s as good as any you’d find in Silicon Valley for 2/3 the salary cost.” This is usually bullshit - they usually have a team of developers that dress like they’re from Silicon Valley, but couldn’t get past a first-round interview at a real Silicon Valley company.
Here in Silicon Valley, everyone managing a company is obsessed with understanding the global competition. They’re obsessed with information and getting the truth. We all are very clear that the Chinese entrepreneurial clusters are on the verge of just eating Silicon Valley’s lunch as centers of high-value innovation. We’re partnering where we can, investing there to the extent we can, and in general just trying to make our play to stay relevant in a future where the Chinese economy is way larger than ours. The average Rust Belter didn’t get that the Japanese were eating their lunch in the 80s, didn’t get that China was eating their lunch in the 1990s and 2000s, and now that they’ve woken up to a post-’08 environment where they have nothing to offer the world, these meatheads elect Trump so he can launch a trade war with China. People in the Rust Belt just have no goddamn clue how the global economy actually works.
People from the Rust Belt also do not value achievement. If you try too hard, they pull you down like crabs in a barrel. Ironically, it’s become very popular for white Rust Belters to look down on African-American culture as “anti-school,” but of course the Rust Belt’s middle class is guilty of this across the board. (Except for the immigrants, who work hard because they’re terrified of being poor. Which is why Rust Belt America voted for Trump - they hate being outdone by the newcomers). All over the culture of the Rust Belt, nerds are still made fun of. In Silicon Valley, kids work themselves literally to death in school. I’m not saying that’s the best thing, but it does tell you that they’re taking academic achievement much more seriously.
That carries over into adulthood. Here in Silicon Valley, we all want our friends to get big equity payouts. We want each others’ companies to succeed. We connect each other with resources we think might help. in the Midwest, that’s all taken to be a little too try-hard. You’re supposed to go home and spend time with your family, not wheedle your friends for intros to VCs that they like.
The investor class in the Midwest is generally 2nd- or 3rd-generation wealth, and they mostly value age over ideas/execution. There’s a cultural class divide in the Rust Belt. The people with money generally grew up with money. They don’t like to interact with “the poors.” The standard Y-Combinator-ish story in the Valley is some broke-ass graduate students getting funded by angels that are barely older, and then bringing in institutional VCs who are totally fine with first-time CEOs. Along with the heirarchical culture of the Rust Belt comes a prejudice against founders without grey hair, and also against founders that didn’t come from the moneyed class. I dealt with this first hand. It’s way easier to have class and social mobility in Silicon Valley. (And yes, there is a robust and valid critique of Silicon Valley as biased toward founders from just a few fancy schools, as well as a critique about race and gender bias in VC allocations. But let me tell you, Silicon Valley is the goddamn rainbow connection compared to the level of old-money bigotry at work in the Rust Belt.)
Most middle-class people in the Rust Belt are lazy as fuck . I’m not kidding. I can’t believe how people would clock in right at 9 and then edge toward the door at 4:45. In between they’d spend hours gossiping around the water cooler about nothing whatsoever. Very few people talk about work on the weekends. Very few people in the Midwest think of themselves as integral to the success of their companies.
The thing the the press covers about Silicon Valley is the Peter Pan-ish office acoutrements. The snacks. The foosball tables. The weird parties. What they do not tell you is that even when we’re fucking around at work, we’re fucking around on work things. We go to Burning Man and we talk about new products that our companies could create. We eat $7 avocado toast and try to find out what the competition is developing. The work talk never stops here in Silicon Valley. People are generally just obsessed with whatever they’re working on. There is none of this clock-watching “it’s 5PM, time to go get a beer and talk about sportsball” culture that is the the dominant mode in the Rust Belt. In Silicon Valley, that’s considered boring. We want to know what ignites you, and if you’re not working on something that ignites you, we want to know why the heck you don’t change that.
And then once you visit China and see the 10 hr/day, 6 day/wk regular work week, you understand the threat to Silicon Valley comes from there. Midwesterners with a 9-to-5-with-three-smoke-breaks mentality aren’t going to be able to compete, regardless of how low the taxes are.
The regulatory & tax burden of California specifically does not burden technology startups, and does not burden other businesses to the degree that is sometimes described. I’ve operated businesses in Illinois and Indiana, where the corporate taxes have more layers - in particular, business property tax (“replacement tax”) and excise taxes. Here in California, income taxes are not levied on companies that are losing money. The average startup is not profitable on a net basis, despite the (hopefully) high rate of revenue growth. Silicon Valley investment returns come from equity sales, which frequently happen before a company becomes profitable on an accounting basis.
And let’s look at the corporate tax rate differential. In California it’s 8.84% vs. 7% in Illinois and 6% in Indiana. To a libertarian, every percent rankles. But as a libertarian business owner, I run the math pretty easily and find that it would be remarkably difficult to run any of my businesses in Indiana and make as much money on a net basis. (My three businesses are (1) a software technology startup, (2) a retail business, and (3) a real estate rental business. (1), there is simply no earthly way I can identify to run that business in the Rust Belt, without massively increasing my risk of failure due to lack of access to talent and capital. (2) has such a larger customer base, and I have so much more pricing leverage here than I would in the average rust belt town, that I’d be foolish to take my equipment and set up shop anywhere in the Rust Belt. And for (3), the combination of Prop 13 and the general rise in land values in California mean that I have made vastly more money with this business here than I would in the Rust Belt. Do I wish my taxes were lower? Oh, absolutely! But am I making vastly more money here in California than I would expect to make doing similar things in the Rust Belt.
There are plenty of business owners who whine about California taxes and threaten to move their company to Texas or Florida. These op-ed screeds are usually written by older entrepreneurs running manufacturing businesses. Running a low-margin business with a lot of employees is a bad idea in California. I’d argue that this is an entrepreneurial failure, like opening a bar and strip club in rural Utah. But if you’d got an unprofitable business with a ton of revenue per employee, which is an apt description of the usual tech startup, then the burdens of California taxes won’t affect you much.
And the relatively higher California payroll taxes / workman’s comp / etc. are not particularly onerous for companies that are generating a great deal of revenue per employee. It’s a bit of a rounding error in the budget of a Series A or Series B startup. And our regulatory burden just isn’t particularly onerous compared to the corrupt, capricious, and inefficient government bureacracies I had to deal with in Illinois and Indiana. I’d rather eat glass than try and do a high-growth startup in one of the those places.
Some of this guy’s points are valid, but a lot of it is complete over-generalization. Further, the author seems to be drinking his own koolaid way too heavily. Narcissist much?
It is true - there is more competition here in the Bay Area and people tend to travel less in the Midwest. However, anyone who thinks that they’re standing tall and that the Midwest is full of mouth-breathers is just ripe for getting his lunch eaten — not by the Chinese — but by some “doofus” from the Midwest.
Rule #1 - always be paranoid that you’re 1 step away from ruin. At the hands of those whom you least expect it from.
Source - myself - I spent 25+ years in the Midwest.
Agreed there — if your co is not making money then business income taxes levied against $0 are still $0 no matter where you are. And, he’s right, if you have not-so-many employees, then some of the additional costs vs. say Chicago or Minneapolis are not a big deal.
His example about his real estate rental “empire” is cringe-worthy though. He’s bragging that he has made tons in CA because of prop 13 and CA’s quickly appreciating prices.
Well, in CA, you pay for that by getting meager cash flow. 5 cap on residential property here is considered good. Get 5 cap in Indianapolis and people laugh at you.
Most Americans are lazy even ones raised in Silicon Valley. Silicon Valley is mostly transplants from around the US and world. The nature of that is it’ll attract the best and brightest.
