Thought

Foreign founders rank as a large demographic of Y Combinator founders, so it comes as no surprise that the question of where to base a startup post-YC comes up often. As a part time partner and foreign founder, I’m often the one answering this question, so I’ve written my thoughts down in the hopes that they may be useful to others as well.

Most of this blog post discusses starting a company in Canada vs the Bay area because this is the question that comes up most often for us, but as far as I can tell it applies more broadly.


Starting a company is not an experience that’s guaranteed to succeed. Even with the help of organizations like Y Combinator, it is very likely that your company will have periods of struggle and need help as it grows and matures. So while there’s no guarantee of success, there are real things that you can do to improve the odds of success.

In particular, there are a few things that are incredibly important to improve a startup’s chances: Access to capital, talent, partners, and customers. There’s also one thing that’s incredibly important and not very obvious: Where you incorporate.

## Access to capital

In the first 9 months of 2014, the SF Bay area received $13.61 billion of investment through venture capital. The next city after that was New York, with $3.05 billion, and the next city after that was Boston, with $1.05 billion. In fact, the SF-Bay area received more venture capital than the next ten cities combined.

More broadly, According to the Organization for Economic Co-Operation and Development’s most recent numbers, the US leads in absolute dollar amount by about 20x.

In the same time period, Canadian companies received $1.64 billion as a whole.

People will also often make the argument that in Canada you’re a smaller fish in a smaller pond but based on the latest numbers, as of Q3 the average deal size in the Bay area was $16M, and the average deal size in Canada was $6.9M. So not only is there less money, the money also writes (on average) smaller cheques.

It is also quite true that many US based investors won’t touch companies outside of the US, and quite often they won’t even tell you that’s the reason. Yes, like with most things in life, there are exceptions to this rule. If you’re the hottest deal in town it won’t matter. But in the “average” case, or the worst case, you’ll have a harder time raising money. The reason is quite simple: Many investors want to be close to where their companies are.

### SR&ED (This topic is truly specific to Canadians, so if you’re not one, feel free to skip to the next section.)

One of the most common capital arguments that people make when they think about basing a company in Canada is the Scientific Research and Experimental Development Tax Incentive Program, or SR&ED (pronounced shred) which provides tax credits for R&D work.

Yes, you may get tax credits back, but it’s a short term gain and it has two issues: You’ll only get them back at the end of the year, after the tax season, *and more importantly*, the value of these credits to you will dramatically decrease over time as your product matures and you start hiring more non-R&D people (sales, marketing, accounting, administrative, etc).

Asking a few Canadian founders about SR&ED resulted in generally negative feedback, and one common theme was:

If you want to bootstrap, then SR&ED may be worth it, but for any startup the amount of time you spend doing the paper work is just a time suck. Instead of focusing on the product you become a professional form-filler.

re: SR&ED specifically, people end up asking engineers to write down what they are doing as though they are lawyers billing for hours. That’s not how innovation works. You can’t claim a credit for “thinking”.

On top of all that, in recent years, the Canadian government has been making it harder than ever for companies to receive SR&ED funding.

## Access to talent

Once you have capital, you’re going to want to hire. Many of my Canadian counterparts will tell you that if you stay in Canada you can hire the “untapped resources” of Waterloo.

The problem is that you’re limited only to engineers who actively do not want to explore outside of the Waterloo region, and I don’t believe that’s a majority of the engineers there. I don’t have statistics to back up this argument, but from our own experience at AeroFS, I suspect most engineers would at least entertain the idea of working for a Bay area company. I’m also reasonably sure the *converse is not true*.

In general, if you’re trying to convince an engineer to uproot and move, convincing them to come work in the Bay area is going to be significantly easier than convincing them to go elsewhere.

This means that at least in theory, startups in the Bay area can extend their hiring reach to talent worldwide. Unfortunately, this is not fully realizable today because of the broken high-skilled labor immigration system of the US, but even so, startups in the Bay area can still recruit top engineers from at least anywhere in the US and Canada as well as any other countries with friendly US immigration relationships (such as Australia and Mexico).

## Access to partners/customers

This is probably the one area where your decision may be “region dependent”. If your potential customers and partners are all in one country, it may may make sense for you to base your business in that country. But if one country is truly your total addressable market, there’s a real question to be asked about the growth opportunity for your startup.

Most likely, your customers are based globally, and although launching in a market that you know may indeed be the best decision, that does not mean that your company has to be based there. AirBnB’s first market was in New York, but they are still headquartered in San Francisco.

## Delaware C-Corp

There are many little things that become easier when you’re doing things the “standard way”, which is why where you incorporate often matters as much as where you base your operations.

When it comes to incorporation, having a Delaware C-Corp is standard.

You can and will run into investors that won’t deal with non-Delaware corporations, and even more investors that won’t deal with foreign corporations. They’re simply not familiar with these corporate structures, meaning they need to spend time and money on lawyers to figure out what protections they have, and what other various legal implications may be.

It’s hard to stress this point enough. Not only will you save money on legal diligence, but in early stages, being a non-Delaware C-Corp can be incredibly harmful and even devastating in a fund-raising process as investors simply refuse to deal with the diligence required.

## Serendipity

One final meta point: There’s a magic to Silicon Valley that simply has not been replicated anywhere else. The density and sheer number of entrepreneurs, founders, investors, engineers, etc. leads to great things. A lot of that comes from the serendipity of randomly running into like-minded people on the street. This type of ecosystem leads to introductions, new hires, acquisitions/exits, partnerships, and so on. Today, you simply won’t be able to achieve it anywhere else.