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Rise of remote working entices startups to flee big tech hubs

The pandemic has caused some early-stage startup founders to relocate their companies away from expensive startup hubs in an effort to maximize savings.

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Mehran Ebadolahi has dedicated the last 11 years to building an edtech startup in Los Angeles. But now the Harvard-educated attorney is planning to join an exodus of entrepreneurs leaving expensive startup hubs in hopes of maximizing savings for their companies by moving elsewhere.

Ebadolahi, co-founder and CEO of TestMax, which offers test preparation for the GRE, LSAT and other exams, has opted to set up a new headquarters for his company in Tempe, Ariz. Compared to Los Angeles, he said he pays significantly less to lease space, saving about $4,000 a month.

“We want to have a headquarters and be able to engage with our team in person,” Ebadolahi said, “The real epiphany is, why does that have to be in Los Angeles?”

Since pandemic lockdown measures took effect seven months ago, some early-stage startup founders have shifted parts of their businesses away from startup hubs like San Francisco and New York, where operating costs for their budding companies are much higher.

An increase in remote hiring has also made the decision to leave easier than ever.

Kate Lister, president of Global Workplace Analytics, a research and consulting firm for employers, said companies are dramatically reducing their downtown space or setting up in regional hubs, in the belief that a big portion of their workforce will be remote in the future.

Nearly 70% of full-time workers in the US are working from home during the pandemic, according to a recent survey conducted by Owl Labs and Global Workplace Analytics that featured responses from over 2,000 full-time employees between the ages of 21 and 65. And one in two respondents said they won’t return to jobs that don’t offer remote work after the pandemic.

“Hiring remote talent is not only cost effective, it also allows for a greater diversity and inclusion, which has been shown to increase innovation,” Lister said.

She said founders and investors are learning that while virtual meetings may not have all the same benefits of being face-to-face, the savings can frequently outweigh the costs.

The ability to recruit remote engineers was the catalyst for Ebadolahi to move his company from Los Angeles to Arizona. Over the past few months, he has hired 14 remote employees based in states as far away as Tennessee and Ohio.

Like many founders during the pandemic, Ebadolahi has also been trying to raise more capital remotely. While some companies have had fundraising success, not all investors think the trend will last.

Adam Struck, founder of Struck Capital, a seed-stage venture capital firm based near Los Angeles, said that if founders are considering moving out of Los Angeles because they believe dealmaking and investor check-ins via Zoom are going to be the new normal in the long-term, they are probably wrong.

“If early-stage founders feel VC ecosystems such as Los Angeles have nothing left to offer, they might get hurt from over-indexing the current situation,” he said.

But not all VCs feel the same way.

“The coronavirus pandemic has taken geography out of the VC dealmaking equation,” said Cathy Connett, CEO and managing partner of Minneapolis-based Sofia Fund, which invests in women-led businesses primarily in the US Midwest.

Connett said entrepreneurs have been moving to Minnesota’s Twin Cities region in the past few years to improve their quality of life. The pandemic has only accelerated the trend, as early-stage founders continue to realize that in-person networking is not an integral part of the dealmaking process anymore, and relocating may not necessarily mean a compromise on founders’ ability to get VC funding.

The startup exodus also seems to be an offshoot of a larger migratory trend that’s taking place across the country. From April to August of this year, New York and the San Francisco Bay Area saw net arrival declines of more than 20% year-over-year, according to LinkedIn data.

Not all founders are entirely turning their back on established VC hubs, however.

Though she’s not fully ready to move her company away from its New York headquarters, Heidi Lehmann, co-founder of Kenzen, the developer of a health analytics platform for industrial workers, has spent the past few months exploring options for her company in Kansas City.

“I may even be giving up my apartment for a bit in New York and spend the majority of my time to focus on building out the Kansas City team,” said Lehmann. “I would not do that if I did not see potential for the company there.”

Featured image via Julia Midkiff/PitchBook

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    Written by Priyamvada Mathur
    Priyamvada Mathur writes about venture capital at PitchBook.

    She is an Indian chartered accountant and has studied economics and journalism.
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