Escape from Silicon Valley: Why are giants abandoning California?

In a month will mark the 50th anniversary of the term “Silicon Valley,” which describes the global technology capital, located in the southern part of San Francisco Bay, in the northern state of California.

An article called Silicon Valley USA was published on January 11, 1971, according to Wikipedia. IBM has since become the world’s world capital of technology. Anyone who wanted to be something in the field – wanted to get there.

However, it seems that recently the cracks in the magic of “Silicon Valley” are beginning to be discovered. Terribly high real estate prices, endless traffic jams and high living costs – for residents and businesses – all of which make life in the San Francisco Bay Area unbearable for many. These cracks are expanding following the Corona plague.

An announcement released by enterprise software and cloud giant Oracle that it would relocate company headquarters from California to Texas drew attention to what appeared to be a partial abandonment of the valley, both by employees and companies. The process, the buds of which can be traced back to the Corona, has been accelerated by it and is integrated with a broader trend of new ecosystem growth, not just in the US but worldwide.

Oracle’s announcement is significant for two reasons – the immediacy and the importance of the company. Oracle opened its campus in Austin Texas, which has about 10,000 employees, as early as 2018, in order to enjoy the tax benefits that Texas provides compared to expensive California. The fact that the company is now changing the purpose of the campus and transferring its headquarters to it, has long-term implications and indicates that it is very possible that this is a profound and significant change in trend in the world of technology.

In contrast to the establishment of development and production centers, the geographical location of the company headquarters is the most important parameter for the identity of the corporation. The company’s location determines the type and quality of manpower it is interested in attracting, the customers it is interested in reaching, as well as its network of relationships with start-ups and venture capital funds.

Oracle's headquarters in Silicon Valley.  Joins Trend / Photo: Shutterstock

Oracle’s headquarters in Silicon Valley. Joins Trend / Photo: Shutterstock

Leaving list Getting longer and longer

The announcement of the transfer of Oracle’s headquarters joins previous announcements from other high – tech giants from the valley.

Veteran technology site arstechnica has published a list of companies that have recently announced a move. HP Enterprise, which split from HP in 2015, last week relocated its headquarters to the Houston, Texas area. Entrepreneur Alon Musk has announced in recent days that he will personally move to live in Texas, to be closer to the SpaceX test site and Tesla’s manufacturing plant.

Apple announced the expansion of its campus in Austin two years ago, but its headquarters remain in California. Another well-known company that will leave the valley is Planetir, of Peter Thiel, which is expected to move to Colorado.

The departure trend is gaining momentum as giant companies set up operations at new sites in the United States – outside Silicon Valley.

Peter Wire.  Moved Planetir Headquarters to Colorado / Photo: Associated Press, Evan Agostini

Peter Wire. Moved Planetir Headquarters to Colorado / Photo: Associated Press, Evan Agostini

Managers prefer to pay less taxes

To understand the motives for leaving Silicon Valley for the benefit of other countries, it is worth looking at several planes. At the level of business culture, Silicon Valley has in some ways reached a kind of saturation. Everything is too expensive and fast, and for a long time now there have been indications that workers are voting with their feet.

Whether it’s San Francisco or Tel Aviv, it needs to be able to attract the quality manpower that will feed both the start-ups and the big and old high-tech companies in innovation. This manpower, it turns out, has requirements that Silicon Valley is no longer built to serve well.

Beyond the business culture, cost of living and quality of life, the numbers also speak against Silicon Valley. Other areas offer tax rates that appeal to both corporations and executives.
When examining U.S. tax rates there are five parameters. The employee wants to know how much tax he pays to the state on his income (federal tax is uniform and therefore not subject to discussion); whether he also pays city tax (as in New York City); whether he pays tax On the maintenance of a home (also as in New York); and in addition – what is the rate of purchase taxes (equivalent to VAT).

Even the executives in the big companies are ultimately employees, who can benefit from the fact that there are countries where there is no income tax at all. In states like Texas or Florida the income tax rate is “zero”. For executives who earn half a million dollars a year, these are tax differences of tens of thousands of dollars.

Employee taxes affect the corporation’s considerations, because in high-tech companies the most significant assets are intellectual property (IP) and manpower. In the Silicon Valley tech companies the ability to satisfy employees is not a luxury, but bread and butter. If in California it is difficult to provide them, then there are other states that would be happy to offer high-tech companies to be hosted in their territory. Workers who are already fed up with small and expensive apartments and traffic jams will be happy to work in countries where the quality of life is higher, they can earn more, with dollars buying more.

Corporations’ tax rates offered by various states in the U.S. are also an attraction. “California corporate tax rates are a catastrophe,” says David Yaari, who heads the Arizona State Chamber of Commerce in Israel, while the state tax rate in California stands at 8.84 percent from the first cent. In contrast to states where there is a tax-rated income), in Texas it stands at 0% and in Arizona at 4.9%.

“When a company looks at a place to base its operations in the United States, it needs to examine some parameters, including taxation, regulation, and whether the place is business-friendly,” Yaari explains. “That’s why Google has moved its autonomous vehicle operations to Arizona,” he says. In addition, he explains, “For companies that have logistical considerations, geographic location and accessibility to other parts of the U.S. are also important.”

The shift to remote work following the Corona crisis has accelerated processes that began even before the crisis. As part of these processes, companies have sought to expand beyond Silicon Valley to succeed in filling their ranks with more and more developers. This need of the companies met another need of theirs – lowering operating costs, including rents and salaries.

Israel has been part of this global trend. For many companies, the development sites in Israel are the first to establish the same companies outside the United States, and the largest of them. Now it seems that just as in Israel there is a process of moving to centers like Haifa, and even Eilat and the Negev, the United States is spreading to other large cities.

Larry Allison.  Oracle has announced it will move its headquarters to Austin Texas / Photo: Reuters, Stephen Lam

Larry Allison. Oracle has announced it will move its headquarters to Austin Texas / Photo: Reuters, Stephen Lam

“Facebook, Google and Amazon will not leave soon”

Is this the end of Silicon Valley? probably not. Ben Rabinovich, founder and managing partner of the “True” Foundation, says it is too early to eulogize Silicon Valley and even in five or ten years he will still be the technology center of the world, a place where “every engineer who wakes up in the morning dreams and dreams of being part of what happens there” . Rabinovich hangs the discourse on moving out of the valley for tax reasons, but it downplays their importance. “There are tax issues in the Valley, but the changes are pretty minor. Oracle is not really going to move employees and the operation will not really change. Facebook, Google and Amazon are not going to leave anywhere soon either,” he claims.
Rabinovich also explains the current trend in tax considerations. “The biggest thing that has changed lately is Trump’s tax reform that state tax can no longer be deducted from the federal tax, causing a jump in the overall tax rate – which has affected wealthy people like Larry Allison and Alon Musk. However most people will not leave because of the tax. Those who declare their intentions to leave also have Republican leanings. ”

Oak Musk.  Announces to move to Texas to be close to SpaceX's test site / Photo: Associated Press, John Raoux

Oak Musk. Announces to move to Texas to be close to SpaceX’s test site / Photo: Associated Press, John Raoux

Alternatives: “There’s a real exodus towards Miami, mainly because of taxation”

Nicole Priel, who heads the Israeli branch of the IBEX venture capital fund and hedge fund, which manages $ 670 million worth of assets, says that since Corona, “Twitter is full of high-tech people who report leaving the valley.” “There’s a real exodus to Miami, mainly because of taxation – in Florida, personal income tax is zero.”

New York City also attracts many more Israeli entrepreneurs. New York may not offer tax benefits, but like the entire West Coast – the relatively sane time difference between it and Israel, compared to California, is a consideration. “The Valley is no longer of interest to the CEOs of our portfolio companies. It is far away, real estate is expensive, it is difficult to recruit workers in general and good workers in particular.

Nicole Priel, Ibex Foundation / Photo: Elisa Szklanny

Nicole Priel, Ibex Foundation / Photo: Elisa Szklanny

In Oklahoma, you can find better people at a third of the salary in the valley, and also those who will not leave after six months because they received an attractive offer from the competitors. “

“There are many launch points between Israel and Arizona. The climate is quite similar, but less humid than Tel Aviv and the product per capita is similar,” says David Yaari, director of the state of Arizona in Israel, which is trying to market the southern state, which borders California to the southeast. Local epistemics.

Yaari says that the mission was established by Arizona about a year ago, at the initiative of Governor Doug Dossi. “Because of the Corona, it’s less important today where people sit, and more important to them a nice place where your dollar buys more. For the price of a one-room apartment or two in the crazy areas of California, you can live with a pool in Arizona, pay less taxes and live with good people.”

It is too early to talk about traffic from Tel Aviv to Arizona, but it is worth mentioning Aeronautics, which announced in June that it had acquired a US company called CP Technologies, which would open a complex in Arizona in early 2021.

Abandoning the valley

  • Software company Oracle will move its headquarters from California to Texas
  • Search giant Google has moved autonomous vehicle activity to Arizona
  • 3HP Enterprise, which split from HP in 2015, moved its headquarters to the Houston, Texas area
  • Apple announced the expansion of its Austin campus two years ago, but its headquarters remain in California
  • Alon Musk will personally move to Texas to be closer to SpaceX’s test site and car maker Tesla’s manufacturing plant.