First COVID, then Palantir, then Hewlett Packard Enterprise and now Oracle. The news of recent weeks and months gives the impression that the area around San Francisco and San Jose, better known as Silicon Valley, is past its prime. The Corona crisis led to local companies having to offer home offices to their employees, which led many to wonder if it was worth staying here and paying the expensive rents. A room in a shared apartment in San Francisco can easily cost $3,500 – per month. Not to mention the disastrous traffic situation once you had to commute by car. No wonder that a significant number of employees moved to the surrounding area or to other states. More isolated, in the countryside and, above all, much cheaper. And thanks to the Internet and video conferencing tools, it’s possible.

The secretive company Palantir, co-funded by Peter Thiel, had already announced in mid-2019 that it would move away from Silicon Valley and make Denver, Colorado, its home. But then Silicon Valley stalwart Hewlett Packard – or more accurately, Hewlett Packard Enterprise – and Oracle announced plans to move their headquarters from Silicon Valley to Austin, Texas. And in the ears of many, that already sounds like the swan song for the world’s innovation region.

But: Is this true?

To do this, we need to look at the background of the move away, the types of companies, the history of Silicon Valley, and the risks to companies moving away.

At Palantir, several results form the background for the departure. One had to do with Peter Thiel’s support for Donald Trump, for which he faced a lot of criticism from the liberal Silicon Valley environment. And then it doesn’t help either that Palanatir’s business model mainly serves military, intelligence and law enforcement. Surveillance, data collection and data analysis for these purposes meet with more than a frown, even in Silicon Valley, which is otherwise not known for frowning upon Big Data. This gave both Thiel and the Palantir founders the impression that Silicon Valley had become too intolerant of dissenting opinions and perspectives. This seems to be a mixture of personal reasons and the nature of Palantir’s business that led to the decision to move to Denver.

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Hewlett Packard, on the other hand, was, in the opinion of many, the first true Silicon Valley garage start-up. Founded in 1939 by engineers William Hewlett and Dave Packard, it was long considered an innovative company with a strong culture of innovation and engineering. But with the departure of its founders, HP began its slow decline. The last two decades in particular have been marked by turbulence, with Carly Fiorina, Mark Hurd and Léo Apotheker as board members, costly and ill-placed acquisition (Compaq under Fiorina), accusations of inappropriate behavior (Hurd) and incompetent communication at the top (Apotheker) causing the company to wither from an engineering culture to an old dinosaur. I had frequent dealings with HP during this time, drove past HP buildings for years, and each visit made it clear how few young people were working there. Young talent is not attracted to such a company and the salaries that Google, Apple & Co can pay are no longer within HP’s reach and want. Every year more and more of HP’s buildings were abandoned. In other words, HP had long since lost its innovative power and had become a legacy company. And Silicon Valley is simply too expensive for such a company.

The situation is similar for Oracle. Tightly managed for many years by founder Larry Ellison, Oracle always struggled to expand its portfolio outside of databases. This was evident in the early 2000s, when Oracle could not compete with its own business software against the top dog SAP and began to acquire competitors like JD Edwards or Siebel one after the other. It was a similar story later with cloud solutions, when new providers such as Salesforce or Amazon built up and began to dominate this market. Oracle, although the undisputed market leader in databases, was never able to expand beyond its core business area to the size Ellison had envisioned. Innovation thus came to the company primarily through corporate acquisitions. Oracle is thus plagued by similar problems as HP, even if the company is half as old, it is already one of the legacy companies in the region. And even with that, Silicon Valley is simply becoming too expensive for Oracle.

This exodus is not the first in the history of Silicon Valley. There have been several such cycles before. I myself moved to the area in 2001, just as the Internet bubble burst and half a million people left with the 9/11 attacks. But after each crisis, Silicon Valley came back stronger than ever. It’s simply an unusual mix of infrastructure and ecosystem for startups that you can’t find anywhere else in such a concentrated breadth and with such experience.

And Austin or other cities aren’t necessarily as far along or going through their own cycle with the arrival of these Silicon Valley refugees. Austin has been struggling with a strong influx for several years, which has caused housing prices to skyrocket, neighborhoods to turn upside down, and thee mood of the locals against newcomers

Such a move can have both positive and negative effects for a company. On the one hand, it helps to save costs and, especially for companies like Oracle or HP, to bring fresh, young talent into the company that is not so mercilessly spoiled by Silicon Valley. This could bring much-needed fresh blood into the company. But at the same time, you may lose the most experienced and best employees who simply don’t want to make the move. They can find jobs any time at companies willing to stay in Silicon Valley. That can do lasting damage to companies because knowledge and skills are lost.

The impact of a city or region on the success of the companies located there cannot be underestimated. Not only is there a larger pool of talent and customers that has a beneficial effect, but whether a company chooses to locate in the city or the surrounding area can have a direct influence on the company’s success. While cheaper rents are often cited as an argument for locating outside the city, location counteracts business success. In one study, the stock prices of 38 comparable New York companies that left the city and relocated outside were compared with those of 35 companies that remained in New York. The stock price performance of the relocated companies was half as good in the years that followed.[1]

The conclusion is that such a move is hardly being made from a position of strength. The companies concerned either can no longer keep up with the dynamics of the competition for talent and locations in Silicon Valley, or have very personal reasons for withdrawing. It certainly doesn’t hurt Silicon Valley. Rents in San Francisco have dropped by a quarter, making the city and the area a bit more attractive again. Not to mention, the companies that have benefited the most from Corona are predominantly Silicon Valley companies. Zoom, Apple, Google, Tesla or Airbnb almost had to apologize for their profitability and are certainly not planning to relocate their headquarters. And that again provides capital for investment and inevitably attracts talent. That’s far from sounding like the beginning of an end for Silicon Valley.

[1] William Whyte; City: Rediscovering the Center; University of Pennsylvania Press, 2009

This article was also posted in German.