Web Startups: Location, Location, Location?

A year or so ago, an oft-aired television commercial showed a businessman driving along a dusty, empty road and then pulling over to the shoulder where a colleague waited — a solitary figure in a barren landscape. This very spot, the businessman was told, was where the company should build its headquarters.

It would cost pennies a foot and it was only a short drive along the highway to the airport, the location scout gushed. On top of it all, the company’s customers, suppliers and partners were just a phone call, e-mail, or click away.

A fine suggestion. It seemed perfectly logical that in the Internet age, a company’s address should be irrelevant. While that theory may be true in the future, location still matters — perhaps too much.

The In-Crowd

For dot-coms and other high-tech firms, nothing provides the instant cachet of a Silicon Valley or Boston address. Locating in North Carolina’s research triangle, or in the Washington, D.C. or Seattle hubs, comes pretty close. Those are the places where the venture capital goes — where expectations are high for the emergence of “the next big thing.”

There are other high-tech hotbeds, but they are few and far between. Most efforts to revive long-vacant mill cities or to develop remote outposts as low-cost centers of e-commerce have been doomed to failure.

In western Massachusetts, for instance, the city of North Adams seemed like it could become the east coast clone of Silicon Valley, albeit on a much smaller scale. The city had a lot going for it: Tons of empty factory space renting for next to nothing; proximity to Williams College and Amherst, where the state’s main university campus is located; and Boston — just a three-hour drive away.

Startups like Angelfire and Tripod helped put North Adams on the map. Briefly. Shortly after buying the companies, as it expanded from search engine to portal last year, Lycos announced it would move both businesses closer to its headquarters in the eastern part of the state.

Silicon Desert

North Adams and several other cities in Massachusetts are still trying to gain the edge in attracting startups. Cape Cod, for instance, known primarily as a vacation destination, is pitching itself as “the silicon sandbar,” while the city of Lynn, about 30 miles north of Boston, has designated a downtown area as “a cyber-district,” complete with high-speed access and sliding-scale rents.

The cities’ efforts have brought moderate success. But for every startup in those places, half a dozen companies trip over one another to get “top-three” addresses on their business stationery.

The nature of the Internet actually reinforces a clustering impulse among e-commerce firms, as opposed to spreading out, which would seem the logical tendency for businesses whose operations are not constrained by physical boundaries. That dynamic could be due to the fact that e-commerce relies on partnerships with other companies — software, hardware, content providers, security providers, etc. — at least as much as other types of businesses do.

Rising Rents, Nervous Landlords

But here is the problem: Available office space in the high-tech meccas is rare and therefore outrageously expensive. Fueled by dot-com demand, places like Boston, San Francisco, Washington, D.C., and New York have all recorded record-high rentals and per-foot sale prices in recent months.

And now the ante is being upped considerably. Landlords who could not wait to sign “the next big thing” are suddenly wary, realizing that a prospective tenant may not be around halfway through a 10-year lease. Increasingly, property owners in the most desirable locales are requiring up-front payments and other guarantees.

That is bad news for a sector already in the throes of a shakeout. So what is a smart dot-com to do? Head to the hinterlands? Not exactly. But halfway to the middle of nowhere might be a good bet.

The Boston area, for instance, has several outlying markets that are within an hour’s drive of downtown — yet offer per-foot rents at half the cost of the big city. Similar distant suburbs of Washington, Chicago and other major cities could provide affordable housing for fledgling Internet ventures.

Money Well Spent?

Paying $50 (US$) a foot for a premium address is not much different than paying $6 million or more for a memorable domain name. It is not the most important ingredient for a dot-com’s success. Hard work and innovation are — but for a few scary months, the e-commerce world lost sight of that as investors showered money on each and every startup that wrote a business plan.

E-commerce, for many businesses, is a small margin game, especially at first. Internet startups have no place in the midst of the law firms and financial houses that rightfully reside in the expensive downtown high-rises and rolling green campuses just outside the big cities.

True, a startup in the suburbs lacks the prestige of one that can claim an Internet hotbed address, and a less glamorous location might not attract as many employees to a new venture — but think of the tradeoff. The rent savings alone could keep a dot-com alive and kicking for a few extra months.

And in the world of e-commerce, location matters less than time.