Cheaper Costs in Other States Don’t Lure Most Businesses from California


By Steve Tannehill

This is part 2 in a three-part series exploring the myths and facts about the climate for business in California.

Recently, Inc. Magazine published its 2016 list of the 5,000 fastest growing private companies in America. Who topped the list? Loot Crate – located in Los Angeles. Why on earth would a new company locate in high-cost L.A. and not, say, low-cost, low-tax Kansas? And how on earth did it become the fastest growing private company in America?

Loot Crate, which sends fans and gamers a monthly collection of action figures, comic books and other loot, draws on the talents of the local workforce and “Benefits from being close to the toy and garment districts downtown,” according to CEO and co-founder Chris Davis.

“We feel like we’re uniquely taking advantage of a lot of L.A.’s strengths,” said Davis.

These resources are expensive, but, the quality of those resources in other states simply doesn’t measure up to the quality available in LA, or those resources simply aren’t available in other low-cost states at any price.  No doubt Loot Crate’s expenses – for talent, rent and taxes – are higher than they would be in Nevada, for instance. No doubt their regulatory burden is higher.  But with those more expensive resources, their revenues far exceed what they would be in a low-cost state. As a result they are far more profitable than they would be in a state such as South Dakota or Texas.

In 2014, Google spent $120 million to buy 12 acres in Playa Vista – why not save millions and buy land in Nevada or Utah? Because LA is the nexus for technology and entertainment, and, to use a much over-used term, the “eco-system” found here for creating new ventures in that space is simply unparalleled. L.A. offers world class talent, a strong and deep network of funding sources, and access to the resources of world class universities – which to this day are the number one source of patents in America. It’s also worth noting that Playa Vista is also home to USC’s Institute for Creative Technologies, which attracts top virtual reality researchers.

Southern California based Cal Tech was recently ranked the top University in the world. Two of the top five, and four of the top 20 universities in the world are in California (none by the way can be found in Texas or any of our “low-cost, low-regulation” state competitors).   Why is Silicon Valley in California and not low-cost Wyoming? In large part you can thank Stanford and UC Berkeley – in many rankings the number one private research university and the number one public research university in the world. California leads the nation in many agricultural sectors – including of course wine production. And it’s also home to UC Davis, which has the top veterinary and enology programs in the country. That’s not a coincidence.

Millennium Space Systems, which builds satellites for customers, is another Los Angeles success story. Stan Dubyn, the founder, was quoted in an L.A. Times interview Jan. 2 this year: “The access to research institutions such as Caltech, USC and UCLA and the cluster of engineering talent in Southern California make it an obvious place for a company like mine to thrive,” he said. “I interview people all the time who can’t wait to move from Michigan or Wisconsin or Iowa,” he said. “It’s a vibrant place for the high-tech and aerospace industry.

Dubyn said he’s aware of relocation incentives offered by other states such as Texas and Nevada. But ultimately, he said, no amount of tax incentives could outweigh the benefits of being close to a dense network of customers, suppliers and potential employees. “We have a very high-tech workforce, people with bachelor’s, master’s, PhD’s,” Dubyn said. “It’s hard to get people to relocate, and it’s expensive for the company. I would basically have to reformulate the company.”

Next month will conclude this three-part series on the California Business Value Proposition.

Steve Tannehill is a former adjunct professor of finance at California State University, Northridge, and served as the executive director of the Small Business Development Center at College of the Canyons.

Related To This Story

Latest NEWS