The Hedge | Brutal Honesty Over Hype Since 2008
Most entrepreneurs never make a deliberate decision about what state to operate in. They form their company where they happen to live, pay whatever fees and taxes that state requires, and never revisit the question. This default approach costs some of them significantly. The decision framework is not complicated — it requires asking five honest questions and following where the answers lead.
Question 1: Where Are My Customers?
If your customers are primarily local — a restaurant, a regional services company, a brick-and-mortar retailer — your operating location is largely determined by customer location and the choice is about optimizing within that constraint. If your customers are national or global — a software company, an e-commerce business, a consulting firm serving clients anywhere — your operating location is a genuine choice, and the question becomes which state best serves your operational and financial interests. The distinction matters because California’s cost burden is most easily justified when California customers require physical presence. A software company whose customers are spread across the country doesn’t need to be in California to serve them.
Question 2: What Talent Do I Specifically Need?
Be precise. “Good engineers” are available in Austin, Denver, Seattle, Raleigh, Nashville. “PhD-level AI researchers with large language model training experience” may genuinely require California’s academic ecosystem. “Experienced biotech executives with FDA submission track records” may require proximity to San Diego or South San Francisco’s biotech clusters. The more precisely you define the talent requirement, the more clearly you can assess whether it requires California or is available elsewhere. Most founders, when honest, find their talent needs are less California-specific than initially assumed.
Question 3: Am I Raising Institutional Venture Capital?
Not “could I someday” — but is institutional venture capital a real and specific part of your current financing plan, from investors who have demonstrated willingness to invest in companies in your category? If yes, California’s venture capital advantage is real and the cost premium may be justified. If no, or if it’s a vague aspiration, California’s one genuine advantage doesn’t apply to your company.
Question 4: What Does the Five-Year Cost Comparison Look Like?
Run the actual numbers. Take your projected headcount, office footprint, owner income, and revenue trajectory and calculate the total cost of California taxes, fees, workers’ compensation, and regulatory compliance versus an alternative state. Then compare that number to any California-specific benefits you’ve identified — specific talent, VC proximity, customer proximity — and determine whether the benefits exceed the costs. Most entrepreneurs who do this exercise are surprised by how large the California premium is and how few specific California benefits they can identify that justify it.
Question 5: How Mobile Is My Business?
If California’s cost premium isn’t justified, what would it take to operate from a better state? For businesses whose primary assets are human capital and intellectual property — software companies, consulting firms, design agencies — the operational migration is often less complicated than founders assume. A distributed team with a headquarters in Austin or Denver can serve California customers, raise capital from California investors, and access California talent remotely, while avoiding California’s cost structure for core operations. For businesses with significant physical California infrastructure — manufacturing facilities, retail locations, real estate — migration is more complex. But for the growing category of knowledge-work businesses, the question of whether California is necessary should be asked honestly rather than assumed affirmatively.
The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.
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