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 good news is that 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 your customer location and the choice is about optimizing within that constraint, not selecting among states. If your customers are national or global — a software company, an e-commerce business, a consulting firm that serves 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 are a necessary part of the business model. A restaurant in San Francisco needs to be in San Francisco. It doesn’t have a choice. But a software company whose customers are spread across the country doesn’t need to be in California to serve them. The location choice is genuinely available, and it should be made deliberately.
Question 2: What Talent Do I Specifically Need?
Be precise here. “Good engineers” are available in Austin, Denver, Seattle, Raleigh, Nashville, and dozens of other markets. “PhD-level AI researchers with experience in large language model training” may genuinely require access to California’s academic and research 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 can define the talent requirement, the more clearly you can assess whether that talent requires California or is available in less expensive markets. Most founders, when they’re honest about this question, find that their talent needs are less California-specific than they initially assumed. The engineers who will build your first product can be found in many cities. The question is whether you’ve looked.
Question 3: Am I Raising Institutional Venture Capital?
Not “could I someday” — but is institutional venture capital a real and specific part of my current financing plan, from investors who have demonstrated willingness to invest in companies in my category? If the answer is yes, California’s venture capital advantage is real and the cost premium may be justified. If the answer is no, or is a vague aspiration rather than a concrete plan, 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 insurance, and regulatory compliance versus an alternative state like Texas, Nevada, or Wyoming. Then compare that number to any California-specific benefits you’ve identified — access to specific talent, venture capital 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. The $500,000 five-year premium for a ten-person company over even a relatively high-cost state like Minnesota is a real number. It should be weighed explicitly against real benefits, not absorbed by default.
Question 5: How Mobile Is My Business?
If you conclude that California’s cost premium is not justified by California-specific benefits, the follow-on question is: 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 through remote arrangements, while avoiding California’s cost structure for its core operations.
For businesses with significant physical infrastructure in California — manufacturing facilities, retail locations, real estate investments — migration is more complex and may not be feasible. 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 Framework Summary
California is the right operating base for: companies raising institutional venture capital from Bay Area or LA investors, companies that require specific talent concentrations that genuinely exist only in California, and companies whose customers require physical California presence. California is probably not the right operating base for: profitable lifestyle businesses, companies serving national or global markets with distributed talent needs, and companies whose financial model doesn’t include institutional venture capital.
Most companies fall in the second category. Most California companies never ask which category they’re in. Ask the question.
The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.
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