Texit: Why high-tech giants are fleeing Silicon Valley for Texas

It has been the beating heart of the tech world and its unparalleled capital since the 1930s.

But Silicon Valley’s position as the epicentre of the industry has taken several powerful blows in recent weeks, as the impact of the Covid pandemic has hit home.

A small but high-profile number of so-called “Texit” companies have decided to leave their northern California bases and set up new headquarters in Texas.

While Facebook, Apple and Google are going nowhere, other legacy firms, tech leaders and venture capitalists are on the move.

Database giant Oracle Corp, which only last year signed a 20-year sponsorship deal worth $180m (£132m) to name the San Francisco Giants baseball stadium Oracle Park, announced it is moving from Redwood City, California, to Austin, Texas.

"We believe these moves best position Oracle for growth and provide our personnel with more flexibility about where and how they work," spokesperson Deborah Hellinger told CNN.

Hewlett Packard Enterprise, which has a long and acclaimed Silicon Valley history, has also announced it is moving its headquarters to Houston, Texas.

And earlier this month Tesla founder Elon Musk, who lives in Los Angeles and commutes to the company’s headquarters and factory in Fremont, California, announced he had personally moved to Austin.

“If a team has been winning for too long, they tend to get complacent and then they don’t win the championship anymore. California has been winning for too long,” said Mr Musk at the Wall Street Journal CEO Council summit.

“First of all, Tesla and SpaceX obviously have massive operations in California,” said Mr Musk.

"Tesla is the last car company still manufacturing cars in California. SpaceX is still the last aerospace company still doing manufacturing in California.

“California used to be the centre of aerospace manufacturing. My companies are the last two left. That’s a very important point to make.”

Some observers say that the moves can be partly explained by the coronavirus pandemic and the way it has changed workplaces, with employees now used to contributing from home. A number of tech firms have already said they will allow employees to work from home permanently after the public health crisis is over.

“Covid basically encouraged people to work remotely and experiment with other places to live,” said San Francisco-based venture capitalist Keith Rabois, who moved to Miami, Florida.

Mr Rabois, a former executive at PayPal and LinkedIn, also said that he grew tired of California’s high taxes, cost of living, and problems such as homelessness.

“It became clear there were much better places to live,” he told the Wall Street Journal.

California also has a high personal state income tax, something neither Florida nor Texas has.

An entrepreneur like Mr Musk, who is now the world’s second richest man with a personal wealth of $155bn, could therefore expect to save vast sums of money in taxes following his relocation to Texas.

The lack of state income tax would in effect give executives in the top rate tax bracket a 13.3 per cent pay rise by leaving California.

Mr Musk was also a vocal critic of Covid restrictions and workplace shutdowns enforced by California officials in 2020, and both Florida and Texas are viewed as less restrictive business environments.

While Silicon Valley has the highest annual average high-tech salary of around $144,800 (£106,000), notoriously high housing prices in the region have seen it become the most expensive real estate market in the US.

The median price for houses sold in the area in November came in at $1.38m, and housing costs in Texas are a third of the price.

Many asked why they should struggle in one of the country’s most expensive housing markets when they could afford so much more for their money in Texas.

The most fashionable new landing spot for tech firms is Austin, Texas, which has already developed the nickname of Silicon Hills.

As of November, 39 companies, in tech and other industries, had relocated to the area, which is already home to computer company Dell and semiconductor giant American Micro Devices.

Austin subsequently has the highest net inflow of tech workers of any major US city over the year from May 2020 to April 2021. The perception that workers needed to be in close proximity to their employers’ headquarters was seemingly broken.

According to Linkedin data cited by the San Francisco Chronicle, the Texas capital gained 217 tech workers for every 10,000 users, while the Bay Area lost 80 per 10,000.

Tesla has broken ground on its 4 million sq ft factory in Texas, which is expected to create 5,000 jobs, and will build the company’s Model Y and Cybertruck models.

"We talk about ourselves as the Human Capital," said Laura Huffman, president and chief executive of the Austin Chamber of Commerce, of the region that has 25 colleges and universities.

"I also would not underestimate the importance of quality of life," said Ms Huffman.

"There are a lot of things about this community, it’s got a great local flavour, a great music scene, it's an outdoors city.

“That's where people want to be. I think 2020 has taught us all that we have more choice when it comes to where we live.”

Tech investor Joe Lonsdale has also moved his 8VC financial company to Austin.

"It's just become really obvious that there are a lot of places to build around the country, not just Silicon Valley, due to cost of living, talent and all sorts of other things, culture and what not," Mr Lonsdale told the Austin American Statesman.

The city has now regained 97 per cent of the jobs it lost during the pandemic, according to the chamber of commerce. Unemployment is down to 4.6 per cent from a peak of 12 per cent in April 2020. By contrast, San Francisco has lagged behind bringing employment back to pre-pandemic levels.

But advocates for Silicon Valley insist the firms have not left for good and will still employ people in the region.

“Haven't left Silicon Valley; they're still continuing to employ people here. They're still continuing to innovate here in Silicon Valley,” said Peter Leroe-Munoz of the tech industry's advocacy organisation, the Silicon Valley Leadership Group.

“We've got a very unique blend of world-class universities, ample venture capital and we attract immigrants from all over the world at a rate higher than any other region,” he told San Francisco’s KTVU station.

Carl Guardino, the former chief executive of the Silicon Valley Leadership Group, said that losing innovators and leaders was never helpful.

"Companies go where they're wanted and they stay where they're appreciated," he said.

"That takes some of the top intellectual talent somewhere else and often those other jobs will follow so that they stay together. Either way it's not good for our region or our state," said Mr Guardino.

But don’t count out California just yet. The state has defied doomsayers and surprised everyone by turning a projected $54bn budget deficit into a $75.7bn surplus. There is also $27bn in federal aid still to spend.

Even as the tech majors expand in Austin, they are also investing more in California – Google plans to invest $1bn in California real estate, and Apple has signed a huge lease to expand in Sunnyvale.

The Golden State also leads in venture capital needed to fund start-ups and take tech firms to the next level. According to data from research company Pitchbook, VC deal activity in the Bay Area topped $61.5bn in 2020, and in Los Angeles, it was $19.3bn. Austin’s total was just $2.3bn.

While the Bay Area will continue to be the centre of the tech industry, other metropolitan areas have benefitted from the upheaval of the pandemic economy to capture a share of the business.

Austin is certainly one city that appears to be leading the way.