Where to open a business in California - Part 2

Earlier today, I posted an evaluation that I conducted comparing different cities in California for the purposes of opening a marketing or advertising related business. I caveatted the findings by saying I had not weighted the education resources based on quality. This evening, I went ahead and added the education weightings in and made a number of other changes which I think presents a truer picture of the actual climate for where to open a business in California.



Findings according to this new methodology:

• San Francisco talent pool is in fact stronger than average (but not as strong as LA),
• San Diego lost the most ground going from #1 to #3 (expected given the lower weighting of the city fees - San Diego has the lowest fees by far),
• Los Angeles business climate is least business friendly due to a combination of highest rents (class A, desirable neighborhoods) and 2nd highest fees (yet still half San Francisco),
• Due to a severely weak talent pool, Sacramento swapped places with San Francisco to be the least desirable location,
• Interestingly, when pure rankings are the only factor taken into account (SUM RANK), Sacramento is ranked #2 overall due to its cost of living, cheap rents, and relatively cheap city fees (and San Jose falls from #2 to #4 due to its average performance in all three categories),
  

Here are the summarized changes I made:

1. High scores are best (previous version had low scores as best)
   
2. Weighted raw data as Cost of Living (25%), Talent Pool (50%), Business Climate (25%) to reflect every business' need to find and retain the best talent (indexed against San Francisco)
   
3. I updated the overall methodology to include weightings for population size and a more refined education scoring. This is expressed in the methodology in two ways, 1. nearby 4-year colleges (overall, large, & w/ MBA programs), and 2. total population with 4-year and graduate degrees.
4. I also changed the weightings on the business climate to calculate the potential rent and city fees as percent of Gross Revenue. The reason is that expressing city fees and rents seperately over-weighted the city fees portion significantly given the huge discrepancy between San Francisco and other cities. For example, using the earlier example of $15MM revenue, the assumed (in San Francisco) rent would be $700,000 per year and city fees would be $135,000 - a 5:1 ratio. However, if seperated and indexed against other cities, city fees were outweighing rent as a factor by ratios of anywhere from 5:1 to 20:1 -- in other words, city fees were swinging the results by up to 100 times (5:1 x 20:1) leading to disproportionate results.
5. Lastly, I dropped Phoenix from the evaluation. While peaking interesting personally, I did not have the time to continue working on non-relevant data.

Where to open a business in California

UPDATE: Where to open a business in California - Part 2

I did an evaluation today comparing some the major cities in California for the purposes of opening a business. The results were very interesting and are posted below. (I also included my home town Phoenix out of curiosity). I evaluated three elements related to my field - advertising and marketing:

1. Cost of Living: Salaries, Amenities, etc.
2. Talent Pool: Competitors in market, colleges and universities
3. Pro-business Climate: Rents, businesses license fees and payroll tax

Interestingly, Phoenix would beat all California cities for the reasons you would suspect - cost of living is the best and the climate is pro-business, but places a lousy 5th overall because the talent pool (for consulting, marketing and advertising) is dead last compared to the other cities.

San Francisco, where I live, places dead last because the cost of living is highest, government taxes the most, and the relative combined lower totals of advertising related companies and colleges compared to other areas.

A couple of caveats, I did not weight the standings of the colleges and universities in the areas otherwise Phoenix and San Francisco would have had stronger talent pools (Cal, Stanford, Arizona State are all class top universities pumping out thousands of talented individuals each year). I also did not measure things like MBAs per capita, etc. Correct or not, the working assumption in this evaluation was that things even out with volume.

The biggest surprise was that both LA and San Francisco do not cap annual city fees which sends their fees skyrocketing when your business starts to ramp up. In my scenario, assuming a $15MM annual revenue yield for a consulting business, the following fees would be due to each city:

• San Francisco: $135,500
• Los Angeles: $62,050
• Sacramento: $5,000
• San Jose: $1,800
• San Diego: $514
• Phoenix: $50

In other words, to run the same consulting business in San Francisco would cost you 2,710 times as much in city fees as it would in Phoenix. This of course begs, why would anyone consider starting a business in San Francisco when the wages are highest, the talent pool is average and the city has its hand in your pocket?