Elon Musk says Tesla’s headquarters will move to Austin. Are California’s much-vaunted venture capital deals the next?

In May of last year, Elon Musk, frustrated with California’s increasingly draconian governance, threatened to move Tesla’s headquarters to Texas. A month later, Tesla was negotiating to build its massive new factory outside of Austin. In December, Musk himself moved to the Lone Star State.

Today, 17 months later, Musk announced that Tesla’s corporate headquarters is moving from Palo Alto, California, to Austin, Texas.

Head office moves grab the headlines, but they don’t employ as many people as manufacturing operations. Not all staff will move with the seat, however – it depends on company policy and the personal desires of the workforce as they seek to balance the departure of friends and family (and high taxes and skyrocketing housing costs) for Texas’s lower cost of living and hot summers.

Companies moving from California to Texas are expected to cut operating costs by 32%.

ELON MUSK ANNOUNCES TESLA’S MOVE TO AUSTIN

Last year, Musk sharply criticized California’s heavy regulatory burden, suggesting that large companies can absorb regulatory compliance into their overhead costs while startups struggle: “You have a redwood forest and little trees cannot. not push. ” California should “step aside” from innovators, Musk added.

But what if California refuses to “sideline” innovators?

The dreams of innovators need money to come true. Venture capital (VC) often provides this money. Last year, 10,862 high-growth startups with 2.5 million employees raised $ 164 billion, or 51% of the global total. Meanwhile, 103 venture capital-backed companies have gone public, generating $ 222 billion in listed equity wealth.

California policymakers like to brag that their state takes the lion’s share of venture capital deals. In a debate broadcast live in September sponsored by Stanford and the University of Texas at Austin, I highlighted California’s many shortcomings, including: high cost of living, high taxes, and high tax rates. highest poverty in the country. My training partner, a former chief economic assistant to California Governor Gavin Newsom, underline that California captured 50% of venture capital deals in 2020, more than the next three, New York, Massachusetts and Texas combined.

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California has seen tremendous venture capital activity for decades, feeding off the state’s premier research universities, deep personal networks, and easy access to capital. But California’s share is eroding as the state continues to live off a huge pile of goodwill accumulated since it became an aerospace power in WWII.

If California was America’s VC motherboard, Silicon Valley was the high-speed processor. But Silicon Valley’s dominance is waning, its share of U.S. deals falling below 20% for the first time in history.

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High taxes play a role in the demise of California venture capital. When I was vice chairman of the California Assembly’s Committee on Income and Taxation, I remember the huge tax revenue gain for the state from Google’s initial public offering.

State capital gains taxes on sales of shares soared 36% from $ 39.7 billion in 2004 to $ 54 billion as Google founders cashed in their shares from their offering 2004 government contributing about $ 5 billion of the increase.

The same thing happened when Facebook went public eight years later. If these companies had been incubated, matured and made public in Texas, the founders and start-up investors would not have paid anything in state capital gains – Texas has no personal income tax .

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While Musk’s move to Texas grabbed the headlines, other major inventors and investors made the move last year as well. Joe Lonsdale, one of the founders of Palantir and Addepar in Silicon Valley, moved to Austin almost a year ago, just before Musk announced his move. Lonsdale’s venture capital firm 8VC has made 70% of its investments in California. He moved from San Francisco to Austin last November.

A successful VC business takes time to develop. With Musk settling in Texas with both feet, some of his friends, board members, and investors followed suit.

Texas’ mighty tax-exempt magnet is set to move the hub of the venture capital world from Silicon Valley to Austin, and with this shift, billions of dollars in investment fueling innovation will follow.

Chuck DeVore is vice president of national initiatives for the Texas Public Policy Foundation, served as a member of the California State Assembly from 2004-2010, and is a retired U.S. Army Reserve Lieutenant Colonel .