Paul, here is another point to backup your premise: one of the best ways to meet potential investors/acquirers is to go to the same social events that they do. If you live in the same place as them, even if you aren't going to a startup-oriented social event, you still have a good chance of running into them and striking up a conversation.
Case in point -- my cousin wants to make movies. So he decided to move to LA and get a job as a bartender. He went to bartending school and then got a job at a bar that is frequented by producers and other movie industry folk. One day he served a drink to a producer, mentioned to the guy that he wanted to make movies, and is now working on a couple of movie deals. That could have never happened even if he continued to live in his native Orange County, only 40 miles away.
A startup simultaneously creates several products for different markets:
1) It creates software for users to use. 2) It creates a company that owns the rights to certain software and accompanying intellectual property 3) It creates a community of users 4) It creates a team that has proven that it can create and ship a software product.
#1 is not geographically limited. You don't have to be in Silicon Valley to write software. Anyone in Duluth, MN can create software and load it on a server for users all over the world to use or purchase.
The market for numbers 2, 3 and 4 are geographically limited, however:
#2 and #4) The highest concentration of software companies in the world is in Silicon Valley. This in generally your market for #2 and #4. Your chances of interaction with someone interested in buying your IP are much higher in SV than in Duluth. Your chances of finding someone interested in paying top dollar to acquire a proven group of developers increases exponentially in SV.
#3) Many companies are interested in purchasing large communities of users. These tend to be located in large urban areas, however. If I'm Chief Acquisitions Officer (CAO) for BigMediaCo, and I'm interested in acquiring a startup that has a big community of users, it's not going to hurt if that company is based in Silicon Valley. It adds to the CAO's prestige if he has to travel to silicon valley to acquire a startup.
But, ask yourself this question: How would that CAO feel about traveling to Duluth to talk about the acquisition?
Also, the value of a network increases exponentially with the number of users in the network. In SV, it's hard to avoid networking with entrepreneurs and people in the software industry. It's really not that large, and after you've been here for any length of time, there are no more than 2-4 degrees of separation between you and everybody else in the Valley, including people who want to fund you or acquire you.
Case in point: I've been here for 1 year, and I know for a fact that there are 3 degrees of separation between myself, Guy Kawasaki and Woz, and 2 degrees of separation between 3 different VC's and me. That would probably never happen in Duluth.
Case in point -- my cousin wants to make movies. So he decided to move to LA and get a job as a bartender. He went to bartending school and then got a job at a bar that is frequented by producers and other movie industry folk. One day he served a drink to a producer, mentioned to the guy that he wanted to make movies, and is now working on a couple of movie deals. That could have never happened even if he continued to live in his native Orange County, only 40 miles away.