Here's how I've always looked at it. It's retarded to think a startup cannot succeed anywhere. You can do ALL the things you need from the middle of Iowa, and still kill it. Here's what you're NOT given in Iowa? All the opportunities and resources you COULD have. By being in Silicon Valley, you have the maximum amount of opportunity and resources to succeed. Think of it like playing a video game: sure you could win with the basic pistol they give you, but it's probably best to face the game boss with a rocket launcher.

The other main question is scaling a company. If you're doing the typical venture back startup thing, then scaling is a huge issue. You need access to capital and talent to the point you can grow the company from 3=>30=>300 people. That's hard to do, especially on the engineering side outside of most startup hotbeds. If you're in a crappy city for a startup, think right now if you could go recruit 50 of the brightest engineers in the next 18 months there.

So in short a) you don't need to be in the valley to succeed, at least in the short term b) the valley can give you the maximum opportunities c) think about how the current city you're in can help you scale the startup when (or if) it needs to grow heavily, but don't think about it too soon.