Could an online social network deliver a virtual “Silicon valley” to non-US economies?
Paul Graham recently wrote an essay which questioned “Could you reproduce Silicon Valley elsewhere, or is there something unique about it?“. IN summary, he asserts that “all you need is the people … if you could attract a critical mass of nerds and investors to live somewhere, you could reproduce Silicon Valley. I will extract a few more of Paul Graham’s thoughts below, explore the impact of cultural differences and explore the potential application of the internet in delivering “Silicon Valley” to non-US economies. Why do the people need to move? They can deliver their talents and energies over the internet.
Extract:
- It wouldn’t be surprising if it were hard to reproduce in other countries, because you couldn’t reproduce it in most of the US either. What does it take to make a silicon valley even here?
- What it takes is the right people. If you could get the right ten thousand people to move from Silicon Valley to Buffalo, Buffalo would become Silicon Valley.
- That’s a striking departure from the past. Up till a couple decades ago, geography was destiny for cities. All great cities were located on waterways, because cities made money by trade, and water was the only economical way to ship.
- Now you could make a great city anywhere, if you could get the right people to move there. So the question of how to make a silicon valley becomes: who are the right people, and how do you get them to move?
- I think you only need two kinds of people to create a technology hub: rich people and nerds. They’re the limiting reagents in the reaction that produces startups, because they’re the only ones present when startups get started. Everyone else will move.
- If you go to see Silicon Valley, what you’ll see are buildings. But it’s the people that make it Silicon Valley, not the buildings. I read occasionally about attempts to set up “technology parks” in other places, as if the active ingredient of Silicon Valley were the office space.
- Building office buildings for technology companies won’t get you a silicon valley, because the key stage in the life of a startup happens before they want that kind of space. The key stage is when they’re three guys operating out of an apartment. Wherever the startup is when it gets funded, it will stay. The defining quality of Silicon Valley is not that Intel or Apple or Google have offices there, but that they were started there.
- The exciting thing is, all you need are the people. If you could attract a critical mass of nerds and investors to live somewhere, you could reproduce Silicon Valley.
- There has been a lot written lately about the “creative class.” The thesis seems to be that as wealth derives increasingly from ideas, cities will prosper only if they attract those who have them. That is certainly true; in fact it was the basis of Amsterdam’s prosperity 400 years ago.
- If you want to attract nerds, you need more than a town with personality. You need a town with the right personality. Nerds are a distinct subset of the creative class, with different tastes from the rest. You can see this most clearly in New York, which attracts a lot of creative people, but few nerds.
- What you can’t have, if you want to create a silicon valley, is a large, existing population of stodgy people. It would be a waste of time to try to reverse the fortunes of a declining industrial town like Detroit or Philadelphia by trying to encourage startups. Those places have too much momentum in the wrong direction. You’re better off starting with a blank slate in the form of a small town. Or better still, if there’s a town young people already flock to, that one.
- The first is that you need time to grow a silicon valley. The university you could create in a couple years, but the startup community around it has to grow organically. The cycle time is limited by the time it takes a company to succeed, which probably averages about five years. The other implication of the organic growth hypothesis is that you can’t be somewhat of a startup hub. You either have a self-sustaining chain reaction, or not. Observation confirms this too: cities either have a startup scene, or they don’t. There is no middle ground.
- For all its power, Silicon Valley has a great weakness: the paradise Shockley found in 1956 is now one giant parking lot. San Francisco and Berkeley are great, but they’re forty miles away. Silicon Valley proper is soul-crushing suburban sprawl. It has fabulous weather, which makes it significantly better than the soul-crushing sprawl of most other American cities. But a competitor that managed to avoid sprawl would have real leverage. All a city needs is to be the kind of place the next traitorous eight look at and say “I want to stay here,” and that would be enough to get the chain reaction started.
The article is an excellent start on the issue. In an open source way, I would like to make a further contribution on two issues. Firstly, I would like to explore the potential for cultural differences that may prevent formation of a Silicon Valley. Secondly, I will explore the potential of the internet to dramatically reduce the time to establish a Silicon Valley in any other economy and make redundant the need for individuals to physically live in the new Silicon Valley.
Skype: Reflections for European Venture Capital, By Bundeep Singh Rangar
Extract:
The approach of European Venture Capitalists
When I first met Niklas Zennstrom on Day 2 of his arrival in London in the fall of 2003 following an introduction by Howard, we discussed the self-defeating process of most European VC analysis.
The calculation they made followed a method similar to the two highlighted below:
- 1. Calculate a value for the company today based on a 5-year discounted cash flow analysis with a 25% discount rate. Do a Net Present Value and Terminal Value calculation and see if you can get the IRR on an investment our Fund promised to our LPs ; or
- 2. Rate the company from 1-5 for each of the following: management team, market opportunity, technology robustness, defensibility and intellectual property, sales and growth strategy, profit horizon, etc. If it gets a median score above 3.5, take another look at it.
There’s nothing inherently wrong with either analysis – but they remain a sub-set of what’s required to evaluate an early stage deal for its true future value. If early-stage technology investments were so predictable for their returns, they would be an asset class indeed.
The approach of Silicon Valley venture capitalists
A few European VCs did have a chance to see Skype in its embryonic form. Their decision not to invest came down to a fundamentally different approach to investing. In contrast to Niklas’s experience in Europe , his dealings with Silicon Valley VCs (and those with offices in Europe such as Accel and Benchmark) were remarkably different.
They [US Venture capitalists] generally follow three logically inductive phases of thinking:
Phase I of Thinking
Does the company have a simple, easy-to-use product that can be easily adopted by consumers? Can this product be marketed directly to consumers so that its channel to market is not dependent on clunky corporates? Does the product fulfil a basic modern human need that users get excited about and tell others about and therefore, create a “viral†effect? If the technical, product development and market strategy are executed well such that it achieves scale and mass adoption, can it make lots of money through “economies of scale†once a “purchase price/revenue-profit model†switch is flicked on?Phase II of Thinking
What’s the cost of carrying the company until the point that the “switch is flicked on?†Do we, i.e. the VC, have the pockets to support it, the vision to encourage it and the networks to propagate it? Will the company’s product be so disruptive that its true value might be a calculation of money saved at the bottom line for doing the same utility using today’s technology rather than just money made at the top line at some point in the future?Phase III of Thinking
Do we, i.e. the VC, have the networks among decision makers in large acquisitive corporations that will value the company by calculating how its own cost of building the start-up’s new product, acquiring its customer base, scale, reach (particularly in new markets and demographs), traffic and brand will vastly outweigh the price of purchasing the start-up today. And that upon acquiring the start-up, can it flick on its own “much bigger switch†(i.e. revenue model) and see a much greater generation of revenue and profit? That’s the trade-sale argument to be made and won. And that will give a start-up today a multi-billion valuation tomorrow rather than just one worth tens of millions.
Different investors and service providers have different risk profiles. The differences in approach may reflect structural, rather than cultural differences. United States investors may be more risk oriented. The Silicon Valley private equity industry has the investment returns, building international companies, serial entrepreneurs, vibrant clusters, angel funding and “transparency” that comes with a long history. This transparency means that people, partnerships and capital can be assembled faster. There may even be a surplus of capital over good deals in these mature VC environments. All parts of the value chain understand risk. Given the scale of activity, all providers who assume some risk as part of the process are generally rewarded for their activities across the portfolio of companies in which they are involved. I would, however, suggest that this mature VC environment is probably not typical of the rest of the United States. These other areas in the United States may resemble other parts of the world.
The different approaches above may be a reflection of risk, rather than cultural differences. Europe has not demonstrated a reproducable early stage investment asset class for generating consistent returns at an understood risk. Although the quality of Europeans that are, and could be, involved in early stage investment are equivalent to the United States, the risk profile of investors and service providers is not. The lower level of activity also means that a portfolio of companies for an investor, or service provider, may not be large enough to deliver a predictable return. Thus, investors and service providers with a regional perspective apply a different approach in Europe.
Investors and service providers with an international perspective that are based in any location can mobilise international teams to execute, secure partnerships in the global market place and perform like the best venture capitalists. Location should not matter, except to the extent that it matters to others. It does matter to some. Opportunity can be a cold call away.
The key reason that Europe and other regional economies have not developed a “Silicon Valley” is not cultural and not lack of capital. There are enough entrepreneurs and the capital will mobilise. There needs to be predictable risk for involvement in early stage, greater transparency that reduces the costs of involvement and a significant reduction in the time/cost to find opportunities. Entrepreneurs and investors need to know who to call. The recipients of those calls need to be willing to get involved. With transparency, entrepreneurs and private equity firms can source the quality people and other elements necessary to build a business quickly and at a competitive cost (or for equity). Investors and service providers would be willing to work with these companies because they have sufficient activity in their portfolio of work/investments that assures them they will receive a certain return for their efforts or capital. Investors and service providers in Europe may not be able to create an early stage investment portfolio with enough diversity to ensure a specific return. The cost of finding quality opportunities is too high. However, the required transparency is generally only developed after decades have passed.
Is there a way to achieve transparency, without waiting for decades to pass and relationships to form in the conventional way? There must be a role for an online social network to assist each regional economy, company, advisers and investors with sincere early stage aspirations.
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