What Makes Silicon Valley Unique?
In a recent interview, tech guru Marc Andreessen noted that, although Beijing has great potential to be the next Silicon Valley, it probably never will be. Despite the great engineering talent and enormous market, its lack of openness is a serious liability.
While many might argue with Andreessen’s conclusions (it’s always hard to tell when he is offering genuine insight and when he is merely trying to be provocative), the questions he raises are important ones.
Why is it so hard to create another Silicon Valley? How should a society encourage innovation? Why are some places with great technical talent (like the former Soviet Union) seemingly unable to produce innovative firms? While there is no strict formula,there are some conditions that must be met for innovation to thrive.
How The Bay Area Became The Technology Center Of The World
While the computer revolution came to its fruition in Silicon Valley, it didn’t start there. The first modern computer was developed back east, at the Institute of Advanced Study (IAS) at Princeton under the direction of John von Neumann. Even today, our computers are arranged in what’s called the von Neumann architecture after that very first design.
Perhaps not surprisingly, the further development of technology was centered around East Coast institutions, such as AT&T’s Bell Labs in Murray Hill, NJ, IBM Research in Yorktown Heights, NY and the Route 128 corridor near Boston. These were the places that had both the academic and corporate resources to make innovation happen.
However, that changed after World War II. The old line academic establishment was uncomfortable with engineering (the original IAS computer, always controversial at Princeton, was abandoned after von Neumann’s untimely death). Big corporations, for their part, were skittish about investing in risky ventures with uncertain profitability.
So military research budgets found a home out west, at places like Stanford, whose linear accelerator attracted some of the world’s greatest scientific talents. Other places, like Moscow and Dubai are trying to recreate Silicon Valley’s success by developing innovation hubs like Skolkovo and Media City.
Unfortunately, it takes more than geeks to make innovation happen.
The Creative Class
In The Rise of the Creative Class
, urbanist Richard Florida makes the case that attempting to create innovation hubs in sterile office parks is counterproductive. After all, if young, tech savvy professionals can work anywhere, why wouldn’t they want to work someplace fun, with a thriving music and art scene, underground bars and cafes?
He points to Pittsburgh as an example, where he was once a Professor at Carnegie Mellon, one of the world’s premier research institutions. However, for all the great technical talent that comes through, few stay. They leave to places like the Bay Area, Austin and the Research Triangle in North Carolina.
In Florida’s view, building an innovative place requires three elements: talent, technology and tolerance. Places like Beijing, Moscow and Dubai have an abundance of the first two, but a gaping void in the third and that will make it difficult for them to ever achieve a decent return on their investment in technology.
While Florida has his detractors, after spending most of my adult life in Eastern Europe, I find that his ideas ring true. There was never a lack of technical talent in the Soviet Bloc, but the sense of intolerance was (and, increasingly, still is) palpable. Anybody with a taste for Pussy Riot and Anonymous, will most likely be happier somewhere else.
Tech Catalysts
One often overlooked element in creating an innovation center (and one that government has little control over) is the emergence of a company which becomes a catalyst by creating a network of tech savvy angel investors with close ties to the community.
Hewlett Packard, among others, served that purpose in Silicon Valley by helping to build the “garage entrepreneur” culture. ICQ, in Tel Aviv, created vast wealth for its founder, Yossi Vardi, who in turn almost singlehandedly forged Israel’s VC movement. The new book Tech and the City
points to Doubleclick’s role in catalyzing New York’s startup scene.
Again, culture plays an important part. Start-up moguls in Silicon Valley and other tech meccas tend to stick around and reinvest their money, time and energy in the community. Meanwhile capital flight remains endemic in places like China and Russia. For people like Mail.ru’s Yuri Milner, Steve Jobs is surely an example, but so is Mikhail Khodorkovsky.
The True Wealth of Silicon Valley
It’s no wonder that so many places seek to be the next Silicon Valley. Perhaps never before in the history of the world has so much wealth been created in so short a time in one place. Technology is the new oil and any society that can not create it is at a tremendous disadvantage.
However, many efforts to recreate the success of the Bay Area amount to no more than hi-tech Potemkin villages. They invest in the trappings, but share none of the spirit or the culture. While that may seem ethereal and high minded, the truth is that it matters.
And that’s the true value of Silicon Valley. It serves as a beacon – a sort of Statue of Liberty for the 21st century, if you will. It is the one thing that unites the hacker in Kiev with the protester in Istanbul. However, unlike the Statue of Liberty, those who seek it do not have to cross oceans in steerage, a simple Internet connection will do.
So there is really no need to build another Silicon Valley. It is enough to live in the spirit of the one we already have.
– Greg
You wrote – “In Florida’s view, building an innovative place requires three elements: talent, technology and tolerance. ”
A fourth element often never mentioned is that the Silicon Valley, according to insiders, is the biggest dog eat dog capital in the World!
Greg,
Great post. Like a cake. You’re the Master Baker. I can smell the fragrance of the ingredients. The dough though. is still rising – its still not quite baked yet.
What’s needed? Just a little more heat. And a few more ingredients.
Heat in this case adds communities to the concept of conditions which you bring out. Think Renaissance. Not just Florence, Italy. Or Silicon Valley.
Ingredients = behaviors and motivators in their right combinations. Its not just an engineering capactity for problem solving, practical thinking, systems design.
There also has to be high degrees of creativity, imagination, conceptual thinking, risk taking, and abilities to not rely on tradition persecptives and ways of seeing and doing.
As for motivators, there has to be a highly cultivated aesthetic drive not just a theortetical or unitilitatian one. Additional there has to be fluid lines of communication and understanding of vision and direction.
You can see that when the ingredient mix is right between skills, competencies, acumens, behaviors and motivators and to those are applied the right heat of conditions, financiing, climate, timing and tempeture – then the dough rises, stays risen and the fragence of what is – lasts from the first initial smell, to the first taste and then through to the last bite. And then has us coming back for more!
Its this through the last bite part that’s also often missed to when describing Renaissance thinking and Silicon Valley mind. That part represents the repeatability and scalability of the procress.
Great article Greg! I agree it is very often overlooked the importance the city’s quality of life has in attracting global talent to an innovation hub.
I guess it would depend on which “insider” you asked.
– Greg
Great thoughts, Jay.
Thanks.
– Greg
Thanks Sergio. When you get out in the world a bit, you realize how important culture really is.
– Greg
The way it was told to me, I assumed this was a universal culture in Silicon Valley. Looks like maybe I was wrong.
I think like most places, you hear a variety of things from a variety of people. I’ve seen a lot more cutthroat places, though.
– Greg
Good article Greg. Having traveled extensively both domestically and internationally, I echo your comments around tolerance and a culture of creativity. I also see a great deal of synergy with Jay’s comparison to the Renaissance. It seems to me a strong corelation of ideas are birthed when the proper culture of creativity meets the proper level of funding.
With these thoughts in mind, I would be interested to hear from you and others on other domestic or international locations where you believe there could be a transformative ecosystem that would support the next great boom?
Kenny,
Good question. Ironically, I think Eastern Europe is a great place for innovation. Places like Poland, the Baltics, Czech, Hungary, etc. all have great, open cultures (for the most part), strong educational backgrounds and a great lifestyle,
– Greg
The belief that Silicon Valley will remain the only or even the pre-eminent “technology hub” in the world is quite dangerous for the people of California or the United States, who are extremely over reliant on this area as an economic engine. Silicon Valley is already struggling with several albatrosses which have little likelihood of leaving its neck soon. Namely:
Albatross 1) Inability to bring in foreign talent at both the founder and “troops” level: There is no doubt of on-going US congressional political deadlock over anything to do with the words “immigration” or “citizenship”. This situation has gotten so bad that some people in Silicon Valley are even contemplating a floating Silicon Valley in the international waters off of San Francisco (http://blueseed.co/) (http://www.huffingtonpost.com/2011/08/18/peter-thiel-seasteading_n_930595.html). However, this cruise ship idea fails to meet Richard Florida’s tests and will therefore not be a practical replacement for Silicon Valley. As one VC confessed to me, “It’s a bit like a new Alcatraz for techies”;
Albatross 2) Ever increasing tax burden both for existing VCs and new founders: Whether you think it is fair or not, the revenue model of a “progressive” (aka accelerating) tax system has resulted in the top 1% of US taxpayers paying just over 1/3rd of the total revenues. These “Golden Geese” are no longer “sticky” as a result of global “flattening effects. This dangerous overdependence becomes even more extreme as we look at the .01%. The top 400 individual taxpayers contributed just under 2% of the total individual taxes collected. If just 49 more join Eduardo Saverin and cease to be future US taxpayers, that will have the same negative economic impact as 10 sequesters. Watch this video, and armed with the knowledge that 30 year old Mr. Saverin paid hundreds of millions in US tax before severing his future US tax liability, consider the likelihood that he would invest in the US in the future (http://www.youtube.com/watch?v=tE-IySdt-XI). Now also ask yourself if the next Eduardo Saverin or Sergey Brin will reconsider moving to the US (i.e. lost opportunity cost for the US from their non-presence). Finally, if you are US citizen VC (whether native born or immigrant) you know that no matter who is the future US president or state governor, they will need more revenue simply to pay for existing entitlement programs meeting an aging population. With the tax revenue model being so overdependent, the tax burden just keeps on increasing on Silicon Valley’s Golden Geese;
Albatross 3) Civil Litigation: The US is home to over 90% of the world’s civil litigation. Undoubtedly, people and companies do things for which they should be sued, but there is also a huge amount of “litigation blackmail” which has no legal justification. IOW, the incentives are there for people to play the litigation lottery and sue on completely frivolous grounds on the hope that the target will give them some type of settlement to avoid the cost and distraction of litigating the matter. The long-term effect is that potential litigants (and it only makes sense to sue deep pocketed Golden Geese) will leave the US and take themselves out of the firing range.
For one or all of these reasons, people in Silicon Valley are being inspired to consider leaving the US. Like every immigrant in history, after they have first decided to leave their current location, the next decision is where to move to. A quick Google turns up many possibilities (http://en.wikipedia.org/wiki/List_of_technology_centers). Mr. Satell mentioned only Moscow and Dubai in his article, but there are many other “civilized and tolerant” locations around the world which meet Richard Florida’s criteria and therefore are poised to be the landing point for individuals who cannot get into or who want to leave Silicon Valley. If you think this is unlikely, then I would simply point out that Mr. “Creative Class” himself Richard Florida now calls Toronto, Ontario, Canada his professional and personal home!
There’s an interesting theory that another factor was that in California, non-compete agreements are largely unenforceable, while in the east they tend to be enforceable. So on the west coast, great people were able to move around and contribute to many different companies, leading to more innovation than on the east coast, where good people were less able to move around and spread ideas and knowledge.
David,
Thanks for pointing out these areas. Another one you can add is a infrastructure, which is a national disgrace in the US. The expanded investment improved things a bit, but only from a “D” to a “D+.”
However, I wouldn’t go to far. Having lived and worked in 4 foreign countries and done business in many more, I can assure you that every jurisdiction has its challenges. Taxes are much higher in Europe, skills much lower in developing countries, employment law is more strict almost anywhere and corruption is a serious concern in many places.
In fact, in IMD’s most recent survey, the US ranked #1 in competitiveness and is always near the top. So, while there are certainly valid concerns, I wouldn’t be two quick to declare the grass greener elsewhere.
– Greg
That may be so. For sure, moving between companies is far more common and accepted in California.
However, in any jusidiction, non-compete agreements are very hard to enforce. They need to be very well written (i.e. extremely specific). You can prevent someone from Coke going directly to Pepsi, but can’t do anything about someone going to work in a general industry.
Generally, courts take a very dim view of restricting someone’s right to work. I’ve even found this in countries with fairly primitive legal environments.
– Greg
Greg: Full disclosure here. I am an international tax lawyer who specializes in assisting VCs (and other financial types and entrepreneurs) in looking at alternatives to their current US personal and business situation.
Like every immigrant in world history, my US clients have first determined for themselves, that their home country is no longer best for them, their families and their business. They call me to answer the second question, “Where to go?”.
With regards to the Silicon Valley VCs, they have a very good idea of where they and their businesses can expand, relocate, and flourish. My job is to make their personal and business situation as tax efficient as possible. Citing rates in isolation is useless and misleading. The tax equation is “taxable income/capital gains” times “tax rate” equals “tax dollars paid”. Using legal tax planning, they are able to reduce and control the amount of “taxable income”, they and their businesses are legally obligated to include in taxable income/capital gain. With this type of planning, any concerns that you raise about higher (than the US) taxation in the new location is eliminated.
With regards to skills, take a look at the list I cite in my original post. Only a fraction of those are located in “developing countries”. Talent is searched for globally. My clients want a location which has a) such a high population that there is sufficient numbers of the skills you are looking for eg. India or China; or b) is immigration friendly and allows you to pool global talent within a jurisdiction eg. Canada, Australia, New Zealand, Europe
With regards to corruption lets look at that list and compare it to the current global corruption ranking (http://www.transparency.org/cpi2012/results). You will note that the US is number 19th, with most of the prior 18 having the Richard Florida elements necessary to create a “Silicon Valley”.
When looking at your resume, I see that you spent time in “Eastern Europe” with some time obviously in the Ukraine. With the Ukraine ranking 114th on the corruption scale, your perception might be a bit skewed. If you simply look at one of its neighbours Poland you will find a) 41st on the corruption list; b) only EU country NOT to go into recession or bail outs its banking sector; c) has a very large highly educated domestic work force; and d) since it is part of the EU, is now a major destination for mobile EU talent that is fleeing recessions in other countries. All factors have made Poland a major technology destination (http://multishoring.info/market-news/everest-poland-is-an-ideal-place-for-offshoring-it-projects/)
On the issue of “Rule of Law”, I suggest that you read Niall Ferguson’s “The Great Degeneration”, which discusses how the US is failing on this “killer app”. All the countries on the cited list have much better litigation climates; speed to court processes to resolve commercial disputes; and stability of laws, legal system and governments, than the US.
I bring all these points forward simply to note that there are storm clouds on the horizon for Silicon Valley (some would argue they are already overhead). In addition, the “Rise of the Rest”, means that there are viable alternatives for those who are seeking an exit strategy. Food for thought!
David,
Yes, I spent significant time running businesses in Ukraine, but also in Poland, Russia and Turkey and have done business in a variety of other countries.
Trust me when I tell you, American tax liability is not especially onerous and, even more importantly, taxes are only one consideration in running a business and far from the most important one.
– Greg
Greg: With all due respect, it is neither your opinion or my opinion whether US tax liability is “too onerous”. That is up to each individual “Golden Goose” client to determine for themselves. Even if you compare the US to Canada, Canada has NO gift or estate tax AND all non-Canadian income and capital gain produced outside of Canada can be excluded from “taxable income/capital gains” for 5 years using basic pre-immigration tax planning. Therefore, an individual or corporation who moved to Canada would pay a FRACTION of the tax that they would pay in the US. And Canada is not the only country where this is possible, the list is long. Despite the fact that I have been an international tax lawyer for over 2 decades, some basic research can quickly back me up.
You are right in saying that tax is not the only consideration in running a business. However, if one looks at the expenses side of the ledger, it is often the highest or near the top.
For more detailed discussion and background, I commend your readers to this comment (http://disq.us/8edspx).
Bottom-line is that I think that complacency by the US in assuming that Silicon Valley will always be the economic engine it has been in the past, is the result of ignoring a changing world rather than based on reality.
Duly noted. Thanks for sharing.
– Greg