How to Kick Silicon Valley's Butt

From the fjords of Norway to the sands of Israel to the ice of Alberta to the waves of Honolulu, many regions of the world have Silicon Valley Envy. They look at the Valley as a place where people start cool companies that generate billions of dollars of wealth (and tax revenue), create thousands of jobs, and yet does not pollute the environment (at least compared with a smokestack). The question I hear over and over is, “How can we create our own Silicon Valley?”

First, a little background. It’s taken more than seventy years to create Silicon Valley. Any politician who thinks she can create another Silicon Valley in one or two terms is overly optimistic—perhaps one has to be very optimistic, if not delusional, to be a politician, but I digress.

Second, to my knowledge, there has never been any “master plan” for the creation of Silicon Valley. What stands before you is an amalgamation of hard work, luck, greed, and serendipity but not planning. Indeed, Silicon Valley has probably worked because there was no plan.

Third, my father was a state senator in Hawaii, so I understand how politics work. I have zero interest in a political career. Just to make sure I‘m never tempted, I penned this posting to burn down any bridge to a political career. (Sometimes it’s a good thing that the Internet archives everything you ever said.)

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Stuff You Can’t Do Jack About

• Beautiful, but not gorgeous, surroundings. California is beautiful. The weather is good. It’s fun to live here. No matter how great an entrepreneurial environment Cleveland creates, it’s always going to have people wanting to move away. If a place is gorgeous, like Hawaii, then the distractions are sometimes too great. Some place in the middle is what’s ideal. At the very least, it would be good to have a lousy season so that the company can be extremely productive part of the year.

• High housing prices. If houses are cheap, it means that young people can buy housing sooner and have kids. When they have kids, they can’t take as much risk and don’t have as much energy to start companies. (I have four kids—I barely have the time and energy to blog, much less start a company.) Also, if houses are cheap, it’s easier to “make it big,” and you want it to be hard to make it big.

• Cities, crowds, and high- if not over- population. The pressure of these conditions make people jealous of each other; this in turn makes them compete. Cities also bring people together to work. People can’t telecommute to a startup. People need to get together to bounce ideas off one another, argue, and cajole. Also, over-crowding gives people something to shoot for: that is, achieving success so they can get out of there.

• Absence of multi-national companies—especially the finance industry. If your companies have to compete with conglomerates or banks like Goldman, Sachs throwing money at people, it’s going to be hard to get anyone for a startup. Pity the startups in New York, London, and Singapore. Come to think of it, how many tech success stories have come from these cities? There is intense competition for employees in Silicon Valley too, but we’re using the same currency: the upside of equity, not high starting salaries.

• Life-threatening enemies. Israel is a speck of dust that has few natural resources, and it’s surrounded by real enemies. And yet the country has produced some of the world’s best technology companies. There’s nothing like a life-threatening environment to get the entrepreneurial juices flowing, I guess. If a region has to do nothing more than stick a pipe in the ground, throw a net in the ocean, clean beaches, or manage a natural seaport, it’s going to be tough to be the next Silicon Valley.

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Stuff You Can Do Jack About

• Focus on educating engineers. The most important thing you can do is establish a world-class school of engineering. Engineering schools beget engineers. Engineers beget ideas. And ideas beget companies. End of discussion.

  If I had to point to the single biggest reason for Silicon Valley’s existence, it would be Stanford University—specifically, the School of Engineering. Business schools are not of primary importance because MBAs seldom sit around discussing how to change the world with great products. Mostly they care about how to get interviews at multi-nationals and consulting firms. As my mother used to say, “Best case, engineers give buildings. Best case, MBAs endow chairs.”

  On a tactical level, this means that aspiring regions should raid the best engineering schools. What do associate professors at Stanford, MIT, and Carnegie Mellon make? Whatever it is, offer them double the amount to move. Be clever: how hard could it be to recruit top flight faculty to move to your beautiful (but not gorgeous) region if you conduct interviews at MIT in the winter? This is a trivial expense compared to the various incubator, tax treatment, and venture capital fund formation schemes that are the usual solutions to the challenge.

• Encourage immigration. I am a third-generation Japanese American. My family moved here to drive a taxi and clean white people’s homes. If I had a choice between funding someone from a family who moved here from Vietnam whose father and mother run a 7-Eleven versus a descendant of a Mayflower passenger with “IV” in his name, I’ll give you half a guess as to my preference. You need to encourage smart, hungry, and aggressive people to immigrate from around the world. And to do that, you need good schools. To mix several metaphors, if you want to cover your ass, you need to open your kimono because trust-fund kids don’t make good entrepreneurs.

• Send the best and brightest to Silicon Valley. I can hear the complaints already: “This will lead to a brain drain which is exactly what we are trying to prevent.” This attitude misses the essence of entrepreneurship: it’s not about preventing bad things, but fostering good things. Would it have been better for Hawaii if Steve Case had become a lawyer at his father’s Hawaii law firm instead of moving to the mainland and creating AOL? I don’t think so.

  The goal is to infect them with the disease called entrepreneurship and show them that there can be more to life than “a job;” that two guys/gals in a garage can change the world; and that a lot of money = millions of dollars. Sure, some people will never return—like me. But those who do return come back with a much broader perspective on what life and a career can be. Maybe they will build another Silicon Valley because they’ve seen it done before. Here’s a dirty little secret: Silicon Valley is more a state of mind than a physical location, and you can’t alter a state of mind by staying a home.

• Celebrate your heroes. Every region needs its heroes. These folks take role modeling to an extreme; they have names like Steve Jobs, Bill Gates, Ted Turner, Steve Case, Anita Roddick, and Oprah Winfrey. Kids need heroes, so that they can say, “When I grow up, I am going to be the next Steve Jobs.” In many places, a successful person is pulled back down because of jealousy. Sure, there’s jealousy in Silicon Valley, but our way of dealing with it is to try to outdo the person, not pull her back down.

• Forgive your failures. There is no better place to fail in the world than in Silicon Valley. (Where else can you get your clock cleaned by Microsoft and become a venture capitalist and top-ranked blogger?) Indeed, some people here have made a career of failing. Some of this is cultural—failing in Europe or Asia casts a cloud over one’s family for generations. Not in Silicon Valley. Here, it doesn’t matter (within reason) how many times you fail as long as you eventually succeed. So many entrepreneurs who failed went on to create massive successes that we’ve learned that failure is a poor predictor of future results.

• Be logical. Make the challenge to create a Silicon Valley as easy as possible. Thus, a region should use it’s natural, God-given advantages. For example, aquaculture in Hawaii, security technology in Israel, alternative fuels in the Midwest, and solar power in the Sun Belt. There’s a reason why the best woolen sweaters come from Norway and the best Aloha shirts come from Hawaii. It’s not because people tried to buck the trend.

• Don’t pat yourself on the back too soon. Many regions declare victory because Microsoft, Sun, or Google opened a branch office. These branch offices don’t hurt but don’t kid yourself into thinking that the existence of a branch office means that you are now a tech center. Truly, a region is a tech center when its companies open branch offices elsewhere, not when tax incentives and kowtowing got a company to open up a branch office in it.

• Be patient. There is nothing short-term in these recommendations. I estimate that creating something that begins to look like Silicon Valley is at least a twenty-year process. This is certainly longer than most politician’s reign—mdash;hence the challenge of doing the right things for the long run.

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Stuff You Shouldn’t Do Jack About

The short answer is that the government should not do much except provide more funding to the engineering schools. Unfortunately, that probably won’t seem like enough to most people.

• Don’t focus on “creating jobs.” When a region adds the second bottom line of creating jobs, things get whacky. Such a goal perverts the objective of a startup because the primary, perhaps the sole, goal of a startup is to kick ass. If it also has to create jobs for the sake of creating jobs, then you defocus it. The thinking should be: “If this company kicks ass, then it will survive and grow. If it survives and grows then it will create jobs.” So let startups focus on kicking ass and the jobs will come naturally-or not.

• Don’t pass a special tax exemption. There’s an assumption that tax benefits for investing in startups encourages entrepreneurship. I disagree; I think it mostly creates sloppy decisions by unsophisticated investors and crooked ones by others. Indeed, the unstated (and perhaps unrealized) goal of a sophisticated investor is to create, not avoid, tax liabilities. Nothing would make me happier than having to pay $100 million in income taxes. I would hand deliver that income tax return to the White House.

• Don’t create a venture capital fund. The thinking here is that a government created venture capital fund would kickstart entrepreneurship because of the influx of money. However, if there’s one thing you can depend on in venture capitalists, it’s greed. If you show them good engineers with good ideas for good companies, they will appear by (private) plane, canoe, dogsled, and camel. Such a region doesn’t need to create a fund. A supply of capital does not create demand from entrepreneurs—mdash;at least not the kind of entrepreneurs that you want.

  (There is one notable exception to this: the government of Israel created a seed fund that launched its venture capital industry. However, my interpretation is that the fund was successful because there were already entrepreneurs there; the fund didn’t cause entrepreneurs to suddenly appear out of the desert.)

• Don’t provide cheap office space and infrastructure. The rationale is that if entrepreneurs had office space, photocopying machines, T1 lines, and adult supervision, they would be successful. I can’t think of a case where cheap space, incubation, whatever caused success. This isn’t to say that there haven’t been successful companies from incubators (eBay is arguably one), but the key point is to determine the actual causes of success. Cheap space, etc, can’t hurt, but I’d buy engineering professors, not crappy buildings. Just because there’s a cheap building doesn’t mean you should create an incubator out of it.

There’s one more thing you need to do: Aim higher than merely trying to re-create Silicon Valley. You should try to kick our butt instead. That’s true entrepreneurship.

Acknowledgement: Thanks to Glenn Kelman of Redfin for a huge contribution to this posting.

Comments

[James Garnon]

Yes Thanks Guy for adding to the 06/06/06 "number of the beast" jollity that is circulating the web.

(I am assuming that this post is an elaborate joke that has been misunderstood by the link-hungry lunatics of the business blogsphere.)

To argue, as you pretend to do, for the economic benefits of a region where miserable weather forces people to work for the profit of others, where house prices prohibit ownership and prevent families raising children in favour of toil, but that nonetheless remains over-populated enough to stimulate greed and envy and encourage people to be"jealous of other people", where there are few natural resources to promote security and also the added bonus of a genuinely life-threatening environment to quosh any hope of content, where labour is cheap, rootless and desperate, "hungry and aggresive", but still aware that the best way to look after their asses is to open their kimono to those more powerful, where job creation and tax breaks are frowned open as enemies to desperation, where those violent and ruthless enough to clamber over the heads of others are lauded as heros, were people focus on "kicking ass" lest whacky perversion leads to them charity and love for their fellow man, that really would please Satan on his birthday if he existed, which of course he doesn't. Any more than the baby Jesus.

Christ, who needs satan anyway when so many are prepared to take your funny joke seriously.

So which country do you favour? Iraq? Afganistan? Or (are you thinking long term) Iran? For my money I'd look to Africa. The secret war in Dafur on the edge of Sudan looks ideal. I don't know if in its hysteric one-eyed rabidity the US media is even covering the genocidal hideousness of that particular conflict given the naughtiness of North Korea and Iran but I assure your gullible readers that there are no natural resources there at all, and awful dangers, tonnes of refugees, lots of people practiced in real ass kicking (and kimono lifting), and really no chance at all of surfing in what is a truely inhospitable climate.

I'd put my Silicon Valley there. True the schools are awful but think of the aid money that will flood in once the media get bored of the middle east. Thats your long term bet. Mark my words.

Thanks again for an uplifting post and all the best.

(oh and if you fancy a giggle pop over to Rosa Say (your Hawaiian compatriot)'s blog entry for 666. She was telling people to hug strangers, pass jolly notes to their workmates, dance, play, turn of television, comment on other people's blogs. She clearly didn't know what day it was. Or else she just isn't quite as funny.)

[Justin McHenry]

Guy,

The weather in Cleveland is awesome! Awesome, I tell you! Global warming is putting us in the catbird's seat, baby!

When you Californians have earthquaked out of existence or simply floated out to sea West of the fault lines, you're going to be wishing you'd set up where the sun always shines, the birds always sing, and where the finest minds in science and technology are already plotting world domination--Cleveland, suckas!

[FutureTechWeb.com]

There is another factor playing a central role in the formation of such tech conglomerates, the "economies of scale" and "economies of purpose" that are created. They affect the pool of talents, specialized suppliers and so on.

Great post.

www.futuretechweb.com

[vinnie mirchandani]

Guy, fanstastic...

but I would say compared to 10 years ago, it is actually good
to see some global variety - Korea with leading edge mobile apps, lots of Open source from Scandanavia, variety of BPO from India, obviously a bunch of manufactured stuff from China,

it is good to see tech be so global. 40% of my humble blog readership is outside the US - yours is likely even higher...

[Stiennon]

Hah! Your comment on "don't do it to create jobs" strikes home here in Michigan. The Economic Development group focuses solely on job creation. We are also big on creating "corridors". Detroit has Automation Ally, the High Tech Corridor, and dozens of tax free (which are not) development zones. So why is Michigan number 50 in job creation and number 1 in population flight?

I am in the process of launching my 10th Michigan based startup. This one will work because I do not need any Michigan customers!

[GregR]

Good points but I would add access to markets that can seed your product. Silicon valley is a good place to start. (but it doesnt explain Israeli success).

[Brad Hutchings]

Great post Guy! I disagree about the telecommuting vs. office thing. There is a percentage of people who are effective remote workers. It's not 95% and it's probably not 50% or even 30%, but it might be 20%. Brought together with good, cheap tools (Skype, Bosco's Screen Share, e-mail, $25 unlimited long distance) they can definitely work more effectively and will give you a lot more than making them move and commute to an office. Office culture is great for control games and for pertuating bureaucracies but not much else. I'm probably a combination of good and lucky, but I have not found any shortage of opportunities over the past 5 years that would accept me working from home or while traveling or whatever and had others doing the same. It may be outside the comfort zones of some VCs and some bosses, but it is becoming a significant portion of the talent pool. On the flip side, I have a couple suppliers that I have to have over to my home office to get them to accomplish anything -- some people need structure. Gotta play each game as you see it.

[Web 2.0 Asia]

On your note "Send the best and brightest to Silicon Valley," I'm a bit dubious about its feasibility. How does a bright engineer from Korea land a job in Silicon Valley, given the current dearth of H1 Visa?

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The government of Korea and universities could sponsor programs that send kids to Silicon Valley. It would be a lot cheaper than tax incentives, incubators, and VC funds.

Guy

[Michael Urlocker]

I agree with your comments about a tax incentive as a corruptor of clear thinking: "It mostly creates sloppy decisions by unsophisticated investors."

In my finance work, every once in a while I would come across very shrewd tax planning, such as delaying or structuring a deal to be more tax efficient, which had the unintended effect of producing losses because events changed in unexpected ways.

Maximizing cashflow today and just paying your taxes is often the simplest, best way to create high profits.

Tax planners and cheapskates may disagree.

[keith ray]

I used to work for a start-up whose founder came to Silicon Valley from Japan. Why didn't he create the start-up in Japan. Good question.

He told me it was because it was VERY hard to create a new business there. Very hard to get a venture capital or a loan.

I've heard the same thing about St. Louis, MO. USA (where my wife comes from) - also hard to get funding for a startup from the local VCs, there.

There are SOME countries that we still consider "third world" that stay that way because it's too hard to start a legitimate business - ambitious not-rich-yet people work in the underground economy instead of the legit one.

[Wil Schroter]

We need another Silicon Valley about as much as we need another Wall Street or Hollywood or Vegas (ok, I could use another Vegas).

Why re-create what's already working? How about creating a definition of your city that no one else has?

Originality. What a novel concept.

[Jim Lyons]

Great post, Guy. I am forwarding to the local business leadership (Boise, ID) for their consideration.

[Henry]

Hey, I grew up/live in Cleveland! I just moved back after living in NYC and DC and I hated Cleveland growing up, but after getting some perspective, its not THAT bad. Then again, if a good opportunity came up, I might move. Cleveland's new motto should be, "Cleveland, its not THAT bad".

[Steven Kempton]

Guy, New Zealand is on the way! We have beautiful surroundings, house prices are getting higher, but we lack a life-threatening enemy and overpopulation (we are working on it though). All we need to do next is recruit some of Stanford's Engineering faculty and pick a fight with Australia and we will be rocking all the way to global domination. Great post.

[Ryan Torma]

Richard Florida, an economist, has written two excellent books on this subject, "Rise of the Creative Class" and "The Flight of the Creative Class." I highly recommend them both.

[Paul Elosegui]

Guy, you have definately burnt your bridges in Europe.

Most European politicians know that you cannot delegate entrepreneurship and economic growth to the market and the masses. All you get is creative destruction, market disruption, and upset all the old encumbent monopolies. You bad boy !

Jacques Chirac, the french president, is so upset with these Google upstarts his government is funding a French alternative. The state knows best.

A case in point are the entrepreneurs that have been successful in continental Europe. Disrespectful, unpredictable, and chaotic. Why do these individuals always try to beat "The System"?. How is a career politician supposed to work with individuals so outside the established network. They don't even wear suit and tie ... I rest my case.

Joking aside, the proportion of successful EU entrepreneurs that secure funding from US and UK sources is sadly high. Obviously, there is nothing like greedy money.

You HAVE pulled your punches on labour laws. Mr Paul Graham seriously let rip on the need for labour flexibility in hiring and firing at the recent Amsterdam XTech conference. Not a popular view in France recently.

If you are visiting Europe anytime, you have my vote for EU president...hum, you do have to wear a suit though.

[Rich]

Fair enough Guy. I believe you. I guess as a blog reader you get this impression that you guys all know each other. I would have bet money that you knew who Paul Graham was since he is trying to put a new spin on VC funding with his Y-Combinator project.

Anyway, the fact that what the two of your wrote on the same topic is virtually identical, means you would probably like his writings. He's number 60 in the Technorati 100, by the way. Better get to know the competition! :)

[China Law Blog]

If I were to single out one difference between American business culture and Asian business culture that makes a Silicon Valley less likely in Asia, it would be "Forgive your failures." Americans boast of the guy who failed, failed and then suceeded, but in Asia, the loss of face can be overwhelming. The United States' bankruptcy laws are (still) quite forgiving as well, much more so than any country in Asia of which I am aware.

[brian]

Guy,

Not funding a kid with a "III" in his name? I guess you wouldn't have funded Bill Gates then. Oh, wait nevermind...Microsoft is the Dark Side.

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Maybe I'll change it to "IV." :-)

[Ethan]

Expensive housing? Um... Guy, the Silicon Valley got going in the first place in part because of inexpensive housing, with plenty of room for big yards so that the engineers (nearly all family men) could raise their families happily.

[Candy Minx]

I've got a great idea! Seeing as you have been such a good sport about my teasing you and your desire for top ten technorati ranking...I am going to offer half the sale of my portrait of you for the charity of your choice. I keep expecting you to delete my comments at your blog or maybe I sound like a stalker...but you have been a good sport. So when I put my painting with your portrait in it up for aution...just to make some fun...

half the profit I dedicate to a charity of your choice Mr. Guy Kawasaki...

myabe this gesture will inspire all these business groupies to look at some contemporary art...don't forget to buy art when you make your millions you Kawasaki grouies!

much love to all,
extreme high priestess of buttkicking,
Candy

:)

[Rich]

I'll give you the benefit of the doubt Guy, but this post is pretty close to a direct rip off of Paul Graham's essays. You either didn't read them, which would be pretty wacky seeing as how they were everywhere on digg, reddit, etc., or you did and didn't mention Graham. Pretty strange.

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Always go with the simplest explanation:

- I didn't read his essay.
- I don't know who he is.
- I seldom read other blogs except when people point me to specific postings.
- I don't use Digg or Reddit.
- I don't rip people off.

Guy

[Candy Minx]

That was brilliant! I loved this very cool. Um, I am putting your portrait for sale on eBay tomorrow. It should be interesting to see what pull a portrait of "Guy Kawasaki" gets and what it's market value is...of ocourse including the idea that I am not a famous artist may be a drawback, but I've never shied away froma fight!

Your fan base here are such wimps, they don't even stop by my blog to look at your portrait. What jamtarts!

Much love and best wishes,
Your enemy in rankseeking,
Candy

[Dimitar Vesselinov]

MySpace, Skype, Facebook, Flickr, del.icio.us, Basecamp, Feedburner...What do these companies have in common? They are not built in the Silicon Valley...The internet is the new Silicon Valley. VCs (very clueless) just don't get it.

[Frank Walsh]

Great post Guy.

I can understand the intention of extreme statements like "Life threatening enemies", but it is a little over the top and for some reason struck a bad note with me.

The premise is on target, and I couldn’t agree more with the statement "If a region has to do nothing more than stick a pipe in the ground, throw a net in the ocean, clean beaches, or manage a natural seaport, it’s going to be tough to be the next Silicon Valley."

Adversity breeds ingenuity. 'nuf said.