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

[Todd Garrison]

Guy... I am a fan of yours, for sure. However, I don’t agree with one of your comments under the heading "Don’t create a venture capital fund." Your comment was that VC's will do just about anything to get into a deal anywhere if the "good engineers with good ideas for good companies" are the in the ingredients. Having been a provider of venture-debt to VC-funded companies for years and now living in Montana, I can tell you that there ARE all of those ingredients in companies here… unfortunately, they don't even catch a glimpse from VC's. With the exception of RightNow Technologies (RNOW) in Bozeman (one of my former clients), I can't think of any companies here that have been funded by a formal VC firm. The State tried to start a VC fund (which I'm not sure is a good idea) because VC's won't come to Montana except to fly fish. The effort recently failed (CSFB was to partner with the State), but they were unable to generate almost any interest from investors. What alternative is there for states like Montana other than a State-started VC fund?

[Geof Aucinleck]

For years I've heard the 'new Silicon Valley' chant here in Vancouver. My response has always been "our garages are just as good as theirs, and some are even heated!" As you say - they key is 'kick butt' not copy - which we are already doing in some areas (Hollywood North anyone?) Personally I think Vancouver has all the 'can't do Jack about' charateristics - even the 'common enemy', which in our case is our good friends to the south - thanks to the occasional trade battle.

In my own business, I knew we were getting there when one of competitors starting referring to us as 'two guys in an igloo in Canada'.

Great post as usual.

[ann michael]

Guy - great post (as usual). I have just one comment about the "focus on educating engineers" point.

While I think you're right, there are a lot of engineering schools out there that aren't Stanford! We need to create engineers that are in touch with consumers (like IDEO). We need engineers that build the things people want/need (or will want/need) and not just things that incorporate the latest technology because it's there! The soley left-brain approach to engineering isn't enough anymore. That's one of the thing that makes Stanford so amazing!

[Colin Bohanna]

Guy,
I have always looked up to you and enjoyed your thoughts. This post has excellent advice, not just for those trying to re-create Silicon Valley but for entreprenuers in establishing their mindset for success.

Cheers

[Arno]

Manual trackback:
Zeigt dem Silicon Valley wo der Hammer hängt! (in German)
http://arno-klein.de/weblog/2006/06/07/zeigt-dem-silicon-valley-wo-der-hammer-hangt/

[Laura Bennett]

Cleveland - what is it about using Cleveland as an example of undesirableness? Yes, the weather could be more desirable to some (but then I'm from Canada so I don't see anything wrong with it - go Edmonton!) Why don't you come over here and see what's going on. Things do change.

On your comment about not creating a venture fund, I agree with you that if the fund creates the entrepreneurs, then that's bad, but how many places don't have entrepreneurs beneath the scene just waiting for money?

North-East Ohio pulled together funds for an organization called Jumpstart (www.jumpstartinc.org) and thought that there wouldn't be very much interest in the fund until people decided to become entrepreneurs. Well, they were flooded from the start. The entrepreneurs were already here but had little access to start-up funding. There's so much demand from great entrepreneurs, Jumpstart can't keep up and extremely fund worthy businesses are getting turned away.

Sounds like Israel a bit...

[skillMeter]

Guy,

Best.. as always !.

Thanks,
Team @ www.SkillMeter.com

[Bernard Leong]

Well, thanks for saying this and I feel pretty good being validated by you here. This is an excerpt from what I have said earlier on whether can Singapore be a Silicon Valley.

Here is my answer to the question:

"I want to answer the question in the beginning, by taking an example how Steve Jobs, the CEO of Apple, brand the IPod product and the products made by his rivals. In his famous MacWorld keynote, he labelled all the other mp3 players to be “IPod Wannabes”, contrasting with his opponents constantly competing for the title of “IPod Killers”.

If you understand what I am saying now, the aim is not push Singapore to become a Silicon Valley, but to grow Singapore towards achieving an identity of a technology cluster that made its own mark. The future will be brighter for Singapore, if we start thinking of how to transform this new entrepreneurial movement and local infrastructure to a different and branded place compare to the one in California."

[Tim]

Only a minor point, verging on pedantry in fact, but I think 'begat' is the past tense of the verb 'to beget', so the 'Educating Engineers' paragraph should read 'Engineering schools beget engineers. Engineers beget ideas. And ideas beget companies.'

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Got it. I made the changes. I've never really figured out thy vs thine either if you understand the difference.

Thanks!

Guy

[Manoj Khanna]

Very interesting and intuitive post. Guy you rock! This reminds me of my meeting earlier this year with CTP in my home city Calgary, Alberta where the provincial, city and local efforts have been underway from past year and more to create a Silicon Valley sort of environment and attract companies to setup their respective shops.

Well, no one can beat California that's for sure. But with rising prices in every aspect; sustainability of resources could be a challenge in future. After all, we need to acount for inflation and the trend of economy as well, which is, right now is showing a slowing trend and is focused on quite a couple of dual-effect factors and is going to affect the Ideal-Silicon-Valley.

[andraz]

Well, isnt that the case with everything exeptional? I mean, you cant expect people to create fantastic things if the enviroment, culture and social status is just too confortable for them to run that extra kilometre? Totaly the same thing with art, science, cultural revolutions and social revolutions. Extraodrinary things happen in extraordinary enviroments. Thats been the case since the beginning of the human rase.

[Jeroen Heijmans]

There are several interesting parallels between this posting and two recent essays by Paul Graham: How to be Silicon Valley (http://paulgraham.com/siliconvalley.html) and Why startups condense in America (http://paulgraham.com/america.html).

[Maria Palma]

I echo the previous comment on this one....and Audi's slogan: "Never Follow". What people should be really asking themselves is "How can I make myself better and make a difference in other people's lives?"

[Shashi Menon]

Wonderful post. There is a definite reason why Silicon Valley has fostered such innovation over the past years, and as you mention, that type of environment is not easily transferrable or re-createable.

"Aim higher than merely trying to re-create Silicon Valley. You should try to kick our butt instead. That’s true entrepreneurship."

Truer words I could not have spoken.