I recently moved to Chicago and, a couple weeks later, found myself reading this article: Why Chicago Needs to Stop Playing by Silicon Valley’s rules. I agree with it. I also want to speak more generally on “the next Silicon Valley”. It doesn’t exist. The current Silicon Valley is succeeding in some ways ($$$) and failing in others (everything else) but the truth of it is that it’s an aberration. It has as much staying power as the boomtowns surrounding North Dakota oil. Trying to replicate it is like attempting to create one of those ultraheavy chemical elements that lasts for 50 nanoseconds, but less interesting and far less cool.
I’m 31 years old, which is about 96 in Silicon Valley years, and I’ve seen a lot of the country and world, and I’ve come to the conclusion that “the next Silicon Valley” is a doomed ambition because it’s a pretty fucking lame one.
Rather than explain this, I think that a picture really is worth a thousand years here. So let’s look at some inspiring, creatively energetic, cities. These are the sorts of places that bring ordinary people to reach for the extraordinary, instead of the reverse.
Budapest:
Chicago:
New York:
London:
Paris:
Okay, so now let’s take a look at Silicon Valley.
I think my point is made by these pictures. There is a sense of place in the world’s great cities that just isn’t found at 5700 Technology Park, Suite #3-107, Nimbyvale, CA 94369.
Why no location can electively become “the next Silicon Valley”
I think the pictures above tell the story well. Becoming the next New York or Budapest or Paris or Chicago is a worthy vision, although any city will develop its own identity more quickly and more successfully than it can replicate another. Becoming the next Palo Alto is fucking lame. Now that the cherry orchards are gone, the only thing that the Valley has is money, and “I just want more money” is a pathetic ambition that leads to failure. Money has to come from somewhere, so it’s worthwhile to understand the source of the money and whether a region’s success is replicable (and desirable). Silicon Valley is rich because it’s a focal point for passive capital. This capital, drawn from teachers’ pension funds and university endowments, gets funneled through a machine called “venture capital” that is supposed to throw its money behind the most promising new businesses. Yet for reasons that most would find unclear, those funds tend to be directed toward a small geographic area. Now, the passive capitalists don’t especially care where their money is sent, so long as they get good returns. If the best business decision were to put that most of that money into Northern California, that would be easily accepted by the passive capitalists, even if they live in other places. While an Ohio State Police pension fund might ideally prefer that some of the jobs created by their passive capital be created in Ohio, they’ll gladly see their money deployed whereever it gets the best returns. That means that the extreme concentration of deployment in California would be completely OK– if it were justified by returns on investment. However, venture capital has been an underperforming asset class for years, and there’s no sign that this will change, because VCs are incentivized to optimize for their personal reputations and careers rather than their portfolios, and that favors the behavior we see. With the returns being abysmal, however, perhaps the Palo Alto strategy ain’t working. Perhaps this extreme concentration of passive capital, creating jobs in already-congested places where ever owning a house is extremely improbable for people who do actual work, is pathological.
My sense on the matter is that Silicon Valley is pathological, hypertrophic, and innately dysfunctional. Talent and capital like to concentrate, but not necessarily in that specific way, and not in such heated competition for resources with the existing economic elite (whose values are at odds with those of the most talented people). While it starves the rest of the country of attention and capital, Silicon Valley is past congestion and suffering for it, in terms of traffic and land prices. On paper, it’s set in a beautiful geographic area, and if you can get away from everything created by humans, California actually is quite pretty. That said, 22-year-olds without cars aren’t going to be impressed by Mountain View’s 200-mile radius when everything they actually see on a daily basis is an ugly, suburban shithole that they pay far too much to look at. Talented people do want to be around other talented people, but they prefer diversity in talent, not rows and rows of tech bros (who often aren’t very talented, but that’s another story). Because of talent’s natural draw toward concentration, and given the U.S.’s tendency toward high geographic mobility, I don’t think that this country will ever have more than 15 or 20 serious technology “hubs”– and even that would be a stretch, given that we currently have about five– but I do think that it’s possible to have a distribution that’s better for everyone involved. The current arrangement is bad for “winning” locations like Northern California, bad for the losing geographic areas, and bad for pretty much everyone individually except for extremely wealthy venture capitalists (who benefit from a reduced need to travel) and well-placed landlords.
As it exists, Silicon Valley probably shouldn’t. It’s a boomtown with ugly (and expensive) housing that wasn’t built to last. It has what could be a decent (if sleepy) almost-city in San Francisco, recently destroyed by the unintentional conspiracy of NIMBY natives (who create housing supply problems) and VC-funded new money. It is rich, on paper, and will be for some time. But replicating accident and pathology is a pretty lame strategy when directing the fate of a new place. The causes of Silicon Valley’s richness and (mostly former) excellence are more worthy of study than the superficial factors, like weather or workplace perks or representation in the entertainment industry.
What, then?
While “next Silicon Valley” is a lame ambition, there is something to that geographic region that makes it attractive to talented entrepreneurs. It provides a path to corporate hegemony that, at least by appearance, combines the “cool factor” of starting a business with the low risk of an investment banking or management consulting track. It encourages risk-taking and a superficially cavalier attitude toward failure, which appeals to a certain type of young person who has never failed and who hasn’t learned yet that life has stakes. The Valley has also done a great job of rebranding the corporate experience as something that left-leaning, upper-middle-class young people can swallow. Silicon Valley excelled in technology in the late 20th century; in the early 21st, it has proven itself world-class at marketing. Since brand-making is crucial to success in the sorts of first-mover, red-ocean gambits that VC (increasingly oriented toward attempting to sit inside the natural monopolies that technology sometimes creates, rather than actually building technology) now favors, that’s not surprising.
In business, there seems to be a continuum between low-risk, slow-growing businesses and “rocket ships” that burn up in orbit 95% of the time. There’s also a misperception, that I want to combat, that utter failure of new businesses is the norm. The risk exists, but 90% failure rates (while not uncommon in the Valley) are actually pathological. The actual failure rate is somewhere around 50 percent. In fact, compared to corporate jobs, the failure rate of typical small businesses (as opposed to VC-funded red-ocean gambits) isn’t much worse. Between firings, layoffs, political messes and damaged reputations relegating a person to second-class status, non-promotability, and less-desirable projects, it seems to be a constant that about 50 percent of jobs fail within 5 years. Of course, the range of outcomes is different; starting a business has more personal downside, and more potential gain. If there’s something that ought to be fixed in the process of new-business formation, it’s the amount of financial risk borne by those who don’t use venture capital.
For low-risk businesses that are unlikely to fail, bank loans are available. However, bank funding is a non-starter in launching even the least risky (“lifestyle”) technology companies, because bank loans those tend to require personal liability, which means that you can’t use them for something that might actually fail. Bank loans are great if one wants to capitalize a franchise restaurant or a parking garage, but not suitable for anything that involves making a new product. At the other extreme, there’s VC. The mid-risk, mid-growth range is, however, overlooked. For a business carrying, say, a 20-30% chance of failure and targeting 40% annual growth, there’s no one out there. Why is that?
Venture capital could be just as profitable by investing in mid-risk businesses as it is by throwing into the extreme high-risk pool. After all, if valuations are fair, then there’s just as much profit to be made investing in large companies as small ones. We’re probably not going to see a change in VCs’ behavior, though. The truth about that industry is that it’s celebrity-driven, and the VCs have a lot to gain and lose by playing the reputation gain. No one cares about the difference between a 7% and an 12% annual return on investment, but there’s a lot of credibility that comes from having “been in on” a Facebook or a Google. This also explains the (justly) hated tendency of venture capitalists toward collusion, co-funding, and reliance on social proof. One might want for VCs to compete with each other (i.e. do their jobs) and avoid this sort of mediocritizing collusion, but with the career benefit of being in on the once-per-decade whale deals being what it is, the incentive to spread information (even at the expense of entrepreneurs, and of ethical decency) around is obvious.
A successful business could easily be built by focusing on the mid-growth / mid-risk space, and delivering an option that removes personal financial risk while avoiding the ugliness and the aggressive risk-seeking (even at the expense of the ecosystem’s health) of traditional venture capital. That would also reduce reliance, for businesses, on the geographical advantage of Silicon Valley, which is access to ongoing capital and the perception of a liquid market for talent. It could be very profitable. It could be this mentality that builds the next ten thousand great companies. It won’t be done in Silicon Valley, however; and when it happens, it won’t come from anyone attempting to, or even cognizant of such a concept, create “the next Silicon Valley”. It will be driven by people creating the first something.
