From various meetings with international startup centers from Russia to Portugal, they all have inquired whether they could create a Silicon Valley in their country. But I have been hesitant to answer in the affirmative, since some of the ingredients for success may not be available in that country. Maybe one can find an ingredient substitute. So the best approach is to investigate why Silicon Valley has become the leading bee hive for technology in the U.S., if not the World. Then each country can determine whether it can replicate a smaller version of the Valley in their country.
First let us analyze why Silicon Valley (“SV”) Eco-System is the leading investment arena for technology companies in the U.S.? $8.4 Billion was invested nationwide by the last Quarter 2013, with an average investment of $7.88 million, for a total of 1,077 Deals. SV stands out with 39% and 306 deals.
Source: NVCA/PWC Q4, 2013
Region Amount % of Total Deals
Silicon Valley $3,220M 38.48% 306
NY Metro $1,220M 14.57% 123
New England $917M 10.96% 106
Rest of USA $3,012M 35.99% 54
1. Quality Educational Institutions
Some commentators extol the existence of Stanford University, Berkeley and other academic centers as the fulmination of creative ideas and engineering talent that led S.V. to its grand status in the World. True. Well trained engineering, business and legal personnel do help. But that cannot be the principal reason for S.V. success.
The New England States are the home of the largest concentration of colleges and university in the U.S. With several hundred, they include leading engineering schools such as MIT and universities from Harvard through Yale. Yet, this region is ranked third.
So from this data you can only conclude that the education helps but it is not determinative.
With over US$3.2 billion invested in startups alone by the last Quarter of 2013, there is no question that new companies need capital to fund business development, employees/managers, product design, and office/administration. SV led the country by controlling over 39%. New York and New England are a distant second and third, respectively.
In such financing environment, one cannot help observe that every technology company worldwide comes to SV for the Holy financial grail. From that source of monetary honey, one cannot help noticing the large value of companies being funded. And if one does the reverse engineering that for every 5 company being funded, 95 are rejected, I suspect that over 6,000 companies were inspected by various investment firms an angels in one quarter alone. That is the best advantage that capital offers – it attracts entrepreneurs, and the more capital the region has, the more deals are being evaluated.
And yet, that alone cannot be the reason. New York metro region is the financial capital of the U.S. By that logic alone, New York should be number one, not number two.
3. Telecom/Wireless/Internet Access
With Cisco and many Internet hardware and software companies abound in SV, it helps to have a robust telecom infrastructure. Intel has been founded here as well as other notable technology names. But will that alone make it? Again, New England has almost identical infrastructure as well as New York. It certainly helps considerably. Yet, it cannot be the most important ingredient to creating another SV.
4. Compensation Model
In an earlier blog, I related the equity style of compensation prevalent in SV. https://jrzarco2001.wordpress.com/2013/12/21/rewarding-employees-with-incentive-stock-programs-isos-specifically-addressing-the-83b-election/. One SV VC partner commented that she would rather have the startup company spend its available cash on product development rather than salaries. Her preference was a modest salary base with an ISO. Product and business development would lead to product sales and to growth.
Meanwhile, European startups are hampered with such a model. The ISO model is great since the capital is directed toward product design and marketing, not to general administrative costs such as labor. https://jrzarco2001.wordpress.com/2014/03/30/does-it-pay-to-be-a-technology-startup-in-europe-or-siiicon-valley/
New England and New York are not handcuffed with such restrictions though. If, on the other hand, I wanted to promote startups in Europe, then a compensation model has to be designed for that market which would lead to a viable exit strategy for the entrepreneurs.
5. Community Support
I once asked the CEO of a European technology company why he preferred Silicon Valley over New York and London. He answered that the experts and advisors are all in SV. I do notice the SV large volume of conferences, exhibitions, “meetups”, mentorship programs, incubation centers, seminars from investment and legal firms, and social events that create technology communities. Social meeting tools such as Meetup.com seem specifically designed to encourage these social and professional meetings. Yet, those environments exist in New England and New York, albeit without the volume and the intensity found in SV.
But I do believe these events are all necessary. One Spanish CEO related to me that he found the SV ecosystem energetic. His European experience described insular business environments that did not share ideas and information. He could not stop by any business in Spain without the managers being perplexed. The many group meetings holding startup competitions, crafting pitches, or preparing managers for IPOs all help any startup company looking to succeed as an entrepreneur. And many are chaired by investors, which afford the opportunity of a private meeting and then sending the pitchdeck to some investor met at these same events. Therefore, these opportunities increase the chances for funding.
In summary, if a foreign country or metropolitan region were attempting to replicate the SV ecosystem, the business development must include the various factors described above from communities to capital access in the right quantity and intensity to encourage entrepreneurship. Not one ingredient provides the solution. Like the cooking ingredients in making a cake, one must allocate the right ingredients to recreate a Silicon Valley ecosystem.