The Silicon Valley Model

Posted by on 16.04.2009 in business, economics, london

Boston’s case illustrates the difficulty you’d have establishing a new startup hub this late in the game. If you wanted to create a startup hub by reproducing the way existing ones happened, the way to do it would be to establish a first-rate research university in a place so nice that rich people wanted to live there. Then the town would be hospitable to both groups you need: both founders and investors. That’s the combination that yielded Silicon Valley. But Silicon Valley didn’t have Silicon Valley to compete with. If you tried now to create a startup hub by planting a great university in a nice place, it would have a harder time getting started, because many of the best startups it produced would be sucked away to existing startup hubs.

That’s Paul Graham, saying some interesting things, as he tends to do, making an argument he has made repeatedly. Last year he caused a stir at a conference in London when he told the audience they’ll never compete with Silicon Valley’s startup magnitude. (Also see How to Be Silicon Valley and Cities and Ambition.)

There are some good insights in this one but the historical analysis seems to miss a little.

Graham compares this to the Industrial Revolution, which is a fair comparison in terms of scale, but I think we should recognize that these current changes are a kind of reversal, or inversion, or undoing of the Industrial Revolution.

Through the Industrial Revolution the economy itself gradually became like one big machine — or at least that’s how most economists tended to see it. Everything could supposedly be quantified, reduced, and rigorously predicted. 

Silicon Valley represents something else entirely. 

Looking back at the Industrial Revolution and most of the time since, it’s reasonable to summarize that the attitude was basically about controlling more and more factors of production and distribution to ever-greater degrees of efficiency, perhaps culminating or reaching a terminal mark in the form of Six Sigma methodology.

The big turning point for business between the Industrial Revolution and today was Frederick Taylor’s Principles of Scientific Management, published in 1911 — not to mention the founding of Harvard Business School in 1907 and the introduction of Ford’s Model-T in 1908 (along with the assembly line and, essentially, the US auto industry). For good measure I might as well mention the panic of 1907, which directly led to the creation of the US Federal Reserve in 1913. 

All of those enterprises and institutions represent an attitude aimed at expanding and refining control of production and distribution. (Conversely, as I suggested in Ex Industrialism, communism and socialism  — while opposed to capitalism — shared the same underlying inclination to control anything within reach, and all of these ideas are on the verge of being consigned to history.)

That way of doing business has certainly accomplished a lot and improved our quality of life immeasurably. But it can only go so far. For example, we know that no process will every be 100% defect-free. Our best efforts can only get us infinitesimally close to perfection, but never perfect: Six Sigma aims for 99.9997% efficiency. 

Now more people are wondering, “Sure it’s great that Six Sigma [or whatever] gets us 99.9997% efficiency — but what does 99.9997% efficiency get us?”

There are doubts creeping in and people are starting to look for more than just metrics and monetization.

U of T’s Rotman School of Management dean Roger Martin captured the new attitude pretty well  in a 2006 BusinessWeek article (I’m recycling from an older post) claiming Scientific Management is Past its Peak:

While executives think they are doing the right thing by managing the numbers for the sole purpose of ‘maximizing shareholder value,’ they are perplexed that employees don’t find that to be a particularly inspiring reason for coming to work each day, and customers find the thought rather revolting.

That was written before the real estate crash and investment banking meltdown. Anyone who smirked at the sentiment then has been whipped by reality to respect it now now. History proves time and again that perfect knowledge and control is a fantasy. People will always be fallible and everything is vulnerable to unexpected events,which are inevitable — as Nassim Taleb delights in constantly reminding us

So with Roger Martin arguing that rigorous efficiency isn’t appealing enough to be sustainable and Nassim Taleb arguing that carefully designed systems are inherently flawed anyways (to name only two high profile voices from a growing chorus), the assumptions and conventions that have embedded themselves into business culture — and our whole society is, in a sense, a business culture — since the Industrial Revolution are being de-leveraged and unwound as fast as AIG’s contracts.

A funny thing occurred to me last week. I remember the Dotcom Bubble collapse and I remember all of the “new economy” hype that led up to it… And I remember that for a while the “new economy” became the “so-called new economy” and Silicon Valley kind of went off the radar for a couple of years (with the exception of Google) — high tech entrepreneurs were seemingly reticent about what happened from 2000 – 2002 — and everyone went back to “sensible” investments, like hedge funds and real estate… 

Now the new rules for the new economy look a lot more sensible again. Even by 2006 the new economy had quietly worked its way back into the spotlight again: the Davos theme that year was The Creative Imperative, and the demand for designers (and design-fluent managers) seemed to explode.

Looking at things on a large historical scale, the underlying attitude is turning away from rigorous, objective value and control, towards creativity, openness, and subjective value. (No doubt it will half-cycle back to a stiff attitude again in a few years — and maybe we’ll even be foolish enough for one last socialist-industrial planned economy push — but over the next century we should be looking at momentum away from that.)

Rather than expanding control and diminishing variations, the emerging attitude will be about expanding variety and accommodating the unknown. It inverts all of our intuitions and assumptions about doing business and managing the economy… Know your ecology and complexity science.

(My favourite books on this are The New Pioneers by Tom Petzinger, Surfing on the Edge of Chaos by Richard Pascale et al, and Bob Sutton’s Weird Ideas That Work… I haven’t read Jeff Jarvis’s What Would Google Do?  yet — I have it on-reserve — but I think it might make my list too. Orbiting the Giant Hairball has been on my reading list for a long time as well.)

So far Silicon Valley is the best model we have for going forward. It addresses the two big defects of industrialism: the one pointed out by Roger Martin, that employees and customers are turned off by rigorous efficiency, and the one pointed out by Nassim Taleb, that the unexpected is inevitable.

Venture capitalists fund a large number of startups knowing that most will fail. Founders themselves understand that (though they may not be inclined to remind themselves of it often) and put all their energy into the product or service on its own merits — whatever monetary value it might generate is secondary and tends to come later (and if the money doesn’t come, then you take what you learned and try something else or work for someone whose startup worked out).

This attitude will spread to other kinds of work — just as industrialization spread from textile mills to coffee shop franchises and call centers — but it won’t happen tomorrow.

Remember it took over a century after the dawn of the Industrial Revolution until Frederick Taylor, Henry Ford, Harvard Business School, and the Federal Reserve marked its maturity… and then it took nearly another century for industrialism to run its productive course, finally worn out by industrialist caricatures like James McNerney, Rick WagonerGeorge W. Bush, MBA, and Alan Greenspan

(You might have noticed the apparent contradiction: Greenspan stands for the free market and Silicon Valley is the freest market there is. If Greenspan represents the end of something doesn’t that implicate Silicon Valley? No. Greenspan’s “free market” failed because too many of the massive companies in in it were like socialist regimes: the system was brought down by the same institutional defects that go along with socialism.)

Ok, now what does all this have to do with Paul Graham’s argument about startup hubs? (Gah — I almost forgot!)… Oh ya. Graham’s essay was about two ideas. The one about cities specializing (e.g. being a “startup hub”) was the second, and,

The first is that startups may represent a new economic phase, on the scale of the Industrial Revolution. I’m not sure of this, but there seems a decent chance it’s true. People are dramatically more productive as founders or early employees of startups—imagine how much less Larry and Sergey would have achieved if they’d gone to work for a big company—and that scale of improvement can change social customs.

So that’s what I’ve been writing about because that’s what I wanted to focus on.

But further down in the piece, as he went on to write about startup hubs, he mentioned that LA specializes in the movie industry and New York specializes in finance. But to imply that New York quasi-monopolizes finance jobs is a little misleading. 

I read recently (forgive me for losing the link, which was probably from Richard Florida) that while New York dominates banking and finance in the US, the local economies in a lot of smaller midwestern cities are more dominated by finance than the larger, more diverse New York City. 

Omaha comes to mind… Come to think of it, so does London Ontario — especially if you include banks’ call centers and insurance companies.

What I’m getting at is that while a few cities will be more important for the post-industrial way of working, the post-industrial way of working may be relatively more important to many more cities.

For example, maybe Vancouver will overwhelmingly dominate the Canadian economy in, I don’t know, video games; but video games could still make a more substantial contribution to London’s economy than to Vancouver’s…

While Silicon Valley will continue to be the hub for a specific kind of high-tech startup, and as the post-industrial startup attitude spreads to other kinds of fields (as it has been with biomedical research, etc, and as Graham himself suggests will happen), then other cities have opportunities to become hubs for the startup-ization in other fields.

… lot’s of opportunities.

If you’re a municipal politician hoping to make your city a hub for some emerging field, Graham has some advice. Unfortunately, if you’re looking for simple suggestions on how to generate highly probable results, you’ll be disappointed.

First of all it’s hard to tell exactly what the new types of industries will be. Second, by the time we’re able to figure out what they’ll be, some city will have already established itself as a hub, giving them a huge competitive advantage. So the advice amounts to hoping to get lucky and have one or two extremely successful personalities decide to set up shop for reasons that may be entirely personal or arbitrary:

Silicon Valley is where it is because William Shockley wanted to move back to Palo Alto, where he grew up, and the experts he lured west to work with him liked it so much they stayed. Seattle owes much of its position as a tech center to the same cause: Gates and Allen wanted to move home. Otherwise Albuquerque might have Seattle’s place in the rankings. Boston is a tech center because it’s the intellectual capital of the US and probably the world. And if Battery Ventures hadn’t turned down Facebook, Boston would be significantly bigger now on the startup radar screen.

Ironically, deliberately cultivating a city into the next Silicon Valley requires a very Silicon Valley-type mindset. The details are out of your hands. You can’t control everything (or hardly anything). Embrace promising opportunities but don’t be afraid to let them fail. From an investor’s perspective, know when to let go — “fail early and fail often” (but founders must be absolutely committed until failure is absolutely obvious). Do something gratifying. Create something you believe is inherently useful and good — not merely a means to some objective or monetary end.

Imagination, curiosity, openness, humility, passion, pragmatism, perseverance… the rest works itself out.