A two-day forum on the Internet's role in economic development raises the question of why Silicon Valley remains the dominant home for tech startup success
French President Nicolas Sarkozy recently sent invitations to leading technologists to join him at the e-G8 Forum on May 24-25 in Paris. E-G8 is the first of its kind: a two-day session designed to foster discussion on the global ramifications of the Internet. The lessons learned from e-G8 will then influence the heads of state and government attending the Group of Eight summit on May 26-27. I'm not only looking forward to a return trip to Paris but also to participating in what are sure to be fascinating discussions on some tough issues. One topic certain to be central is how Silicon Valley's culture of innovation can be exported. If you casually ask most people in Silicon Valley why it is the undisputed capital of the startup world, you'll likely hear the expression "critical mass." While there is some truth in this, I believe the two main reasons Silicon Valley has become the worldwide center for innovation and entrepreneurialism are a local culture that is highly tolerant of startups and a relative lack of government interference. "If you will be unable to live with failure, don't do it." This is one of the best pieces of advice I've ever heard about starting a company. By nearly every credible estimate, more than 95 percent of startups fail. So why does anyone attempt it? Simple. The freedom and the mere possibility of large amounts of wealth and even fame are compelling. The potential upside is immense; the downside fairly minimal. Everyone locally understands the implications of a success rate of about 5 percent, and virtually no one holds that failure against you. In fact, Valley culture lionizes those who risk their egos—and, at least in the short term, their wallets. Not so in Europe, where expected tenures of employment are still measured in decades. Or where having many short stints at companies no one has ever heard of is frowned upon. This is also true across most of the U.S. where the recession and fear of unemployment still loom large. These cultural issues are significant. However, even though I lean toward libertarianism, I think government is probably the largest factor in determining how fertile the ground is for startups, whether by acts of omission or commission, for both good and ill. Governments can incentivize or penalize; they can also help influence the opinions of society. Succeed or Else
Europe is full of examples of laws that inhibit the creation of startups. Whether it is taxation rules on stock options in Norway, the law in Germany that bars chief executive officers of companies that have gone bankrupt from ever making another attempt, or the giant amount of personal liability that founders have in most European countries, the potential upside is curbed and the downside almost draconian. "Results in Europe show that if you don't have the right government infrastructure and policies in place, you'll wish you had never started down the path of trying to create the incubator phenomenon," says John Nesheim, a professor of high-tech entrepreneurialism at Cornell and the author of the startup bible High Tech Start Up. Laws that take the position you'd better be sure you're able to succeed or else tend to influence society in the same direction—and 180 degrees away from the atmosphere of Silicon Valley in which startups appear, vaporize, and reform literally every day. Indeed, this characteristic is the unique strength of Silicon Valley. And while California is not exactly small-business-friendly and the cost of living is high, these are rarely dampening factors.
Why has no one been able to replicate the success of Silicon Valley? I've heard two similar views on this within the past year, from very different sources. The first was Neelie Kroes, vice-president for the EU's Digital Agenda, and the second was Doug Neal, the head of the Center for Entrepreneurship, an organization that promotes high-tech growth in Michigan. Frustrated current and would-be entrepreneurs tell them about the barriers they had to overcome to succeed, in many cases twisting the knife by adding until we moved out to Silicon Valley. Despite the obvious differences in locale, the problems of the EU and Michigan are nearly identical, except for the highly startup-unfriendly EU laws. Further, both have this problem: Making fundamental change is next to impossible given the sheer size and complexity of their bureaucracies and democratic systems. Nesheim notes one advantage that smaller countries like Singapore have when they want to move in a particular direction, writing: "Within nine months after I worked with them, they had changed their bankruptcy laws, their IPO filing requirements, and removed various other regulatory hurdles to high-tech entrepreneurship." Keys to Success
I think the answer to the mystery of Silicon Valley's unique success is remarkably straightforward. In Silicon Valley, almost everyone is from somewhere else. There is no traditional society in place to disapprove of what routinely takes place in the Valley that is contrary to what goes on everywhere else—for example, the short life spans of even most "successful" startups. As Neal notes, in the far less transient Midwest "more people are focused on building lasting companies that will have a positive impact. It is less about flipping companies and much more about building things that will have long-term impact here." Michigan-based entrepreneurs are a very tough lot. They need to be. Venture capital is virtually unavailable, so they must build their businesses on revenue and whatever money they can borrow. It is thus no surprise that more of their ideas are practical in nature. If there comes a day when Silicon Valley's irrational exuberance becomes smaller and more infrequent, those outside Silicon Valley could very well have the last laugh. There is frequently peer pressure to start or join a startup. Objectively, this pressure is often inappropriate, causing young people with no operating or business experience to jump ship from a larger company before they have the skills they will need to succeed. This reflects one fundamental difference between Silicon Valley and everywhere else on the planet. The Silicon Valley mantra is "fail fast" and that of the rest of the world is "don't fail." There is neither a governmental nor societal penalty for trying. If anything, it is considered a rite of passage. On the other hand, more accountability on both the investor and entrepreneur sides might be generally beneficial, and would likely have to be government-provided. For example, I'd like to know how many times a particular founder has failed, and what his idea was, before I would want to invest in him. Likewise, before agreeing to take a particular investor's money, I'd like to know how many of his previous investments failed. If other countries or states want to replicate Silicon Valley's success, they will only do so via a government that offers incentives rather than penalties, offering innovative forms of assistance to worthy entrepreneurs, and visibly celebrating the high-tech entrepreneurs they already have. So I say bravo to President Sarkozy for setting up the e-G8 conference. He is acknowledging that the Internet is a key source of jobs and economic growth, such that it rises to the level of meriting its own track at the annual G-8 summit. The e-G8 conference will gather leading technologists such as Google (GOOG) Chairman Eric Schmidt, Facebook Chief Operating Officer Sheryl Sandberg, and Wikipedia founder Jimmy Wales, as well as a number of respected startup CEOs. I am very much looking forward to seeing what comes of it.