Read this and more of my posts on my website.
Half the world’s biggest tech companies have a Valley connection.
In head to head competition, more often than not, Valley startups still win. But if you’re a founder outside Silicon Valley, don’t be afraid.
You can do things they can’t.
Phoby James Pond
Competing with Valley companies on their terms is hard. They can access more money, faster growth, and deeper experience.
You don’t want to try to build the best company from the second best place.
That’s how you get OneFineStay when you wanted Airbnb, Hailo when you wanted Uber, or Creative when you wanted Apple.
But, because it’s winning, Silicon Valley can’t win at everything. Winning creates opportunities for arbitrage.
So, how can you build a company Silicon Valley can’t?
I’ve got three suggestions.
1. Arbitrage talent
Talent heavy companies outside Silicon Valley have an advantage.
Because Silicon Valley won, it has a lot of winners. This makes it difficult for new startups to hire.
If you’re a talented person in Silicon Valley, you can probably get a meaningful, highly paid job at a tech company that’s already successful.
New startups can’t compete on meaning or pay so, even if they can convince you to join, they can’t convince you to stay. Especially in exciting areas, last generation’s winners monopolise talent.
But in ecosystems where there are no winners, what do talented people do?
Traditionally, they choose between meaningful work and financial opportunity — poor in academia vs bored in industry. And there’s the arbitrage.
Outside Silicon Valley, if you can offer meaningful work and financial opportunity, you can attract and keep talented people. And there are way more talented people outside Silicon Valley than in it.
Hence the explosion of British machine learning startups. The talent was already there – startups just started doing something with it.
DeepMind is a striking example. Could it have been built in Silicon Valley? Probably not.
Founded by two PhD grads and a philosophy dropout (no offence, they’re my investors), in a few years they managed to assemble the world’s best team of machine learning researchers and do groundbreaking work.
Ironically, you couldn’t have built DeepMind in Silicon Valley because everyone who could've built it was already at Google, getting paid too much not to.
Machine learning was Britain’s talent arbitrage. By definition, it won’t be the same elsewhere.
But, in other fields, talent is global and waiting.
2. Arbitrage business models
North America is a great market for startups. Compared with Europe and Asia, it’s relatively homogenous and therefore easier to scale through quickly.
But, because it’s easier, more has been scaled. In North America, fewer opportunities are left to win.
This makes Valley businesses narrower. And that changes their unit economics. You can use this against them.
Take Uber. In Asia, it has taken a beating.
At first, Uber tried to compete with startups like GoJek. But, after a while, even for Uber(!) the unit economics stopped adding up.
Why? Because Uber is a transportation company, and GoJek isn’t.
Transportation is GoJek’s customer acquisition strategy for internet banking, shopping, and services. Mature markets in North America, but still winnable in South East Asia.
This makes GoJek’s unit economics completely different to Uber’s. Uber’s customers are worth way more to GoJek, and GoJek’s infrastructure costs spread across verticals.
To compete, Uber would have to split itself in two. The GoJek model won’t work back home: the US already has internet banking, shopping, and services.
Valley companies can be beaten elsewhere precisely because Silicon Valley has been so successful back home.
There is an important, but uncomfortable, version of this.
The Valley, especially in venture capital, is infamously white and male. You can do something they wouldn’t by making products specifically for non white non males.
The arbitrage is in investors’ business models. VCs have a habit of funding things they understand. Success without diversity compounds into blind spots.
3. Arbitrage regulation
Nimble governments can make what’s possible, legal. And ambitious governments take regulatory risk.
When governments compete, regulation is their most powerful weapon.
Aggressive regulation was the foundation of Silicon Valley’s fiercest challenger: China.
But regulation doesn’t need to be aggressive to create opportunity. It just needs to be clear. In most places, lack of clarity stops cryptocurrency companies opening bank accounts.
Progressive, clear, or sandboxed regulation can make an inevitable future arrive faster. Self driving car (de)regulation in Singapore lured startups like nuTonomy from the US. Challenger bank licenses in the UK created high growth startups like Monzo.
Sometimes, the US does the dirty work for you. ITAR practically guarantees the Valley won’t win the startup space race.
Whether its immigration, gross ideas, or progressive regulation, ambitious governments can quite literally enforce your arbitrage by law.
Culture
Arbitrages are vacuums for founders to fill. But they don’t last long. Pretty soon, vacuums fill up.
So how do you build an ecosystem, not a company?
In the long run, the one thing that lasts is culture. As our investor, Reid Hoffman, says “Silicon Valley is a mindset, not a location.”
Until the most talented people in a society decide that they’re going to start and join startups by default, before trying traditional routes, world class companies won’t get built.
This means sacrifice. Would be bankers in London, or government officials in Singapore, won’t be.
And just a few is not enough. The more unusual the sacrifice, the harder it is to make. Without momentum, there is no cultural shift.
Momentum is what we’re building at Entrepreneur First.
We find extraordinary people, and bring them into one place. 50, 100 at a time. Small numbers, but big enough to make an extraordinary decision feel ordinary. They start startups together.
With momentum, small numbers become large. EF has 792 alumni now. We’re adding 550 this year.
At some point, it stops being momentum, and starts becoming a culture.
And at that point who do you bet on? Silicon Valley, or the whole of the world?
Read this and more of my posts on my website.
Thanks to the EF team and Misrab Faizullah-Khan for reading drafts of this. To place your bet, start here.