No Stopping Any Time
It was only two generations ago when California became famous for its hippy culture and socialist leanings. The weed smoking baby-boomers created the sex, drugs and rock-n-roll ethos, rejected consumerism, revelled in brotherly love and shared all manner of things.
Today San Franciscans are less likely to share a girlfriend or a joint, but will share a cab, an apartment and other things afforded by the “sharing economy”.
Silicon Valley is a different place now — sober, focussed and Calvinistic. California has an economy the size of France, with half the population, and its influence extends across the world stronger than ever. However, this time rather than leading with a radical lifestyle, it is propagating the things and methods designed here. If Californians rebel today, they do this by getting capitalists to scale up their ideas. Apple, Facebook, Google, Airbnb and Uber started here and changed entire industries across the world. Disrupting global businesses is the modus operandi of the local tech community, though they are just as happy to disrupt themselves.
The place has its own lore. Intel’s Robert Noyce was Moses that led the “Fairchildren” out of the oppressing Egypt (the East Coast) of corporate America into the apricot orchards of San Jose. Steve Jobs, like Jesus, was raised by adoptive parents, walked barefoot, preached a radical new credo, fought the establishment and “died” for our sins in 1985, when he was ousted from Apple — only to stage a second coming in 1997 when he transformed a maverick cult into the world’s most valuable company. The Valley grew its own elite with tech celebrities, the PayPal mafia circle and others who boldly and sometimes hubristically take on the world — witness Marc Andreessen’s “we can reinvent finance, it’s just numbers” quipped with the brevity of his tweets. The popularity of ancient stoic philosophy among them did not diminish their libertarian aspirations. These elites are self assured, messianic, and yes, smug.
San Francisco, a bustling city only 7 miles across, is teeming with 20-somethings vying to join the ranks of these elite. Before they make it, they typically have to share rickety 19 century houses, which survived at least two major earthquakes, paying a king’s ransom in rent. The European immigrants very quickly start looking and dressing up like Americans, but proudly carry their accents (which American girls find particularly attractive, like the protagonist in A Fish Called Wanda). The Asians look different but speak with a Texan twang or Mississippi drawl. This is a crowd heavy on males, and one gets the impression that the prettiest girls choose the film industry of LA over San Francisco’s geek scene. Everyone is too busy trying to get rich, and night life dies out by 10pm — so that future billionaires can have a jog before getting busy early in the morning. Still, work attitude in California is a lot more chill than on the East Coast — and some headhunters complain about it.
This young and ambitious contingent of coders, inventors and marketers is being looked after by a cohort of venture capitalists. They are in their late 30s to 50s, and populate the comfortable offices of Sand Hill Road in Palo Alto. The gray heads chaperon startupers’ first steps, for a slice of their winnings. The winnings come rarely but when they do, they are big, and pay off for the majority of ideas that flop. The law of big numbers rules here, and this game requires scale. Of the pre-screened companies that get investments from early stage VCs, up to 75% are written off completely. About 15% pay their money back, another 5% return a modest profit, and only about 1% shoot the lights out, and they are the ones that pay for the rest.
Noone has yet managed to distill the magic recipe for success here. As Tolstoy famously wrote, “all happy families are alike; each unhappy family is unhappy in its own way.” Happy unions of investors and companies in the Valley are the opposite — every success story is unique, and many are a result of a fortunate pivot from the original idea. At the same time, hoards of flops share a similar array of shortcomings.
San Franciscans are very enthusiastic early adopters of new tech, discerning consumers and rights advocates. They often band together to influence business and services to get what they want. When Uber was briefly suspected of discriminating against women, the word spread quickly, social networks rebelled, and the entire city seemed to get up in arms to boycott Uber — which had an immediate effect on the company. This makes Silicon Valley a perfect test lab for many new ideas. But San Francisco is not big on luxury goods compared to other world hubs like London, New York or Hong Kong. Despite SV having the most millionaires and billionaire per capita in the US, one would struggle to find many hypercar dealerships or designer furniture shops. Under the gentle sun, amid the culture of t-shirts and sandals, their fashion in clothing and food is not sophisticated. The coolest car to drive is the locally produced Tesla, but the highways are also clogged with a most diverse collection of old clunkers, that would either rust out or be outright banned in Europe.
In corporate presentations, at investor receptions, at breakfast and over drinks, everyone is talking about ways to disrupt the world. The startups come and go quickly in accordance with fail fast mantra, but the startupers bounce back, reorganise, and carry on to new ventures — or in the industry parlance, pivot. In his book The Selfish Gene Richard Dawkins described evolution as the game of genes, which constantly recombine to produce ever-more adaptable life forms. To the “selfish genes”, the survival of a particular physical organism is less important than passing their genetic code to the next generation. The genes adapt to the environment, form better DNA sequences, and accumulate best traits, thus improving their own chances of being passed on by their host. Similar to Dawkins’s “selfish genes”, the entrepreneurs of Silicon Valley tirelessly regroup, pivot, disrupt themselves and move on. A given business model has a life expectancy of less than 5 years. Unlike in Europe, the bankruptcy or unwind here are not signs of failure, but scars worn proudly as distinction of honour and experience. Those who fail, pick up and move on. Those who succeed rarely retire — they become investors and mentors to others.
The locals prefer to invest locally. It is not uncommon to hear private investors say, “I don’t invest in a company unless I can drive there in under 1 hour”. So if they really like a company, they make it relocate — like they did with Facebook. Such agglomeration is consolidating the best talent and smart money within a 50 mile radius of San Jose. For all its world fame, the Valley is essentially an introverted ecosystem. Thus investment clusters in the US do not talk to each other as much as one would expect. San Francisco rarely deals with San Diego, and Boston’s biotech hub might as well be on a different planet.
The competition for hot deals is rife. Entrepreneurs beat the path to the doors of the top 20 VC firms. The other investors seem to feed off the spoils of the Big 20 table. What’s hot today maybe long forgotten tomorrow. If you come here with your money to invest and are not properly plugged in, it is easy to end up with a dud deal. Yet despite all signs of a bubble, many entrepreneurs expect from investors more than just their cash. They want to see what else you would bring to the table — a qualified industry advice, an influential board member, a valuable industry connection to a supplier, or a lucrative customer contract. Before investing, formulate your thesis in terms of the stage and sector specialisation — otherwise you won’t be taken seriously.
As formidable as the US venture capital industry is today, its size is not big in the grand scheme of things. The total amount of VC funds invested each year in the US is within $60 billion. The less visible part of the equation is government grants and the spillover effect from defence industries. Parents of many of the first generation tech entrepreneurs in California worked in aerospace and defence companies, like Steve Wozniak’s father, a Lockheed Martin engineer. Many Californian kids got to play with computer parts and technical manuals early on. In 1960s US Government started sponsoring Computer Sciences degrees, and Stanford University had the best program in the country. Stanford took a very liberal approach to letting its professors and students start companies, using its equipment and libraries. Many ideas and companies, like Google, came out of Stanford’s campus. Various projects of Advanced Research Project Agency (ARPA) benefited the local tech community. In fact, the US Department of Defense yearly R&D budget is greater than the total of VC investments per year, and a lot of it is spent in the Valley.
The connection between the government and tech industry is growing closer. Peter Thiel, a local tech celebrity, may be best known as the author of Zero to One, a member of the PayPal Mafia and an early investor in Facebook. However, he is also the chairman of Palantir, a $20 billion company catering to the defence establishment. Eric Schmidt, ex-CEO of Google, who recently went on to head an advisory board at the Pentagon, is aiming to bring Silicon Valley even closer to the Department of Defense.
In a recent op-ed in The Guardian titled The state has lost control: tech firms now run western politics, author Evgeny Morozov pointed out how the new tech elite is positioning itself as a part of the new establishment: “[…] while the financial industry has historically been key to “buying time” and staving off the populist rebellion, in the future that role will be assigned to the technology industry.” He argued that with real incomes stagnating, personal information becomes the new currency, and as the likes of Facebook and Google gain significant control over this currency, they will inevitably cooperate with, or even take over the establishment. Disrupting the social contract would merely follow from disrupting advertising, travel, education, or manufacturing.
Such consolidation gives the tech giants much bigger influence than banks ever had. While there may be thousands of influential banks, the “winner takes all” principle of tech created the world where there is only one search engine, and only 3 or 4 social networks of substance. That is a lot of power to exercise responsibly, despite Google’s proclaimed Don’t Be Evil benevolence.
On a human level, what truly sets Silicon Valley apart from traditional business culture is the openness and willingness with which the information is shared here. Entrepreneurs are very happy to tell you about their idea, hear your feedback, test your response as a potential customer, competitor or investor. The VCs are open to discussing latest trends and trade ideas. When coders or marketers change jobs (as they do statistically every 2 years) they retain human connections and create valuable horizontal networks, transcending corporate boundaries. In other countries billionaires often have bodyguards. But if you see a billionaire in a cafe in Palo Alto, more often than not you can have a quick chat over coffee — although it might be easier if you tweet at him first. Many other parts of the US establishment are impenetrable if you’re born to the wrong family. But in here, if you have something interesting to say, you’d be given your chance.
What drives Silicon Valley is not just the abundance of highly motivated talent, smart money and government support in a concentrated place with nice climate and easy, if expensive, lifestyle. What distinguishes it from the European markets is its plethora of exits. Local companies are quite acquisitive, and it is fairly easy to get a bid for your business at almost any stage of development. This shortens the investment cycle and greatly motivates inventors and investors alike. Another uniquely American advantage is the availability of reliable cadre of middle management, ready to be hired to scale up a successful business model.
There have been many attempts to recreate the success of Silicon Valley in other countries, with government support and much enthusiasm. But this spirit, the ecosystem and the concentration of talent remain a unique locus at the thin sliver of American West Coast.
We are seeing signs of deflating investment bubble as the business cycle ebbs in 2016. With the advent of general AI and quantum computing, we will enter perhaps the most exciting period of technological change — the one which can fundamentally disrupt the disruptors. Will Silicon Valley survive this turn in its present form? Will it overcome own hubris, its gender skew, housing problem, the troubled and sometimes incestuous relationship with the government? Can it continue to innovate faster that it’s being copied? There is already very little silicon left in Silicon Valley, since semiconductor manufacturing left its shores. The Valley has been a remarkably resilient lab of human achievements and failures. It will be fascinating to watch as it attempts to reinvent itself as yet another, to quote Michael Lewis’s 15 year old book, The New, New Thing.
© Oleg Desh 2016