One of the most frequently asked questions of today’s startup economy, no? Invariably, we discuss capital, talent, and ambition, frustrated with our own communities’ lack thereof, perhaps. And yet, is that really what’s at the heart of making a startup community work? When you think about it, the access to and significance of capital available is merely a result of the opportunity and reward to investors – they aren’t incapable of their own job… they know how and where to make capital available. And arguably, the same is true of talent, if your community is frustrated by a lack of talent, likely two things are happening… either the ecosystem doesn’t effectively reward talent and thus it is indeed going elsewhere, or the talent is there (what I think it most likely the case) but most ventures fail to appreciate that not being able to attract talent and partners may in fact be a significant proof point, validation that your idea or traction thus far isn’t appealing.
If those thoughts are sound, that capital and talent really aren’t what makes startup communities work because capital and talent naturally follow reward, what is at the heart of why startups seem to work so well in Silicon Valley? Are the rewards indeed greater and if so, why?
Culture, philosphy, and industry
90% of startups fail.
Neither access to capital nor talent changes that much, and frankly, it’s easier and cheaper to start some thing almost anywhere else in the world, certainly so here in Texas. Practically the golden rule of entrepreneurship, not only do 90% of startups completely fail, 90% of those that survive, become mere lifestyle businesses capable of employing people, but not really rewarding them. Only 1%, the unicorns as they’re called, truly and significantly reward individuals for the sacrifices and risks involved in working in early stage ventures.
With so much failure inevitable, the answer to the question obviously doesn’t lie in a success rate any more than it does in the amount of capital or talent available; so start by taking a look not at the significance of rewards where you live but at how people treat failure.
How people deal with, react to, and even expect failure is a sign of the culture and philosophy wherein you live, with regard to entrepreneurship.
Culture
The Valley has a unique culture in that embraces that you will fail. In the years that I spent there, the discussion is rarely about your business, your idea, and the company you’re trying to build because it’s going to fail. Instead, Silicon Valley constantly talks about innovation, bettering the best, people, and even “The Valley” at large and growing the entirety of rewards as an economy.
In recognizing and appreciating failure, the culture of the valley looks not to what you’re doing now but what “we’re” doing next – learning from failures and never giving up; simply moving forward until we find success.
While it seems to me that most other economies tend to strive for the success of a business, the Valley strives for the success of people and the economy itself by expecting that every venture is so revolutionary, so disruptive, that it SHOULD fail, otherwise you’re certainly not striving for something as great as a unicorn.
Think of the implications of that culture of the experience you have raising capital. Do investors typically ask “what” and “how” or do they prefer “why” and “who”? In a culture where failure is avoided, returns are never likely as great, simply because entrepreneurs aren’t pushing hard enough – they aren’t trying to better Facebook or Google, they’re simply trying to learn from that success and do something good enough.
In asking first “what” and “how,” they aren’t seeking the unicorns, they aren’t seeking the risk taker and the dreamer, they are avoiding the risk and failures – is this business you are building clear, valid, and monetizable so that my investment is safe? Does your venture community stress revenue and being lean or does it stress market share and disruption? When 90% of startups fail, the investments in those “safe,” lean, revenue focused businesses lose focus on market share, innovation, and disruption and should they succeed, they’re worth far less, they can support employees but not truly reward investors and talent for their sacrifices. Their philosophy is different.
Philosophy
Perhaps you caught on to an underlying message in my exploration of how people deal with failure. More simply put, there, failure isn’t even a word; there is no fail. Investors are seeking the WHY and the WHO and those things can’t be wrong, only WHAT and HOW can be proven wrong and truly fail. Entrepreneurs who do what they love rather than trying to build a business with a product/market fit, can’t fail. Don’t misunderstand, they can be wrong, they can make mistakes, but they never fail; those entrepreneurs will endeavor in their venture until the day they die – it’s who they are. As a result, their businesses don’t really fail, they simply evolve (pivot). Perhaps a brand name shuts down, a company is closed, but the venture moves forward as the team reorganizes, revisits the market, and endures.
Of course, that’s not true of everything there and assuredly you can give examples to refute me. My point isn’t black and white, the point is merely an example to help understand the philosophy there. Investors invest more often, in greater amounts, because they will get a return of some kind, even if that’s just a great team or some partners who carry forward ultimately getting investors their return.
If you live in an ecosystem where WHAT and HOW are the questions asked, where entrepreneurs are encouraged to avoid failure, get revenue as quickly as possible, and stay lean, businesses fail. What and how can be proven wrong and when the entrepreneurs and professionals within the ecosystem don’t instead believe in why and how, a product/market fit proven wrong is the end of the line. Why? There are NO new ideas. Hopefully you don’t live in an startup community where NDAs and IP are still the norm – your idea is not new, your WHAT and HOW is not new. Rewards come from bettering the best, from the teams with the passion to excel.
But what does it take to transform an ecosystem from building businesses to building teams and dreams? It takes industry.
Industry
What is the size and scope of your community? What brought you here, to learn about what makes startups work in Silicon Valley? Do you work within an entrepreneurial community, a city, or a region?
I have to chuckle, far to frequently, when I hear people tell me they are going to San Francisco to raise Silicon Valley capital. Does your community think in terms of it’s city, your city, or does it realize that Silicon Valley is distinct in that it isn’t about San Jose, or Palo Alto, or San Francisco, it’s about Silicon Valley – the cities are irrelevant. Indeed, the cities aren’t themselves sufficient to create an industry and I’d hazard a guess that neither is yours.
I’ve talked quite a bit about industry here, and the role that it plays in economies. In Austin, arguably, are the world’s eCommerce and Social Intelligence industries. We all know Texas is home to the oil and energy industry but those industries aren’t in Austin. What’s in San Francisco, alone, is insufficient to foster the culture and philosophy that we’ve discussed; the rewards that make startups work, but they don’t think in terms of the industries of their city – they think in terms of the industry of Silicon Valley.
Industry, experience, thought leadership, media attention, and public interest, gives entrepreneurs a distinct advantage simply be being where teams are easily made, mistakes avoided, and traction and market share almost a forgone conclusion because of the attention placed on the entrepreneurs and ventures within an industry.
Startups that would fail elsewhere find success in Silicon Valley for no other reason than the media covering things more prolifically, experience helping avoid mistakes, and old coworkers sill at it and partnering with you.
That doesn’t mean you have to be Silicon Valley, let’s be crystal clear, in fact, increasingly so is that you should not be in Silicon Valley because of the cost of doing business there, and their loss of the monopoly on technical talent. Your community exists within an industry, the question to ask is whether or not you realize it, whether or not the entrepreneurs embrace and support that, and whether or not ideas are prolifically shared to build teams, find partners, and even cooperate in competing with one another. Are you focused on your city and the success of businesses therein or are you truly working together, to develop an industry?
To leave you with a parting thought, I love the brilliance of Miguel Arias, a Spanish investor and mentor, in exploring the European community. Give him a read and ask if he’s not referring to the distinct culture, philosphy, and industry that makes unicorns possible, rewards greater, and startups work.
So, then, at first glance, I would ask, jokingly, if we should all hold hands in a room and sing Kumbaya. But that’s not what you’re talking about, is it? What you want the incubators and the start-up infrastructure in Austin to understand is that each incubator specialty (niche) has a specific place in the infrastructure of the start-up ecosystem overall, right? In addition, each incubator must realize that instead of trying to compete with one another for resources, each should embrace, support, and collaborate with other to enhance the overall infrastructure of the start-up community, as it develops and becomes more integrated.
This requires a new and heightened sense of personal integrity/security in the leadership of each incubator/accelerator. It also requires each organization to consider what is in the best interest of the entrepreneur, as he/she fits into that same larger infrastructure. I’m not sure that the “community” always understands this important point.
Sometimes I see that some incubators/accelerators/funding agencies fail to fully listen to the needs of the individual start-ups. And because of that, the entrepreneurs spend a lot of time, talent, and money chasing down the wrong rabbit hole. Besides wasting a lot of time and money, it can also be pretty demoralizing on the human spirit, and the entrepreneurs suffer due to lack of needed information.
But I see a much larger loss. Time to market for the start-up is wasted. Momentous discoveries are postponed and the infrastructure we all desire is delayed or unattainable.
How do we fix it? A good start would be to listen to what the entrepreneurs actually say and then ask a lot of questions before proceeding. Each venture must have a firm foundation first on which to build legally and understand what that entails. That is biz 101 in my book.
Next, each incubator/accelerator needs to truly understand who it serves and what it’s trying to build. If its targeted customer is too broad, it may miss its ability to truly serve the targeted niche within the larger infrastructure. It needs to develop strategic plans that coordinate the setting of targeted goals to achieve its best internal infrastructure.
This is kinda tricky because each incubator/accelerator wants to preserve and maintain a level of competitive intelligence for the sake of its own sustainability, but I would have each ask the following questions:
How can I find the best people to be located within my incubator that can help me create the internal support systems for my targeted niche and the start-ups I want to attract? Which client companies will be the most generous with my ents by sharing their time, talent, resources to support my goals and my start-ups’ goals?
This is a subject that I am truly passionate about because I studied it for several years as a business student, and I mentor and sponsor entrepreneurs regularly. My hope is that we all become more successful as we learn together supporting each entrepreneur.
Just sayin’…P- ;o)
I had this discussion 30+ years ago with a serial entrepreneur. There were a number of factors he mentioned, here’s a few I can recall all these years later:
1) Climate – The mild, snow-free winters and moderate summers with cool nights perfect for sleeping leave one with a better state of mind for concentrated thinking.
2) Schools – Two of the top ranked schools in the nation are here. Stanford is in Palo Alto, and CAL (Berkley) is just across the bay. Once the the silicon revolution was sparked, these schools provided the engineering ‘fuel’ to keep it growing.
3) History – The valley was seeded with engineers at NASA AMES and other aerospace firms. As the space program wound down, there was a ready force of people looking for the thrill of another ‘moon landing’.
4) Culture – 30 years ago, the South Bay (Silicon Valley in the map above) is a bit of a sleepy place – it simply didn’t offer the kind of distraction midweek found in other large urban areas. On the other hand, it was just a short drive to national parks and forests, the ocean and beaches, wine country, Yosemite, skiing in the Sierras, or if you were adventurous, a night on the town 60 minutes north in San Francisco. Things have picked up some in the last 30 years — there are great restaurants, fancy shopping malls, and loads of new theaters, but get out in the residential areas, and it’s still that quiet kind of place you’d like to return to after a long day.
Having built startups in NY, SF, and Boulder a big fundamental difference is the funding cycle. In SF/SV, schedule 2 weeks of pitches, pitch 20-30 VCs/Angels (all in the same place), get amazing feedback, apply feedback to idea, close 1st funding, start building your team, start building your business. Ready Set Pitch Go!!
In other markets, due to all the reasons Paul mentions above (Culture, philosophy, and industry – or lack there of), it’s a marathon, you spend minimum 6-8 months and 90% of your time pitching. Ready Set, Pitch, Wait, Pitch, Wait, Pitch, Wait, Sometimes Go, Sometimes No Go.
Also, the smaller Startup Markets are usually heavily influenced by a few (maybe one) big local investors. This does not make for vibrant startup ecosystems. The lack of Investment diversity and supply is a huge barrier to a healthy startup ecosystem for MANY reasons.
SV/SF has none of those problems. They have other problems, like: super expensive for everything and hard to recruit tech talent. But you can focus on “create and build” like no where else in the world.
Great article Paul!
Precisely David. Well said.
I especially liked what you mentioned about rewarding talent. Having grinded up as an engineer in the bay area as well as Austin, the startups in Austin seem to not think of attracting talent as an aspect that’s critical to their success. They see the local talent pool as something akin to shopping for the best talent on fiverr. Many of them will talk a good game on how they reward their talent, but you don’t see them making huge offers or aggressively courting the talent to steal them away from the big non startups like what happens every day in silicon valley. It’s like they’re not truly aware how much difference the right talent makes in the success of a startup.
Another very distressing thing I see in Austin is that there’s many of the ‘me too’ enrepeneurs who are just trying to build a startup because they want to be an entrepreneur. They’re not gracefully developing a product or a service out of a true need or innov stove idea, it’s more like they’ve just said “well there’s no uber for watering plants yet, maybe that’s the next big thing and then they do some cheap, biased market research aimed at proving the idea and boom! Entrep-Manure
Really good thoughts. I’d throw in that SV is unmatched for angel capital & talent that has contributed to rapid scaling(2-3x growth YOY for 3-5 years).
I think the cost of living/business is actually an advantage too, it forces the macro econ to reallocate resources quickly.
You are the only person besides myself who I’ve heard push that the high cost of business on the coasts is part of the reason they have the talent and capital. I’m constantly harping in #Texas for saying we’re better for startups because it’s less expensive.
It’s the one variable all of coastal hubs have in common. As you pointed out, SV is not that dense – makes it a good theory.
Startup raises continually & pays a good salary or doesn’t grow and folds – everyone moves on. Creates endless talent pool & new startups creation.
I think this is an interesting point, but if true, it seems pretty inefficient: a lot of startups need time to figure things before taking on outside capital and the high cost of living makes that much more difficult.
Sure doesn’t make sense on the surface of it, but when you dig deeper (really good summit discussion for us all to have)…
1. Higher cost = higher pay. That draws experienced talent.
2. Higher cost drives higher perceived capital requirements = naturally higher funding events = more attention on them
3. Higher cost = higher equity allocation to team to offset salary = more committed team
for example
Plus, it’s really a global economy today; San Francisco / New York get that whereas Texas still tends to think “my city” is validation/support enough. Problem with that is that competing means globally. Competing means being in San Francisco and New York, even if we’re here.
The counter point is that the deal flow is so strong that you have to figure it out quickly regardless. The cost of doing business condenses time, creates urgency, & if no quick traction, move on. It’s a brutal form of natural selection which might explain the culture of helping.
Totally agree with this. Also applies to the actually building of a company early.
Mindset for most in SV = how to build or invest in a massive, global firm.
Mindset most other places = can I build a big business.
Those are two very different things.
I would add that there are just some irreplaceable people there. I went to a WebVR meetup a couple of years ago. Met Brandon Jones, who invented it, Tony Parisi, who invented VRML, Ricardo Cabello, inventor of 3.js. That does not exist anywhere else.
Because (pre covid) when you went to lunch in a restaurant with 75 seats, you could find a qualified CEO, CFO, CTO, and 30 great engineers on an average Thursday. Silicon Valley is like Florence, in the renaissance.
Eh, worked there in the hey day of 15 and 20 years ago. Then, maybe. Not now. Texas is more like Florence:
https://hbr.org/2016/01/renaissance-florence-was-a-better-model-for-innovation-than-silicon-valley-is