Silicon What?

(This article originally appeared in the Oct, 2006 issue of Business District Magazine.)

A brief history of the Silicon Valley and its usefulness to our own goals for success

You hear it all the time, “how does Austin measure up to Silicon Valley and what could we do to emulate its success?” I think the goal of being as successful as that Northern California think tank has been is admirable, trying to use its model and comparing Austin to Silicon Valley will be more harmful than useful. Personally, I would like to see us move away from it.

Let me tell you why.

Let’s begin with The Bootstrap Network. It is a worldwide community of entrepreneurs with its founding chapter in Austin. I started Bootstrap Austin three years ago to support my fellow entrepreneurs and encourage them to bootstrap rather than seek investor financing when building their companies. The network has evolved into a resource, knowledge base and support group for bootstrapping entrepreneurs.

A few months ago the Bootstrap Network had a spirited discussion about comparing Austin to Silicon Valley, based on Guy Kawasaki’s blog post, “How to Kick Silicon Valley’s Butt. (http://blog.guykawasaki.com/2006/06/how_to_kick_sil.html)

This seems to be a perennial discussion point in conversations I’ve had with others. Implicit in discussions of this nature are a set of assumptions that must be examined very carefully before applying them. Without understanding these assumptions, the comparison between them and us may do more harm than good.

Having spent my undergraduate years at Stanford in the early 1990s, I have some insight into Silicon Valley’s evolution and history. First, Stanford (rather than Berkeley) has played a very unique and critical role. Second, the Valley was not engineered through a systematic or planned process; indeed, no economic clusters in the past have been. Third, the “silicon” in “Silicon Valley” speaks to the particular innovation of the microprocessor around which the valley found its stride – and that era is drawing to a close. Finally, venture capital has had an evolving role in the development of the valley and today’s VCs are vastly different from those that made the valley what it is.

Stanford is a key part of the Silicon Valley story. The first Silicon Valley entrepreneurs, (remember Hewlett and Packard?) were encouraged by their professor, Frederick Terman, to form a company based on their passion for the new transistor technology and to locate their company in nearby Palo Alto. Since then, Stanford graduates (and even Cardinal dropouts) spawned new companies such as SUN, Cisco and Yahoo! and Google in recent years.

Stanford, a private university, took a very liberal stance to the commercialization of its intellectual property (IP), allowing students with bright ideas to build companies without extracting upfront fees. SUN stands for Stanford University Network and was developed by Andy Bechtolsheim, a graduate student. This not only made it easy to start companies, but also created a virtuous cycle of donations and employment of Stanford grads.

UC Berkeley, on the other hand, has played a relatively minor role in Silicon Valley’s development. This can be traced to their public status. Berkeley’s focus is on education rather than research, and it has much less flexibility in letting its graduates create companies from its IP.

We face a challenge in Austin in not having an analog to Stanford. Texas, a public university, is more like Berkeley. Its approach to technology commercialization is to require up-front fees before technologies are commercialized. This is totally counter to the way entrepreneurship works and is reflected in UT’s much lower number of per-capita creation of companies.

Silicon Valley was not engineered from a master plan. The different agents who ended up playing key roles did so without clairvoyance about the future or coordination from a central organizing body. No one predicted the important role computer chips would play in the global economy. Rather, things unfolded in a nonlinear and disorganized fashion.

Moreover, they evolved through a series of time-dependant collisions with each set of players – university, professors, entrepreneurs, investors, companies – reacting to each other’s actions. This path-dependency and ongoing feedback was crucial. Similar stories can be told about Detroit (cars), Grand Rapids (furniture), Houston (oil) or Las Vegas (gambling and entertainment).

Conversely, we see many examples where trying to pick industries based on “competitive advantage” simply does not work. In post-World War II Japan, that country’s Ministry of Trade and Industry (MITI) completely missed the automotive sector because their analysis had shown that given the necessary factors for making cars – lots of space, natural resources, etc. – had a competitive disadvantage. Indeed given the way cars were made at the time, it did. When entrepreneurs like Mr. Toyota and Mr. Honda came to the to learn about car manufacturing, they realized they had to completely reinvent the process to suit their unique constraints – and they did to great success.

More importantly, all of these clusters developed around a particular innovation – in the case of a certain Northern California valley: silicon. But it is clear the age of silicon as a primary driver is coming to a close. Witness the declining market caps of hardware companies and the rising ones of Internet-based ones. Indeed, Silicon Valley itself has moved on from the age of silicon. Its new superstars are far-removed from the world of computer manufacturing, which was at the heart of its success. Silicon, and its cousin “technology,” are not likely to be at the heart of the next great eras. Even as silicon winds down, the primary beneficiary will continue to be Silicon Valley.

These twin factors bode very badly for any economic region wanting to duplicate the creation of a cluster, and moreover, one based in silicon. There are many conversations about what the core innovation of the next era will be. In all likelihood, it is already underway, but not yet articulated. And by the time we are able to see it, the area that develops it will have already become the dominant region. The term “Silicon Valley” was only coined in the 1970s, long after the Valley had established its dominance. Certainly, trying to plan around a particular set of innovations is a foolhardy exercise.

Venture Capital’s role in Silicon Valley has been completely overplayed and misunderstood. The great long-term success stories like Oracle, HP, Intuit and others were not venture-funded at all. And in many recent success stories like Yahoo! and EBay, venture capital intervened after these companies became profitable. We seem to be immersed in a broader myth that places capital at the center of innovation. In fact, it is usually the lack of capital that leads to innovations (one must adapt to survive) and capital from investors too early will tend to squash innovation.

Dell’s “direct” model came from the fact that Michael Dell didn’t have cash on hand to build the computers he sold – instead he asked for the cash up front and never built anything that wasn’t already configured and ordered by his customers. In other words, capital constraint creates innovation. We have only to look at our own homegrown successes like Dell, Whole Foods and National Instruments to see evidence of this.

Moreover, today’s venture capitalists are a very different breed than those with those in the early years of the valley. Today’s VCs tend to be money managers with fixed time horizons for “exits” that have never built companies of their own. In the formative days of Silicon Valley, VCs were successful entrepreneurs who deeply understood the dynamics of building companies and were patient.

Austin’s future is bright, and there is certainly a prescription for success written in other centers of innovation. But as we ought not model ourselves specifically after Silicon Valley and pay more attention to entrepreneurial developments that are truer to our strengths at home.

Bijoy Goswami is the founder of Bootstrap Austin, a vibrant open source community of entrepreneurs building companies the old-fashioned way - with little to no startup capital. You can find his column exclusively in Business District magazine.