I’m sometimes approached by government officials, business leaders and economic development experts seeking feedback on plans to create local communities of innovation and entrepreneurship around the world.
It’s not surprising that they all—Philadelphia, Albuquerque, Scotland, New Zealand, Italy, you name it—want to build Silicon Valley in their own backyards. They believe that if they can just replicate Silicon Valley itself, they can somehow replicate the growth, innovation and employment opportunities that have come to represent this country’s high-tech mecca. The problem is, it just doesn’t work like that. You can’t simply replant the seeds of Silicon Valley somewhere else. There’s more to it than that. So much more, in fact, that some very smart people are right now searching for the true magic behind Silicon Valley itself with the hope of figuring out the basic building blocks of its underlying ecosystem.
As says Margaret Pugh O’Mara, professor of history at Stanford University and author of the book Cities of Knowledge: Cold War Science and the Search for the Next Silicon Valley, “Replicating the entrepreneurial culture of Silicon Valley is hard but not impossible; replicating Silicon Valley is impossible.”
John Kapral, CEO of High Desert Venture Management, an Albequerque, N.M.-based consulting firm that works with startups, has identified several elements that must exist for entrepreneurship to thrive outside Silicon Valley.
“First, there must be a solid base of higher education to consistently generate the knowledge workers,” says Kapral. “Second, there must be a culture of innovation that pushes people and their companies to explore and think in big ways. Third, there must be identifiable ‘rock stars’’ to serve as role models for the future (think Hewlett and Packard, Ken Olsen from DEC, Guy Kawasaki of Apple, etc.) Fourth, geographic locale does mean something. An example is the growth of the fiber optic industry in south central Massachusetts; early companies in this industry like Galileo and SpecTran were actually incubated by employees from stodgy, two century-old American Optical which was located in the vicinity and first created to manufacture simple glasses.”
I agree with Kapral, but I would add to his list five more criteria for innovation to thrive. The first is to recognize that a decent-size industry can take root in a small geographic area and make it a signature of that locale, like biotech in San Diego. Second, deliberate plans that promote communication and fluid movement between large industry, the entrepreneurial world, government, and education are necessary for the exchange of ideas and leveraging of resources. Third, an area needs at least a few entrepreneurs in order to entice and inspire subsequent entrepreneurs. (It helps if said entrepeneurs have cut their teeth at industry leaders, such as the Microsofts, Ciscos, and even Baidu.coms of the world.
Fourth, the local community itself needs to be entrepreneurial-minded. O’Mara, who recently spoke at our Labrador LP conference, argues in her book that Silicon Valley was not only built on Cold War research dollars going to Stanford, but also on Stanford’s prescience in turning a land endowment into a research park for innovation The university’s decision not only reflected the Valley’s early commitment to innovation and ideas, but its underlying culture of risk taking.
Last, there must be seed capital. Consider this: of the institutional deals done in 2005, only 63 were ‘seed’ round deals, defined as rounds of $1.5M or less. By comparison, the Angel Capital Association (ACA) estimates that angels invested an equivalent amount, totaling a staggering $20 billion dollars, in mainly seed stage investments. It’s because of angels’ money that most quality later-stage deals come into being. As observes Patrick Von Garben, head of the Kauffman Fellows Program in Menlo Park, Calif.:“Northern Virginia, San Diego, Austin, Texas—none of these areas started with lots of venture capital, though venture capital came in over time. Rather, it was the successful entrepreneurs who became angels who helped create the ecosystem of innovation and entrepreneurship.”
A different mindset
Does availability of startup capital play the most important role in creating a culture of innovation, or is it from the just one essential part, but not the dominant part, of an ecosystem?
Sean Foote, Partner, Labrador Ventures
The irony of all this is that once an ‘ecosystem of innovation’ gets off the ground—once entrepreneurship can find its legs, once technologies have been created and the seed money has done its job effectively—the traditional model of venture capital not only should come in, it must come in and take hold.
“While the early stage and seed capital is the more important ingredient, later rounds of capital are important as well, at the right time,” says Michael Clouser, associate professor with the Edinburgh-Stanford Link at the School of Informatics, University of Edinburgh. “Otherwise, the effects of an innovative culture, a good university, and of marketable innovations are minimal.”
O’Mara cites Philadelphia as an example of where entrepreneurship should be thriving, but isn’t. Despite its strong educational institution in the University of Pennsylvania, a large electronics and pharmaceuticals industry, smart academics and access to capital, it hasn’t create the same ecosystem of innovation in large because “you need that loosey-goosey tradition of entrepreneurial spirit,” she says. Philadelphia doesn’t have the necessary culture, in short.
Clouser described to me the same dynamic abroad. “It is accepted that one of the big impediments to changing the culture is changing the mentality of would-be entrepreneurs. And people do admit that the Scots, and the Brits for that matter, have a low tolerance for risk-taking, and an even lower one for failure. Culturally, the Scots have lost in some pretty big deals; and the Brits continue to see the empire erode. Structurally, the bankruptcy laws disfavor the individual. There is a time lag when you can’t go into business again if you’ve failed in a company and gone bankrupt—basically you are out of the game for one to three years, depending.”
Add more capital and stir
Which brings the argument back to one of money. Does the availability of startup capital play the most important role in creating a culture of innovation, or is it one essential part, but not the dominant part, of an ecosystem?
Clouser and O’Mara both argue that in many ways, to create Silicon Valley’s look and feel and substance, governments and universities must become the first true angel investors within any community. “Governments should first seek to seed universities with monies for science and research to form a competitive advantage for that community, and even then, universities have to build more entrepreneurial cultures themselves,” says Clouser. After that, he continues, “There is a market research function that has to interact with the applied research such that ideas can be developed into marketable products and intellectual properties.”
And is within that spectrum, from the seeds of innovation, to the research done in the labs and universities and think tanks and large corporate R&D divisions, where ideas can truly emerge and entrepreneurs can grab hold and bring them to market. If the policymakers, economic development experts and local government officials can seed these ideas and innovations and either embrace or foster a culture of risk taking—where failure is a completely acceptable outcome—then seed capital should indeed come to their doorsteps. From there, larger pools of capital will emerge as success, even at its earliest stages, yields even more success and innovation down the road.
Sean Foote is a Partner with Labrador Ventures. He sits on the boards of Altierre, Eoplex Technologies, Everyone.net, EZboard, Green Border Technologies and Integrated Materials. He may be reached at firstname.lastname@example.org