Reaching critical mass for encouraging startups

An article in today's New York Times talks about the revival of New York's startup community, which is focusing primarily on consumer Internet services. The article points out that New York is number three behind Silicon Valley and Boston in VC investments, but is growing rapidly.

Most people forget that before there was Silicon Valley, there was Route 128, named for the freeway that circles the Boston area. Route 128 was where the venture capital business was born, funding companies like Digital Equipment, Data General and Lotus. Polaroid was also a huge part of the tech community. The mantle of startup hotbed moved to Northern California in the late 1970s, and has stayed there ever since. New York blossomed for a time in the dot-com boom, and then collapsed as a startup center until its rebirth in the last few years.

There is absolutely no reason why startups have to concentrate in one area. Silicon Valley has Stanford and UC Berkeley, two of the top universities in the U.S. if not the world, and it also has the biggest concentration of venture capitalists anywhere in the world. However, Boston has Harvard and MIT. New York has Columbia and NYU. Chicago has Northwestern, the University of Chicago and IIT. Pittsburgh has Carnegie Mellon and Pitt. Los Angeles has UCLA and USC.

You can see where I'm going here. The educational resources needed to spawn successful startups can be found across the U.S., not to mention in cities around the world. Venture capital is far more concentrated, but there are large communities of VCs in Boston and New York as well as Silicon Valley. Chicago, Pittsburgh and Los Angeles are no more than a two-hour plane ride from one of the three VC centers.

Geographic location is no longer as important as culture. Boston and Silicon Valley have strong entrepreneurial cultures developed over decades. In those areas, people challenge the existing order, question how things are done, look for their own opportunities and seize them.

By comparison, finance has been so lucrative in New York that there wasn't much motivation for people graduating from college to start their own businesses. That all changed with the Great Recession and the collapse of the financial sector. Very little hiring is going on, so entrepreneurship now looks much more attractive to new graduates.

The other cities, Chicago, Pittsburgh and Los Angeles, have largely served as talent feeders to Silicon Valley. There hasn't been a strong startup culture in any of those cities for some time, and new graduates interested in startups either moved somewhere else right away or had their locally-based startups acquired and then moved. However, all three cities are showing signs of nearing critical mass: Chicago has Groupon, 37signals and Threadless. Google has a very large presence in Pittsburgh (and for that matter, Carnegie Mellon has opened a branch campus next to the Googleplex in Mountain View). Los Angeles (and San Diego) have Hulu, Divx, Buy.com and a large Yahoo contingent, among others.

As Caterina Fake says in the New York Times article, what New York (and, by extension these other cities) needs is a PayPal--a big, successful startup that spins off a lot of other startups. PayPal has spun off startups including YouTube, Tesla, Slide, LinkedIn and Yelp, and the founders of those companies are investing in a new generation of startups. (Fairchild Semiconductor and HP performed the same roles for previous generations in Silicon Valley.)

Perhaps that's the "secret ingredient" to creating a sustainable startup culture--you need a successful startup that spawns off others and educates the community that you can not only survive but thrive on your own. Groupon is the most likely candidate to perform that function in Chicago, while Google is the prime suspect in Pittsburgh, and there are a number of candidates in Southern California.

Thus, two final points:

1. No startup center lives forever: Route 128 around Boston lost its lead to Silicon Valley, and now Silicon Valley is declining in strength as other centers around the world are gaining.
2. Culture and the presence of a large, successful startup are as important to establishing a strong startup community as the proximity of top universities and venture capitalists.