Sunday, January 30, 2011

Cloning Silicon Valley is a lot harder than it looks

For decades, cities and countries around the world have tried to duplicate Silicon Valley. With very few exceptions, these Silicon Valley "clones" have failed. The most common reasons given for the failures include lack of venture capital and lack of university support, but there are a number of other reasons why good intentions so often go awry:
  • Technology and business centers usually grow organically, as an outgrowth of existing universities or businesses. "Artificial Trees" are "Silicon Valley" clones that are built in areas with no natural growth factors. They're a lot like farms that are built in the middle of the desert: Everything they need has to be imported. As soon as the supply of any essential ingredients (talent, technology or money) tapers off, these "Artificial Trees" die off.
  • In some areas, startups get funded on the basis of political clout and power, not merit. Entrepreneurs without connections don't get funded, and if they can't make the necessary connections, they go under. It becomes clear fairly quickly that the startups that got funding did so for the wrong reasons, and the available investment capital dries up.
  • Some Silicon Valley "clones" get started with verbal commitments from government or private investors to make funding available. As time goes on, however, those "investors" don't actually make any investments, or the few that they do make are small and ineffectual.
  • In some areas, a handful of people have designated themselves as the "go-to" people for creating and supporting the startup community. If other investors or organizers that haven't agreed to work with the "go-to" people try to offer support to the community, the established order works to push them out or minimize their influence. In addition, the startup community defines itself by the mindset of its "go-to" people and rejects ideas and participants that don't fit.
  • Sometimes, the "go-to" people are well-meaning but ineffective. The head of a startup development organization I interviewed late last year in Chicago said that his group had spent seven years trying to get the city's largest investors (family foundations and investors affiliated with the Chicago Merchantile Exchange) to get involved with venture investment, especially A and B rounds, with very little success. If you try doing something for seven years and keep failing, you're doing something wrong.
  • Startups struggle in areas where there's a great deal of competition for talent from established companies. For example, New York City startups have found it very difficult to compete for technical talent with investment banks and other financial companies that pay enormous salaries and bonuses.
  • If entrepreneurs focus on the wrong reasons for doing startups, they're likely to fail. For example, if an entreprenur wants to start a business in order to get rich, without recognizing the high risk of failure and tremendous effort involved in building their business, they're likely to give up as soon as running their business becomes too difficult or expensive.
  • If the community puts a high price on failure, either social or financial, startups aren't likely to flourish. In the U.S., 90% of all small businesses fail, and 70% of startups funded by professional venture capitalists fail, so it's essential that entrepreneurs have the ability to fail and try again without stigma or crippling personal penalties.
There are so many ways that a venture community can fail that it's amazing when one succeeds.  There's no single key to success--there are many.
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