Beware the Monoculture: The risks of focusing on San Francisco and New York

I just finished reading a good analysis of the market opportunity for valet parking startups, written by Charles Hudson. He writes that the real competition for these startups may be public transit, Uber, Lyft and ridesharing services. In San Francisco, where he's based, he notes that these services have cut down on the use of cars, and therefore, the need for parking. However, it was while reading his post that I realized that San Francisco is primarily representative of San Francisco, and that extrapolating from the San Francisco market could get startup founders, as well as investors and analysts, in trouble.

San Francisco has been a parking nightmare for decades--at least from the time that I moved to the Bay Area in 1983. It's hard to find commercial parking, and it's expensive when you do find it. On-street residential parking is a nightmare. On the other hand, despite the many complaints about the Muni bus system, San Francisco has a very good public transit system, with busses, subways, streetcars, cable cars and trains. It was an early Zipcar market, and it's also the home of both Uber and Lyft. The availability of so many transit options grew out of the natural limitations imposed by San Francisco's geography and the concentration of startup talent.

You don't have to go very far to find a counterexample to San Francisco. Los Angeles is much bigger and more spread out than San Francisco, even though its downtown is smaller than San Francisco's. Los Angeles's public transit options range from poor to nonexistent. Cars are essential for getting around Los Angeles--its geography shapes the market for transit options just as surely as San Francisco's does, but in a different direction.

That illustrates a problem that many startups are faced with: There's demand for them in the area where they were founded, but demand tapers off dramatically when they move into different markets. For example, meal delivery services have flourished in both San Francisco and New York. Even though New York is much bigger than San Francisco, both cities have highly concentrated populations and multiple transit options. Both cities also have a proportionally large population of high-income earners, who can afford to pay for convenience. However, conditions are very different in, say, Omaha, Denver and Dallas. That limits the growth potential for those delivery services--they may do very well on the coasts, but find limited viable markets in the rest of the U.S.

There are many other services that you can think of that take advantage of the population concentration, transit options and high-income populations of San Francisco and New York, but that may not play as well in other places. There are also services that target other unique market characteristics--for example, a dating service that targets techies might be very successful in New York and San Francisco but less so in Pittsburgh or Cleveland, which have much smaller young techie populations.

You might say "We did lots of customer development and found that there's high demand for our service." That may well be true, but where did you talk to potential customers? If you only talked to them in your home city, you've probably got a biased sample. It's important to talk to people in multiple cities with different underlying conditions. Only then can you begin to understand where your service will and won't work. That, in turn, will help you to more accurately gauge your Total Available Market, and you'll be able to launch in the markets where your business is most likely to be successful. In short, successful customer development requires that you not only get out of your building to talk to customers, but that you get out of your home city as well.

Aereo avoids a preliminary injunction

Aereo, the New York-based Internet rebroadcasting service backed by Barry Diller's IAC, has won a round in U.S. District Court. According to Reuters, Judge Alison Nathan rejected requests by ABC, CBS, NBC, Fox and other networks and local broadcasters for a preliminary injunction to halt Aereo's service. The broadcasters argued that they would suffer irreparable harm if they didn't get an injunction, while Aereo argued that it would suffer irreparable harm if the injunction was issued. The judge decided that the "balance of hardships" didn't tip decidedly in the broadcasters' favor, and denied the injunction.

Update, July 12, 2012: CED provided more details of Judge Nathan's decision. She wrote that she most likely would have upheld the broadcasters' request for a preliminary injunction, but couldn't, due to the ruling of the U.S. 2nd Circuit Court of Appeals in Manhattan in a case challenging Cablevision's RS-DVR system. In that case, the court found that Cablevision's network DVR system didn't violate broadcasters' and cable networks' copyrights. Aereo is relying on the Cablevision decision in its defense, and Judge Nathan wrote that the arguments made by the broadcasters were "profoundly similar to those already considered and rejected" by the Court of Appeals.

Broadcasters have already begun the process of appealing Nathan's decision, but assuming that Judge Nathan's decision is upheld, they're going to have to come up with a different approach to the case.

Will Barnes & Noble become "Starbucks with books"?

The New York Times ran an article earlier this week about Barnes & Noble's decision to close its bookstore across the street from Lincoln Center in New York City. The article said that many people in the neighborhood who didn't buy anything there are sad that the store is closing, and that the store is at least as important as a social meeting place as it is as a bookstore.

With that in mind, what will a typical Barnes & Noble store look like ten years from now? (I realize that I'm making the assumption, not altogether defensible, that Barnes & Noble will still be in business in ten years.)  First of all, there will be far fewer stores than there are now, and the ones that remain will be much smaller and will look more like oversized Starbucks than bookstores. The cafe will dominate and will take up the largest amount of floor space. There will be a display space for demonstrating and selling whatever the nook eBook reader turns into ten years from now.

Some print books will still be on sale, but only a very limited selection of bestsellers. For everything else, there will be one or more touchscreen kiosks at which customers can browse tens of thousands of titles. Customers will be able to purchase any of them as eBooks and immediately download them to their eBook readers or tablets, or order physical copies for home delivery. They'll also be able to "rent" them for reading on their eBook readers or tablets while they're in the store.

Barnes & Noble may also place its kiosks into a big-box retailer such as Wal-Mart, Target or Best Buy, just as Wal-Marts have Redbox DVD kiosks inside their entrances. The combination of downsizing and using kiosks to sell books could reopen a niche for independent bookstores that actually stock a wider variety of titles, for those customers who still want to look through physical books on shelves before purchasing and are willing to pay a higher price for that privilege.

Like video rental stores before them, book superstores such as Barnes and Noble and Borders are becoming dinosaurs. They'll have to evolve into social meeting places that also sell books, or even just automated kiosks in big-box stores and coffeehouses, if they want to survive.

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.

Helping startups get started

I moved to the far northwest suburbs of Chicago a year ago from Silicon Valley, but I've stayed interested in and involved with new ventures, having founded or co-founded three companies myself. One of the things that surprised me was how much more difficult it seems to be to start new businesses here than it is in Silicon Valley. There are plenty of universities to provide technology and motivate students, including the University of Chicago, Northwestern, IIT and the University of Illinois. The Chicago area also has Argonne National Labs and Fermilab, two of the top scientific research facilities in the country. 37Signals and Threadless thrive here, and I know of a number of startups that are under the radar. Nevertheless, for those startups that do get traction, there's overwhelming pressure to move, usually to Silicon Valley or New York.

I recently signed up for The Founders' Institute, a program of lectures and team assignments designed to help aspiring founders to gain the skills and make the connections that they need for success. I was accepted but had to decline when I learned that I couldn't participate remotely and would have had to fly back to Silicon Valley for all of the sessions, or attend sessions in one of their other cities, none of which is even remotely convenient for me. There are other groups that do similar things, from Y Combinator (the best-known of the group) on down. The problem is that all of these groups depend on getting members and lecturers together in one place over a period of months. It won't work if there aren't a lot of qualified lecturers and interested participants in a city.

Given the success that for-profit educational instutitions such as University of Phoenix and DeVry University are having with remote learning, I'm convinced that a similar approach will work for training and encouraging new business founders, no matter where they're located. We use the Web for collaboration, messaging, teleconferencing and entertainment all the time--why can't we use it to help people learn how to launch their new businesses, wherever they are?

Let's be realistic--there are millions of jobs in old-line manufacturing industries that are gone in this recession and will never return. We have to encourage new ventures across the U.S and create jobs where the people are. Let's use the tools that have so dramatically lowered the barriers to entry for technology companies to lower the barriers to entry for teaching and encouraging entrepreneurs, across the country and around the world.