Detroit, Pittsburgh, and the value of diversification

I just watched Anthony Bourdain's visit to Detroit for his show "Parts Unknown." Bourdain showed plenty of what's come to be known as "Ruin Porn": Abandoned, burned-out buildings and entire neighborhoods that have been leveled. He also found signs of hope and recovery, although he made it clear that he doesn't believe that Detroit will come back to anything resembling its previous form. Government corruption played a massive part in the decline of the city, but there was another factor that was far more important in leading Detroit to where it is now: An almost complete dependence on the automobile industry for the city's and region's economy.

My hometown is Beaver Falls, PA, thirty miles from downtown Pittsburgh. I went to school and college in the Pittsburgh area. When I was growing up, steel was the sole major industry in Beaver Falls and most of Beaver County. There was a Valvoline refinery in Freedom, along the Ohio River, and the world's first commercial nuclear reactor was running in Shippingport, also on the Ohio, but beyond that there was steel and steel fabrication. Pittsburgh was long known as "Steel City," and the headquarters of both U.S. Steel and the United Steelworkers Union are still there. However, Pittsburgh was almost never wholly dependent on steel. It also was the corporate center for coal; coke, made from coal, is an essential part of steelmaking, but coal was at one time used for heating and steam engines, and is still a critically-important (although rapidly declining) fuel for power generation. CONSOL Energy, one of the country's biggest suppliers of coal and natural gas, is headquartered in the city.

Alcoa (Aluminum Corporation of America,) the largest producer of aluminum in the U.S., recently moved its corporate headquarters to New York but has kept its operational headquarters in Pittsburgh. Like Alcoa, Bayer, the German chemical and pharmaceutical giant, had its U.S. headquarters in Pittsburgh until a couple of years ago, but it still maintains major operations in Pittsburgh. PPG Industries, one of the largest suppliers of paints, coatings and glass in the U.S., is headquartered in a landmark building in Pittsburgh. The city was the home of Westinghouse Electric and is still the home of Westinghouse Air Brake, both companies founded by George Westinghouse. Westinghouse Electric is now reduced to its nuclear plant division, majority owned by my old employer Toshiba, and a trademark licensed to a variety of companies by CBS. However, for decades, Westinghouse was General Electric's biggest competitor and one of the biggest makers of televisions, radios, major appliances and industrial electrical equipment, along with power plants of all types. It also owned the world's first (or second, depending on your opinion) commercial radio station, KDKA, which led to Westinghouse Broadcasting, one of the biggest non-network-owned radio and television station operators in the U.S. As one of its last acts, Westinghouse Electric acquired CBS and took the CBS name, which is why CBS licenses the Westinghouse name to others. Westinghouse Air Brake, now known as Wabtec, is still alive and well and headquartered in the Pittsburgh area.

Pittsburgh was and still is the home of H.J. Heinz. Many people in Great Britain think that Heinz is a British company because it sells so many products there, but it's from Pittsburgh. Rockwell International, now known as Rockwell Automation and Rockwell Collins, was based in Pittsburgh until 1988, and was at one time #27 on the Fortune 500. Candy maker D.L. Clark, maker of Clark and Zagnut bars, was based in Pittsburgh until 1999. It's also the home of PNC Financial, previously Pittsburgh National Bank, one of the biggest banks in the U.S., the University of Pittsburgh Medical Center (UPMC), one of the top transplantation centers in the world, and Carnegie Mellon University, one of the top 10 engineering schools in the U.S. Carnegie Mellon, in turn, has attracted Apple, Bosch, Disney, Google, Microsoft, Oracle, Seagate and Yahoo! to open R&D centers in and around the city.

My point is that Pittsburgh had, and still has, a very diverse economy. When the U.S. steel industry collapsed in the early 1980s, Pittsburgh was hard hit. Every steel mill in the city closed, but the city survived because it had so many other industries to fall back on. Today, the steel mills have been torn down, converted into parks or repurposed as offices and retail space. Other towns around Pittsburgh weren't so lucky. My hometown, and the other towns that were almost totally dependent on steel, were decimated. What were once thriving downtowns are now mostly ghost towns, perhaps not as bad as you'd see in Detroit, but close. Detroit was much like Beaver Falls, on a vastly bigger scale: Just about every business made cars, made parts for cars or sold goods and services to the people making cars and car parts. When the car industry collapsed, there was nothing else big enough in the Detroit economy to compensate.

I've read pundits who say that there should be dozens of Silicon Valleys around the world, each focusing on a single technology or industry. Silicon Valley, however, has a diverse economy--semiconductors, computers, instruments, software, online services, consumer electronics, video games, pharmaceuticals, health care, and automobiles (previously GM, Ford and Toyota, now Tesla.) The Valley is in a constant state of reinvention, because it has such a diverse set of businesses and skills. A "Silicon Valley" focusing on a single technology or industry will be as vulnerable as Detroit was.

If Detroit is ever to recover even a part of its former glory, it has to make attracting and keeping a diverse set of industries its top priority, after reliably providing public services to its citizens. Diversification is the right formula for any city or region that wants to maintain its economic viability for generations.

Amazon close to deal to double its space in Silicon Valley

The Silicon Valley/San Jose Business Journal reports that Amazon is close to a deal to lease two multistory buildings in Sunnyvale, CA near Moffett Field for its Lab126 subsidiary, which designs its Kindle hardware and software. One is a completed 224,492 sq. ft. building, and the other is a 357,481 sq. ft. building that's under construction.

Be your own role model

I was browsing at my local Barnes & Noble last night, and I noticed that the Business section seems to be getting its own "Steve Jobs" department: In addition to Walter Isaacson's biography, there's "The Presentation Secrets of Steve Jobs," The Innovation Secrets of Steve Jobs," "The Steve Jobs Way," "Steve Jobs: The Man Who Thought Different," "Insanely Simple," and on and on. There's clearly a big market for books about Steve Jobs, reflecting a great deal of interest. Does that mean that you should model yourself after him?

Consider that when Steve Jobs first started Apple with Steve Wozniak, the leading company in Silicon Valley was Hewlett Packard. Company founders Bill Hewlett and Dave Packard, and their "HP Way", were the models for many technology companies in the Valley and beyond. Wozniak had even worked at HP's calculator division for a time. Yet, Jobs and Apple didn't try to emulate HP. Jobs had his own philosophy about how a company should be run and how his employees should be treated. The signature companies that were founded in HP's model, Tandem and ROLM, no longer exist.

Founders' personalities and their companies are very much a matched set--either the combination works or it doesn't. Trying to emulate a successful founder's personality rarely works; trying to model that style and then impose it on a different organization almost never works. The most successful people follow their own path; they take lessons from others, but they don't try to emulate them. That's why slavish mimicking of how Steve Jobs thought, or how he ran Apple, is doomed to failure. The best that you can possibly be is a second- or third-rate imitation of Jobs. You're much more likely to be successful by being a first-rate version of yourself.

Should I base my start-up in Chicago, or move to Austin, Portland or Silicon Valley?

I'm in the early days of working on an Internet services start-up, and one of the questions that I'm wrestling with is where to base my business. In the early days, it's very easy to move from one city to another; once my business has multiple employees, many with families, it'll be much more difficult (and more disruptive) to move. I haven't yet come to a decision, but my thinking may be of value to some of my readers who are also going through the process, or who may do so in the future.

Let's start with Chicago, since that's where I'm currently based. Specifically, I'm located in a far northwestern suburb of Chicago, not the city itself. As a practical matter, I'll have to move to Chicago or to one of the near suburbs, such as Evanston or Skokie, to find the talent I need. Chicago has just about everything a technical startup needs--excellent colleges (University of Chicago, Northwestern, Illinois Institute of Technology and University of Illinois at Champaign-Urbana) for talent, a culture with plenty of night life and social activities to attract young people, and reasonably priced office space. It's also got some angel investors and venture capitalists, but by and large, they're significantly more risk-averse than investors in Silicon Valley. Investors in Chicago like to see a start-up making money before they invest, which goes against the whole purpose of seed funding, which is to help new businesses get to the point where they can generate revenue. If you need to be generating revenue in order to attract the necessary investment in order to generate revenue, you're not being offered seed money.

Another problem with the Chicago financing community is that there's a big hole between angel investors and when most local venture capitalists will participate. Even if you manage to get angel investment, it's extremely difficult for growing businesses to get the next round of funding. The amount needed is too high for the local angels, and the risk is too high for local institutional investors.

There are two other issues that make Chicago less than ideal for start-ups (I'll deal with weather in the section titled "Potential Natural Disasters"). The first one is political corruption. Chicago is the most corrupt major city in the U.S., and Illinois is the most corrupt state in the U.S. Last Night's "Daily Show" gave an amusing, but accurate, look at the situation, but for now, consider that you're more likely to go to prison if you get elected Governor of Illinois than if you commit murder in Chicago. This corruption adds billions of dollars each year to the cost of government (which results in higher taxes), and to the cost of running businesses (in the form of those same higher taxes, plus payoffs, contributions to political campaigns, requirements to use union labor when non-union labor is just as good and is much less expensive (even with benefits), and other expenses.)

The second issue is the risk-averse nature of the Chicago community. Just as investors look to minimize their risk by focusing on revenue-producing businesses, Chicagoans would much rather take a job with a start-up, with a guaranteed income and benefits, than start a business themselves. Taking the personal and financial risks involved with a start-up simply isn't ingrained in the local culture, as it is in Silicon Valley.

Potential Natural Disasters: This is where I'll discuss weather and similar problems. For Chicago, the issues are winter weather in general, with blizzards in particular, along with floods and tornadoes in the spring and summer.

Another option is Silicon Valley. The universities (Stanford, U.C. Berkeley and U.C. San Francisco, along with many smaller colleges), existing base of trained developers, engineers, marketers, lawyers and financial experts, and deep financial resources in the form of angels, super-angels and venture capitalists, along with the local culture that supports and encourages start-ups, make Silicon Valley the best place in the U.S. to start a business. Some Chicagoans brag that there's more money in the Chicago Merchantile Exchange than in all of Silicon Valley, but if the people who are investing in the CME won't invest in start-ups because they don't fit their "risk profile", their money is worthless.

Silicon Valley's Achilles' heel is the cost of doing business. Everything in California costs more than just about anywhere else in the U.S. Taxes are higher, and housing costs more, as does medical care (and the insurance to cover that medical care). All of those costs mean that salaries in Silicon Valley are higher than just about anywhere in the U.S., yet the standard of living isn't any better. So long as I can find qualified people in another location, I can save 30% to 50% of my operating costs by basing somewhere other than Silicon Valley.

Potential Natural Disasters: Earthquakes, floods, mudslides, droughts and firestorms. Silicon Valley (and much of California) has earthquakes all the time; most of them are too small to be sensed. However, everyone waits for "The Big One", a magnitude 7.5+ earthquake on one of the major fault systems that's overdue. Any big earthquake has the potential to disrupt transportation, electricity and natural gas supplies for days, weeks or even months. It also has the potential to take many lives. The one big positive is that California's building codes have been upgraded many times, and few places in the world are better prepared for earthquakes. In the coastal areas of California, including Silicon Valley, winter is the rainy season, and that's when the state gets floods and mudslides. The summer is when California gets firestorms, usually in some of the state or national forests.

Austin, Texas is a good alternative. Austin is the capital of Texas, the home of the University of Texas at Austin, and it houses Dell's and Freescale Semiconductor's headquarters as well as major facilities for AMD and Intel. It's also a little circle of liberalism inside a huge red conservative state. Austin has a young, creative population, as perhaps best illustrated by the city's annual SXSW conference every spring that attracts techies, filmmakers and fans from around the world. Austin is a moderately-sized city, but it has technical and business resources that belie its population size. It's also small enough that a start-up isn't likely to get lost or ignored. Finally, Austin's cost of living is a bit lower than Chicago's and much lower than Silicon Valley's.

Austin has a small angel and venture capital community, but it's not as developed as Chicago and nowhere near the size of Silicon Valley. It's also largely dependent on the University of Texas to provide an ongoing supply of young talent.

Potential Natural Disasters: Summer weather in general, droughts and tornadoes. An oppressively hot day in Chicago would be considered cool and comfortable in Austin, where daily maximum temperatures near or even over 100 degrees Fahrenheit are common. Texas is in the midst of a severe drought, and the state suffers a drought every few years; combined with the heat, this causes pretty miserable conditions.

I've also considered Portland, Oregon. I haven't been there for many years, but it's a beautiful city with a strong technical community (Intel, Tektronix, Agilent, Nike and others). Portland State University is based in the city, and both Oregon State and the University of Oregon are two hours away or less. It's also less than 150 miles to Seattle, where Amazon, Microsoft, Nintendo U.S. and many other technology companies are based. Portland's a young person's city, with lots of night life, easy access to the Pacific Ocean, and a deep commitment to the environment. Surprisingly, Portland's cost of living is almost identical to Chicago's.

Portland's angel and venture capital community are similar to Austin's, with one big difference: Portland's location--driving distance from Seattle and two hours from Silicon Valley by air--makes it possible for Portland start-ups to attract funding from both areas, as well as local investors.

Potential Natural Disasters: Volcanoes, earthquakes, tsunamis, floods. When I lived near Portland, Mt. St. Helens erupted (not the devastating eruption that blew off the side of the volcano). Both Mt. St. Helens and Mt. Hood are active volcanoes. Earthquakes occur due to faults and plate lines off the Pacific coast. Portland is much less seismically active than Silicon Valley, but like California, Portland and the rest of the Pacific Northwest are awaiting their own Big One, which is likely to trigger tsunamis due to the underwater location of the faults. Perhaps the biggest weather problem with Portland is its almost continuous rain for eight months out of the year. Unlike other cities, the rain is more like a mist, and the sun comes out so rarely during the rainy season that weather forecasters predict "sun breaks". When the sun finally comes out and stays out, however, Portland is spectacular.

So, those are my options: Chicago, which has a lot of things going for it but also has some serious drawbacks; Silicon Valley, which has much more going for it but is an incredibly expensive place to live and work; Austin, which is a great city with an excellent cost of living, but is incredibly hot in the summer; and Portland, which is also a great city with an excellent cost of living, but it's rainy and overcast eight months of the year.

What are your thoughts? What other cities should I consider, and why?

Why the Burson-Marsteller/Facebook blow-up won't change anything

You've probably read about Facebook's botched attempt to smear Google by planting stories about alleged privacy threats in a little-used Google service called Social Circle. Facebook hired public relations firm Burson-Marsteller to plant the stories, and the PR firm assigned two recently-hired former journalists, Jim Goldman and John Mercurio, to execute the plan.

The two reporters-turned-flacks had no success in getting the story picked up by conventional media outlets--in fact, Goldman's pitch to USA Today turned into a story not about Google but about Burson-Marsteller's fevered attempt to convince the magazine to write negatively about Google. When USA Today independently investigated Burson-Marsteller's claims, it found them to be "largely untrue", at which point Goldman stopped talking to the newspaper. As an alternative, Burson-Marsteller turned to bloggers. Mercurio pitched the story to blogger and security expert Chris Soghoian, going so far as to offer to assist in the writing of the blog post, which Mercurio would then pitch to a variety of sites, including the Huffington Post. Soghoian asked Mercurio who his client was, Mercurio refused to answer, and Soghoian published his email correspondence with Mercurio on the web.

Dan Lyons at The Daily Beast picked up on the story, and got Facebook to confirm that it was the client behind Burson-Marsteller's efforts. Once Lyons' story hit the web, interest in what had happened exploded. Burson-Marsteller announced that, in essence, the problem was all due to Facebook, and it would no longer work for the firm. Facebook announced that it hadn't instructed Burson-Marsteller to plant the Google story in the way the PR firm attempted, but that it (Facebook) was justified in its actions, in large part because Google was mining Facebook's own data in order to offer Social Circle.

Industry observers were expecting both Burson-Marsteller and Facebook to fire some of their employees as a result of the fiasco, but it hasn't happened so far. In fact, Burson-Marsteller has announced that it won't fire anyone, but will give the involved employees "additional ethics training." The question is, why not fire them? The probable reason is that any employee who Burson-Marsteller fired would file suit against the company for wrongful termination. The discovery process for the suit would in turn reveal that Burson-Marsteller management approved the plan, and possibly even conceived of it in the first place. It would further reveal that Burson-Marsteller runs these kinds of campaigns for its clients on a regular basis, and that the problem with this particular campaign wasn't that it violated the company's ethical standards as actually practiced, but that the company and its client got caught.

But what about the ex-journalists who executed the scheme, Jim Goldman and John Mercurio? They were almost certainly hired specifically for their journalism experience and connections. Goldman was most recently CNBC's Silicon Valley reporter, and worked for a number of publications and networks over the years, including the San Jose Mercury News, Silicon Valley's hometown newspaper. Mercurio was most recently the Executive Editor of the National Journal's Hotline, and prior to that was Political Editor for CNN; Burson-Marsteller itself claims that Mercurio has more than 20 years of journalism experience.

Shouldn't Goldman's and Mercurio's decades of journalistic experience have led them to conclude that the campaign they were executing on behalf of Facebook was unethical? And if it didn't, will a few hours of ethics training make either man any more ethical? (Update, May 18, 2011: According to Burson-Marsteller's own website, Jim Goldman got a B.A. degree from Brown University in Ethics in Political Journalism and Political Philosophy. I guess the saying that "most people don't retain much of what they learned in college" must be true, at least in Goldman's case.)

My belief is that neither man objected because Burson-Marsteller's tactics are, in fact, common practice. They no doubt were on the receiving end of such campaigns, and quite possibly actively participated in them as journalists. They saw no ethical conflict because that's how things are actually done.

The reputation of the journalism profession in the U.S. has fallen to the level of used car salespeople. If you want to know why, you need to go no further than to consider how many other reporters and editors with Goldman's and Mercurio's ethical standards, or lack thereof, are writing the news that you're reading, listening to and watching. If those two men are in any way representative of the journalists employed by this country's media outlets, the journalistic profession deserves its reputation.

As for Facebook, no one should be surprised that it would be behind a smear campaign, and that it would react with righteous indignation when asked to apologize for its conduct. Anyone who has followed Facebook knows that the company has a habit of regularly changing its privacy controls and rules to make it harder for users to control how much of their information is made public, and of positioning users' losses of privacy as "improvements" until third parties reveal the truth. To say that Facebook is "ethically challenged" would be an understatement.

Given all that, I have no expectation that this fiasco, compared by Dan Lyons to a Keystone Kops episode, will result in any meaningful changes at either Burson-Marsteller or Facebook, other than that both companies will work harder not to get caught in the future.

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.

A peaceful alternative to the "war" for top talent?

The Wall Street Journal ran an article yesterday that merely reinforces what anyone in Silicon Valley has known for some time--there's a war going on between the startups looking for hire top developers and the established companies looking to keep them. (Example #1 of the established companies is Google, which has raised salaries by 10%, gave every employee a surprise $1,000 cash bonus and offered insane stock options to top developers to keep them from defecting.)

According to the WSJ, Okta, the San Francisco-based startup that's the focus of the article, plans to spend 80% of its $10 million Series A round on salaries, most of which will be for developers. Part of the problem is that salaries for developers in the San Francisco Bay Area are dramatically higher than in most other parts of the country; Okta is paying $75,000 for developers just out of school, and up to $150,000 for top developers, while the national median salaries for entry-level developers is $51,000, and $101,000 for experienced, senior-level developers (based on figures from Salary.com).

These costs are driven in part by the cost of living in Silicon Valley, which is higher than anywhere in the U.S. except for portions of New York City. In addition, even though there are far more developers in Silicon Valley than in any other comparable area in the U.S., everyone wants the best developers, and there are only so many of them to go around. That competition inflates the salaries that companies have to pay for talent.

In addition, the decline in IPOs has made candidates skeptical about the value of equity. In the "Dot-Com" years, startups could offer sub-par salaries, even to top talent, so long as they gave them substantial stock options. Today, when the exit strategy for most startups is to be acquired, most of the proceeds go to the angel investors, venture capitalists and founders; very little is left over for employees. So, while startups are very picky as to who they hire, the candidates demand top salaries (and still demand equity as well).

One solution to this logjam is to stay away from Silicon Valley. I've written about this many times before, but moving from almost anywhere else in the U.S. to Silicon Valley will instantly impose an operating cost penalty of 30-50% on your startup. Cities like Austin, Boston, Boulder/Denver, Chicago, Pittsburgh, Portland and Raleigh/Durham/Chapel Hill have excellent quality of life, strong technology bases, top universities and much lower costs of living than Silicon Valley.

Here's the key: These areas don't need to be "the next Silicon Valley" in order to be successful. They don't have to replicate the entire Silicon Valley infrastructure: Money and resources are now global. The biggest investor in Chicago's Groupon, for example, is Digital Sky Technologies, based in Moscow. Moscow is a long drive from Sand Hill Road.

Having lived in Chicago for two years now after 25 years in Silicon Valley, there's not much that I miss. The weather was much more to my liking, I enjoyed being able to drive to the Coast in an hour, and the seafood was far better. On the other hand, I paid 50% more for a semi-squalid apartment, virtually everything cost much more, and state income taxes were three times higher than those in Illinois. For me at least, it's a reasonable trade off.

So, one solution to the "war" for top talent is to stay out of the battlefield.

Opprtunities for angel investors and VCs in "Flyover Country"

Earlier this week, Technori published a two-part article that I wrote for it on "Angels in Chicago". The first part explained the concept of angel investing and introduced readers to four active angel investors in Chicago, and the second part discussed the problems that angels see in funding proposals, compared angel investing to incubators, and offered some suggestions for entrepreneurs.

There's a surprising number of angel investors in Chicago. AngelList only names 16 Chicago angels, but Hyde Park Angels, the biggest angel investing group in the city, has 76 members, only a handful of which are on AngelList. There are other angel groups just getting started, like Wildcat Angels. And Groupon notwithstanding, the angels I interviewed said that the valuation inflation and competition for deals that investors are seeing in Silicon Valley and New York isn't happening in Chicago.

Terry Howerton, the head of the Illinois Technology Association, believes that the lack of VCs in Chicago is a bigger problem for startups than the number of angel investors. He said that there's only three or four VCs in the city doing Series A or later rounds, so VCs from other cities in the Midwest come to Chicago to look for deals. There's an enormous opportunity for angels and VCs outside Chicago to do deals here.

According to Bankrate.com, the cost of living in Silicon Valley is more than 30% higher than Chicago, while New York/Brooklyn is more than 50% higher, and New York/Manhattan is almost 80% higher. That means that a startup's labor costs (as well as taxes and some other operating costs) are going to be dramatically less in Chicago and other Midwestern locations. In addition, there isn't the competition for deals and valuation inflation that's occurring in Silicon Valley or New York.

Chicago has become a center of startup activity, especially for online services, as well as vertical B-to-B applications (financial, real estate, travel, etc.). There's a real opportunity here for investors, especially if you keep the companies in Chicago (rather than moving them to Silicon Valley or New York) and take advantage of the area's lower costs.

Startups: Getting back to first principles

It's become so easy and inexpensive to launch a software or Internet-based startup that the current "leading edge" of thought is that startups should "fail fast" (make mistakes early) and then "pivot" (adopt a different strategy, or even develop a different product or service) until they land on a viable market opportunity. We've lost sight of some fundamental first principles that startup teams should think about before they write a line of code. These are first principles in the vein of "The Art of War"--how likely are you to survive engagements with customers and competitors.

For example, direct, head-on competition with entrenched competitors is likely to result in failure. If you're building a new search engine, you're likely to fail (see Cuil and endless other companies) unless you've got a parent company that makes more money than it knows what to do with (see Bing.) The best outcome in this case is that you'll develop some unique and interesting technology, and larger competitors will find it cheaper and easier to buy it from you than to build it themselves.

If you're planning to go after much bigger competitors, misdirect them and keep your mouth shut about your true intentions until you're too big to kill. Netscape was growing incredibly rapidly as a browser company, but Microsoft was largely ignoring it. However, as soon as Netscape announced that it was positioning its browser for running applications on any operating system, Microsoft saw it as an existential threat and did everything it could to destroy the company. Since Netscape still had tiny revenues, Microsoft could "cut off its air supply" by giving its browser and Internet servers away. Had Netscape kept quiet about its intention to turn its browsers into an application platform until it was big enough to withstand attacks from Microsoft, it would have survived. (AOL, which acquired Netscape, has abandoned all use of Netscape's brand name and products, and moved out of the last of Netscape's buildings in Silicon Valley in late August.)

Google learned from Netscape's demise and kept quiet about its long-term plans. It was a search engine, and search was at best a minor part of Microsoft's business. It generated advertising revenues, but Microsoft made its money through selling software, so that wasn't perceived as a threat, either. The first iteration of Google Apps was seen as a joke by Microsoft and dismissed. Google hired Andy Rubin, the founder of Danger (the developer of Sidekick mobile phones, which was subsequently acquired by Microsoft) and adopted the funky smartphone operating system (Android) that he had been working on. Again, it was under the radar and not worth Microsoft's time. By the time Microsoft fully realized how many of its businesses were under attack, Google was too big for Microsoft to kill.

If you're going into any market dominated by "old media" companies, position what you're doing as a way for them to retain market share and/or make more money, and make sure that they agree--otherwise, they'll kill you. Napster completely disrupted the business models of the big record companies, and they sued Napster out of existence, but not before they were crippled by music sharing. Apple stepped in and offered the record companies a way to make money from the growth in usage of digital media players. The record companies bought in, which ultimately resulted in Apple becoming the world's largest seller of music, and made the record companies dependent on Apple for their survival.

If your business depends on information or support from entrenched companies, you're going to have an uphill battle. Steve Huffman, one of the founders of Reddit, set off to create an airline ticket comparison service, Hipmunk, that makes it easy to find the lowest fares. This, however, threatens the airlines, which see it as decreasing their potential profits. So, Hipmunk has struggled to get access to the flight and pricing information that it needs for its service. The company has launched, but its most likely exit strategy (if it survives) is to be acquired by a search engine or a larger travel service.

When startups take on entrenched competitors, they almost always roll out the David and Goliath story. The reason that story has so much resonance is that the little guy beat the big guy, when in the real world, the big guy almost always wins. The lesson for startups is to avoid taking on the big guys until you're big enough to fight them as an equal.

The Chicago startup competition this week that you didn't hear about

This was the week of TechCrunch Disrupt in Silicon Valley, where perhaps the biggest news was AOL's (or is it aol's) acquisition of TechCrunch itself. There was a startup competition in Chicago this week as well, midVentures LAUNCH, but it didn't get much press coverage, even in Chicago. I was very pleasantly surprised and encouraged by some of the startups at the event, and the health of the startup community in general.

First, we need to define the Chicago venture community as covering a lot more than Chicago. Some of the most impressive startups I saw at the event were from Indianapolis, Bloomington, IN, and even Bethesda, MD. Rather than being a standalone center for startups, Chicago is really the hub for ventures throughout the Midwest. Next, there were companies competing that are actually making money. TinderBox, for example, is already very successful "under the radar" with an impressive service for creating, managing and tracking proposals that's integrated with Salesforce.com. There were contestants with pre-release services that already look very refined: MyJibe is going after the Mint.com market space with a personal financial management and budgeting service. They're targeting the local and regional financial services companies (banks and credit unions) that want online services to compete with those of much bigger companies like PNC, but don't have the resources to build their own solutions.

For all the hand-wringing over the lack of new hardware startups, the winner of midVentures LAUNCH was a hardware company. The winner, Wearable, makes the AirStash, a $99 wireless flash drive with built-in media server that fits into your pocket. It holds any SD card with up to 32GB of capacity and then shares the contents of the card with other WiFi-enabled devices. It also connects via USB and looks just like a flash drive to a PC. The AirStash is an impressive device, and it's shipping now.

The one thing still missing from Chicago that's holding down the number of startups is a large angel community. A large, successful startup that cashes out in an IPO or acquisition spins out lots of potential angel investors, and the only company in Chicago that's likely to be in that category soon is Groupon. However, those Groupon angels will fund other startups, and as those companies cash out, a new generation of angel investors will be born. That cycle is the backbone of seed funding in Silicon Valley, and it needs to be "jump-started" in Chicago, possibly through Silicon Valley angels investing in some Midwestern startups. They would have been very excited by what they saw, had they attended midVentures LAUNCH.

AngelGate: Send in the clowns

If you haven't been following the increasingly comical affair being called AngelGate, I'll run it down for you. First, a few definitions:

• A venture capitalist (VC) is an individual or firm who invests in start-ups and small private companies with the hope of selling their stock for a large profit, either on the public market or to a larger company that acquires a company that they've invested in.
• Angel investors are individual venture capitalists who invest their own money in start-ups, usually very early in the companies' lives (typically seed or first rounds).
• Superangels are individuals or small groups of investors that invest in a larger number of start-ups than an individual angel would normally invest in, but still focus on very early rounds.
• Conventional Venture Capital firms invest in a lot of different companies at many stages of development. They have a lot more money to invest than the angels or superangels, and usually invest in later rounds.

Last Tuesday, Mike Arrington, the publisher of TechCrunch, learned about a secret meeting of superangels being held at a restaurant in San Francisco called Bin 38. He was told that he wouldn't be welcome at the meeting if he attended, but he went anyway, and in a private meeting room, he found "ten or so" of the largest superangel investors in Silicon Valley. They basically went into a silent stupor when they realized that he was in the room, and he left shortly afterward. Later, "sources", which Arrington says were three people who attended the meeting, told him that the following subjects were discussed (I'm going to quote directly from the TechCrunch article:):

• Complaints about Y Combinator’s growing power, and how to counteract competitiveness in Y Combinator deals
• Complaints about rising deal valuations and they can act as a group to reduce those valuations
• How the group can act together to keep traditional venture capitalists out of deals entirely
• How the group can act together to keep out new angel investors invading the market and driving up valuations.
• More mundane things, like agreeing as a group not to accept convertible notes in deals (an entrepreneur-friendly type of deal).
• One source has also said that there is a wiki of some sort that the group has that explicitly talks about how the group should act as one to keep deal valuations down.

Venture capitalists, whether large firms, angels or superangels, are competitors. They do work together at times on deals, but generally, they compete with each other to make investments. There are U.S. Federal laws that deal with collusion between competitors to fix prices, terms and conditions, and to keep out or limit the activities of other competitors, and they have nothing to do with monopolies or market share. The very act of competitors conspiring secretly as Arrington says they did could be interpreted as illegal.

The best thing for the participants to do would have been to say nothing and refuse to comment if asked by the press, but that's not what happened. The day after the TechCrunch article was posted, Dave McClure, a superangel, claimed that Arringon's charges were a "bullshit superangel consipracy theory", admitted that he attended the meeting, gave his take on what was discussed, and then finished his screed with this line (and this is a direct quote: "(sic)i'm here to Disrupt, motherfucker. (sic)so go right ahead & Hate On Me."

Yesterday, Ron Conway, founder of the Silicon Valley Angels and one of the earliest angel investors, wrote a long email to attendees of the Bin 38 meeting to say that:

• He didn't attend either meeting (apparently there were two meetings), although one of his partners did
• He didn't agree with the agenda or process of the meetings
• He'd really appreciate it if the other superangels not talk to him again
• His only interest is the entrepreneurs that he funds
• And by the way, Dave McClure, don't write or say anything about this email

One of the most endearing things about Dave McClure is that he's incapable of keeping his mouth shut, so almost immediately after Conway sent his email, McClure demonstrated his mastery of Twitter by sending the entire world a message that he had intended to send only to another attendee of the dinners. In it, he confirmed that there were two meetings, said that he and other attendees were being "thrown under the bus" by Conway, and confirmed the identity of another person, David Lee, Conway's partner, who attended both meetings. McClure deleted the errant tweet, but not before it had been copied and widely distributed, including to TechCrunch.

TechCrunch ran McClure's tweet, and then they received a copy of Conway's email and ran that. McClure is continuing to respond to other postings around the web that agree with his point of view, when the best thing he could do right now is visit a foreign country with no Internet connectivity.

Whose story of what happened at the meetings is right, Arrington's or McClure's? Arrington didn't name any of his sources and didn't go into any specifics about what action(s) the group agreed to undertake (if in fact it agreed to do anything.) For his part, McClure didn't mention the fact that there were two meetings, not just one, in his response to Arrington's story, which certainly detracts from the authenticity of his account. Also, his tweet in response to Conway's email didn't say that Conway's or Arrington's charges were wrong, only that he (McClure) and other attendees were being thrown under a bus by Conway.

What conclusions can we draw from this mess (so far)? In the song "If I Was a Rich Man" from "Fiddler on the Roof", Tevye sings:

The most important men in town would come to fawn on me!
They would ask me to advise them,
Like a Solomon the Wise.
"If you please, Reb Tevye..."
"Pardon me, Reb Tevye..."
Posing problems that would cross a rabbi's eyes!

And it won't make one bit of difference if I answer right or wrong.
When you're rich, they think you really know!

Now we know: Being rich doesn't make you smart or give you common sense.

Startups: Tentpoles and pollination

One of the most effective mechanisms for creating startups is a successful startup that turns into a big business. eBay is an excellent example of s startup that became successful and made a lot of people rich. Those people turned around and invested their money in their own startups and those of other entrepreneurs, which created a new generation of startups. I call these big, successful startups "tentpoles", the same term used in the movie business for a motion picture that's expected to be wildly successful and to spin off a series of sequels. In Silicon Valley, Hewlett-Packard and Fairchild Semiconductor were two of the earliest tentpoles; Apple and Intel sprung from them, and the current generation of tentpoles includes Google and eBay.

Tentpoles go through their own lifecycles, however. Early in their lives, they tend to attract engineers who are likely to go off and do their own startups. As they get bigger and more bureaucratic, however, they attract employees. Employees don't want to be entrepreneurs. They want a steady paycheck and good benefits with no risk. Employees crush the startup spirit of the tentpole with bureaucracy and hierarchy. Potential entrepreneurs who do join tentpoles by the time they reach this stage either leave quickly or get trampled down in the organization. As the Japanese say, "The nail that sticks up gets hammered down."

There's another model for startup creation, and perhaps its best exponent is Jason Fried, the co-founder of 37signals, the Chicago-based company that offers Basecamp, Backpack, Campfire, Highrise and other web applications, and that developed Ruby on Rails. Fried and Ruby on Rails developer David Heinemeier Hansson recently wrote Rework, a book about creating and growing small, sustainable businesses. Rework has gotten a lot of attention, and Fried often speaks about his concepts to groups of business founders and potential founders.

Companies that apply the concepts in Rework are unlikely to ever become tentpoles, and that's just fine with Fried. He believes that companies should grow organically from their own cash flow, and shouldn't depend on venture capital. Companies following the Rework model are likely to look a lot like 37signals itself--small (almost always under 100 employees), virtually organized (utilizing team members wherever they're located), very efficient, extremely flexible and a little bit opportunistic.

I call this model "pollination", where a set of concepts, or even a single idea or meme, can pollinate startups around the world. It doesn't depend on a tentpole, local universities or an active venture capital community; all it needs are motivated people who want to start their own businesses. The companies that develop out of this pollination are unlikely to ever get big enough to go public and score huge paydays for pre-IPO founders and employees, so they're probably not going to spin off lots of startups themselves. But, if they're successful, they encourage others to follow in their footsteps.

The tentpole model is the way the startup environment has grown for the past 50 years, but when it costs less to start a new technology business today than ever before, and when more resources are available in more places around the world than ever before, pollination makes more sense. It doesn't depend on the existence of a local tentpole to spin off more startups, and it doesn't rely on a local concentration of resources. People have been trying to build Silicon Valleys in their regions for decades, largely without success. Perhaps the Internet and its related technologies have made it unnecessary to replicate Silicon Valley, but it also means that there's not likely to be another concentration of tentpoles in one area like Silicon Valley in the future.

It takes successful startups to build more startups

There's a number of elements that are generally accepted as essential for a city or region to have a successful startup culture:

• Good colleges and universities, preferably with strong engineering programs, in order to provide an ongoing supply of qualified young talent
• A good quality of life that encourages graduates to stay in the area rather than relocate after graduation
• Availability of venture capital

There's another element that's less-discussed, but possibly the most important of all: Local, successful startups that get big enough to spin off other startups. This is one of the reasons that Silicon Valley has been able to maintain its lead for several generations now. Shockley Semiconductor begat Fairchild Semiconductor, which begat Intel, National Semi, Signetics and others. Those companies spun off other semiconductor companies, and the chain continues today. Hewlett-Packard employees founded Apple, Tandem and many other companies, and those companies have spun off countless other startups. Yahoo and Google have each spun off many startups. eBay acquired PayPal, and now the ex-PayPal team has built a new generation of startups. Twitter (which spun off from Google) has already sprouted Square, and many other companies will bud off over time. Facebook will have the same effect.

It takes a big success to first recruit and then spin off the founders of future startups. In Chicago, where I'm located, Groupon looks like it has the potential to spin off more startups. It's too early to tell whether that will be the start of a sustainable startup culture in Chicago, but it's a big move in the right direction.

WTF? Yahoo plans to build a huge new campus in Santa Clara

According to IDG News, Yahoo has received approval to build 13 six-story and three two-story buildings on a new 46-acre campus in Santa Clara. The company spent $112 million to buy the property and will spend another $10 on transportation and other improvements. Yahoo's facilities have been scattered all over Santa Clara and Sunnyvale for years, so I can understand wanting to eliminate the inconvenience of getting between campuses, but a brand new, 15-building, 46-acre campus now? Really?

When a Silicon Valley company plans one of these "Taj Mahal" campuses, it's usually a sign that the wheels are about to fall off of its business, if they haven't already. Years ago, Atari built a huge central campus in Sunnyvale, and the company was effectively out of business before the complex was completed. First Apple, and later Cisco, planned to consolidate all their offices on a huge parcel in the Coyote Valley in far south San Jose, and both companies abandoned their plans when market conditions changed and their sales dried up. Borland built a huge office complex in Scotts Valley, complete with indoor swimming pool and athletic club, and ended up abandoning the facility after building only half of the planned buildings. Excite@Home built a huge two-building headquarters on the former Ampex campus in Redwood City. When the company went under, the buildings sat empty for years, a  "white elephant" in one of the most visible locations in Northern California.

There's a huge number of unoccupied and under-occupied buildings in Silicon Valley that Yahoo could lease at very favorable rates. Why build new buildings when there are plenty of buildings already available at fire sale prices? This decision, along with Carol Bartz's $47.2 million compensation package for her first year at the company, makes me wonder who's in charge at Yahoo and what they're thinking.

Go where the talent is

TechCrunch wrote today about two companies opening new geographic outposts: Facebook is planning to open an engineering office in Seattle, and Chicago's Groupon has acquired mobile application developer Mob.ly, which is currently based in San Francisco, and will move it to a new Groupon Silicon Valley office in Palo Alto. In Facebook's case, the company is probably looking to tap into engineers that work at MySpace's Seattle offices, as well as talent from Microsoft and Amazon. Groupon's CEO Andrew Mason made it clear that has company has had difficulty getting talent to relocate to Chicago from Silicon Valley, so Groupon will go where the talent is.

Opening up satellite offices is hardly a new tactic; Google has had a Chicago office ever since it purchased Feedburner, and has large operations in New York, Pittsburgh and other cities. Microsoft's Silicon Valley engineering center is in Mountain View, a couple of miles from the Googleplex. Amazon's A9.com search engine operation is headquartered in Palo Alto, and it designs its Kindle hardware at its Lab126 in Cupertino, not far from Apple's headquarters. The point is that all these companies found it easier or more cost-effective to find the talent they needed in cities other than their headquarters.

You don't have to have a billion-dollar valuation to play at this game. Chicago's 37signals is perhaps one of the best at using virtual offices to get the talent it needs without relocation expenses or physical offices. Probably half of 37signals' team is scattered across the U.S. and Europe; they use the company's own tools to communicate and keep in sync.

VCs often demand that startups relocate to Silicon Valley, New York or Boston so that they can be close to investors and talent. However, it's far more cost-effective to create outposts where the talent is than it is to move everything to a region that quite often has much higher costs of living and doing business.

Job offers: If it sounds too good to be true...

I moved to Silicon Valley many years ago, when I was young and stupid (as opposed to being old and even more stupid today.) After I'd worked in the Valley for a few years as a product manager, I was recruited by a good-sized technology company, and was offered a supervisory position and a big raise. The company I was working for had already told me that I had to relocate to a suburb of Boston in order to keep working there, and I wanted to stay in the Valley, so I resigned and took the job offer.

Almost as soon as I started my new job, I realized that I'd made a mistake. Within two weeks, I was told that the company didn't have the budget to allow me to hire anyone, so there would be no one to manage. The VP of Sales was supplying cocaine to his salespeople in order to keep them finding and closing deals; I spent time on the phone with screaming, coked-up salespeople almost every day, The CEO was famous for his insane temper tantrums if a visitor accidentally parked in his parking space. Shortly after I came on board, the company hired a VP of Marketing from an old-line technology company. This VP was more interested in the size and location of his office than he was in getting things done, and I learned after I left the company that he had actually had very little to do with the project that helped him land the job at my company, a project that he bragged about constantly.

I soon found out that the reason that I was offered a big promotion and raise is that the company had a reputation as an almost impossible place to work. I would have found that out if I had asked the right questions (like "What's your employee turnover rate?). I stayed in that job for six months because the recruiter told me that he'd only get his fee if I stayed that long.

The lesson here is pretty simple: If a new job sounds too good to be true, it probably is.

What's the real impact of government vs. culture on new businesses?

I was at an entrepreneurial conference in Chicago this weekend. The keynote speaker started off with the requisite witty anecdotes, followed by statistics about the impact of new and small businesses on the U.S. economy. To wrap up, she barreled into an Objectivist rant demanding that government get out of the way of new businesses. She may have thought that her screed was motivational, but it only left myself and most of the people in the room thinking "WTF?".

So, what's the real impact of government on new business formation? Government can stimulate new businesses with R&D tax credits, accelerated depreciation and taxing capital gains at lower rates than regular income. However, tax rates themselves have very little to do with either encouraging or discouraging new businesses. Consider that Chicago's "structural environment" is, in many ways, superior to Silicon Valley: At least as many top universities, excellent infrastructure, significantly lower state and local taxes (a 3% personal income tax vs. 9% in California, for example), and a more lenient, business-oriented regulatory structure. Chicago is physically closer to many more U.S. markets and to Europe, and is only a few hours further away from Asia.

Nevertheless, even with all those advantages, the rate of startup formation in Silicon Valley is one to two orders of magnitude higher than the rate in Chicago. Why? The reason is cultural, not governmental. Silicon Valley has a culture that, for several generations now, has inculcated the belief that it's better to have control over your own destiny than to give control to your employer. If you're happiest when you're getting a regular paycheck with good benefits, you're not likely to try to start your own company, and if you do try, you're likely to fail.

Chicago's culture is far more the norm for U.S. big cities; most people are perfectly happy with regular paychecks and don't have the "fire in their bellies" to go out and change the world, or at least a little piece of it. The problem with that thinking is that the regular paycheck and benefits lifeline is going away. Companies are moving away from permanent employees and toward contractors, temps and outsourcing. As Daniel Pink wrote a number of years ago, we're becoming a "Free Agent Nation."

So, the biggest reason why Chicago doesn't rival Silicon Valley as a startup formation mecca isn't government policies, it's a mindset that believes that if we do a good job for our employers, we'll be taken care of. Until many more people here believe that they can do a better job of looking out for their own best interests than can an employer, Chicago won't become a startup mecca. The speaker at last weekend's conference got a part of the Objectivist pitch right; it's just that the problem isn't government vs. startups, it's dependence on big business to provide support vs. taking responsibility yourself.

Focus.

I visited a startup in Silicon Valley a couple of months ago; for purposes of confidentiality I won't name them. They're executing a business plan that calls for them to develop an online eCommerce service, client software and a new hardware platform. They started from scratch on all of it, and their goal is to get to market about a year after the company was first conceived. They're well funded, but they're obviously not generating any ongoing revenue, and they're still in stealth mode.

The single most important thing that a startup has to do is to focus. There's never enough money, time or resources. The three things that this startup is trying to do--Internet services, client software and hardware--would be big challenges for three startups, but they're trying to do it all themselves.

The irony is that they don't have to do everything they're trying to do. There are plenty of software clients out there that do what they need, or they could contract out for the client's development. The hardware segment they're focusing on is one of the most active and rapidly evolving areas in consumer electronics. There are (or certainly will be by the time they launch) tons of platforms that they could support, but they've deliberately chosen to build their own hardware platform. They could focus on their eCommerce service, which is going to be a big enough challenge in itself.

By trying to do everything themselves, they're scattering their resources and dramatically increasing the risk of failure. Also, by staying in stealth mode for so long, they're running the risk of coming to market with a poor product/market fit. They think that staying in stealth mode will protect them from competitors, but competitors don't need them to understand what the market needs.

The single most important thing that a startup must do is focus. Focusing helps you to conserve resources, pivot more adroitly, and leverage external partners and technologies. It decreases the potential points of failure. The company I just described is one of those "fat startups"; being fat has enabled it to unnecessarily scatter its efforts.

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.

The Entrepreneurial Challenge

2010 has just begun, and depending on who you talk to, we're either still in the Great Recession, or it recently ended. Either way, there are millions of people in the U.S. and around the world who will remain unemployed or underemployed even after the economy recovers. As a society, we have both a moral and economic imperative to help these people get back on their feet. As a country, the U.S. can't survive with a hollowed-out manufacturing base, and having Wal-Mart or McDonald's as employers of last resort helps no one.

I believe that the end of the Great Recession presents a tremendous opportunity for individuals who want to start their own businesses. For many people, entrepreneurship will represent their best, or even their only, means of getting back on their feet financially. The challenge for those of us who have spent most of their careers in Silicon Valley and other entrepreneurial centers is to bring that startup culture to people who need it.

We've got the tools to spread ideas quickly and inexpensively; we need to use them to encourage new businesses, no matter where they're located. We also need to adapt our philosophy and techniques to the needs of entrepreneurs outside the major technology and business centers. It's far more likely that these new entrepreneurs will start a restaurant than a software company, and very few of them are ever going to have a business that's likely to go public. We need to help them build sustainable, profitable businesses that will allow them to make a good living and support themselves and their families.