The magic in the Valley

Megabuyte, June 2012. Original article here (£).

Letter from the West Coast
The magic in the Valley

Silicon Valley sounds like it should be an airborne construction of glass and steel, with flying cars whizzing around as entrepreneurs test out their latest inventions. But instead, this capital of innovation is string of small suburban towns: San Jose, Santa Clara, Sunnyvale, Mountain View and Palo Alto, all nestled in the crook of the San Francisco peninsula. So what is it about Silicon Valley that makes it the world’s most dynamic place to be a technology startup company?

During the month I spent in the Bay Area I spoke to several entrepreneurs about what it is about the Valley, and the same thing happened every time: their eyes lit up, and they used the word “buzz”. The best people come here, they said, generating such a volume of ideas at such a rapid pace. Being constantly surrounded by this pushes you, it forces you to up your game.

Something in the water
“You can look at every metric of our company and see that it inflected when we moved here. This includes user growth. I cannot even explain that. There is this energy here,” said Adam Pisoni, CTO and co-founder of Yammer, the enterprise social network. I met Pisoni a few weeks before reports surfaced that Microsoft is prepared to pay over $1 billion for Yammer, which has come a very long way in only four years. The company scores highly on the “cool” factor with its San Francisco office, which is full of people in jeans, roaming dogs and discarded bikes, surrounded by framed praise from Forrester, BizSpark, the New York Times and the Wall Street Journal. Yammer spent its first year in Los Angeles, but access to “the best talent in the world” is first on Pisoni’s list of reasons to be on the West Coast: “Also, when you are here there are so many great companies, the bar you set for yourself is higher. You are comparing yourself to the greatest companies, the fastest moving companies in the world. So you start taking your goalposts and throwing them way out in front of you.”

Mountain View, home to Google and neighbour to Facebook, is just an hour south of San Francisco, courtesy of Caltrain. Walking down the street of this little town that intellectual property built I was surprised to find the innovator spirit is actually present in a very physical sense. On Castro Street, the main thoroughfare, you can hear people in Mozilla Firefox shirts talking shop, while the next killer app is being drafted on a napkin upstairs at Red Rock Cafe. It was here it all started, in 1956, when William Shockley left Bell Labs over his conviction that it was silicon, not germanium, that was the future of the transistor. Shockley Semiconductor Laboratory now has a plaque to mark this fact, but the real legacy is probably that of having nurtured employee Gordon Moore to go found Intel in 1968.

The kids are allright
Down the road in Sunnyvale, next door to Yahoo and Juniper Networks, is the operational headquarters of London-listed Spirent. Founded in the UK in 1936, the £1bn market cap is by no means an upstart, but the tester of telecoms and networking equipment still sees a presence in the Valley as vital. “Our operational headquarters are here is because our largest customers are here. If you look at the Bay Area in general, whether it is Cisco or Juniper or Extreme or Broadcom or Brocade or all the IP companies, the Googles, the Facebooks, the Yahoos … clearly it is the centre of tech,” said CEO Bill Burns. “Everybody who is anybody in technology has some kind of presence here.”

While Spirent is not fighting for its place in the sun in the same way as a company like Yammer, it does not take much revision of Valley history to remember that the world of technology innovation is ruthless. While Burns acknowledges that being “a young CEO with a ponytail” is fashionable, he points out that most companies are run by people who have grown up in the industry. Still, Burns thinks the constant influx is valuable also to the established businesses: “It is good for the industry to have smart and innovative new ideas, because it pushes all the rest of the companies to continue to do that. It really is about trying to transform your business over and over again, because if you do not keep up and do not make that transition, someone else will supercede you. […] Start-ups push bigger companies to be more innovative and make that change internally, or they go and acquire the new technology because the smaller company is further along with it.”

Friends of friends
Entrepreneurs keen on more urban settings in downtown San Francisco are mostly found in SoMa, an up-and-coming innercity area far from the chipper bells of the city’s ubiquitous cable cars. VigLink’s business is weblink monetisation, and founder and CEO Oliver Roup moved to San Francisco especially to set up the company in 2009, after leaving Microsoft.

“San Francisco is unmatched as far as the density of the people you want to reach. They are all right here, and many of our customers are a couple of blocks away. Every party you go to, every time you go to a bar you meet someone who is somehow related and helpful, and the ability to grow your network is amazing,” said Roup, as we met in his company’s warehouse office, where the birds on the walls reveal the former tenant’s identity as Twitter. In the Valley, Burns said similar things about the organic development of networks: “People meet at social or charity events, or while supporting local schools and universities. People are open and friendly and always willing to set up things. The introduction at an event is followed up with: ‘Hey, we met last week, we should go and have a coffee’.”

When asked why he decided to move to the city and not Palo Alto, Roup chalks this up to personal preference for an urban environment, and does not see the two as vitally different in terms of nurturing companies. The fundraising community, the venture capitalists, the banking resources, the law firms with the best technology knowledge for patents and M&A, all extend to cover the whole area. The same is also true on the flipside, however: the price of talent is steep. Every t-shirt wearing CEO I spoke to agreed that this is a place where the best engineers can wear what they want, come into work when they want (within reason) and collect good salaries before moving on to something new in a year or two. “But on balance, I think this the best place to start,” said Roup. “If you want to be an actor, you go to Hollywood; if you want to be in the money industry you go to New York;, if you want to be in start-ups you go to Silicon Valley. You can certainly do all those things in different cities, but you are not where the action is.”

Appetite for risk
Other cities could probably replicate many of Silicon Valley’s key characteristics to attract a startup community, but it would be hard to supercede the Valley’s size and history. The sheer tolerance for risk is a particular element that feels very alien from a UK perspective. Suranga Chandratillake, the San Francisco-based CEO of London-listed Blinkx, explained during our chat how the UK venture capital scene has many players from a finance or big company background, but you cannot use those criteria to assess a startup because they work completely differently.

“With a startup it is more about products, the market, and about what products will work for a market. It is about what kind of personalities you need to build a team,” said Chandratillake, who founded video search software specialist Blinkx in 2004 and spun it out from Autonomy in 2007. It is understandably hard for a venture capitalist to back an entrepreneur with nothing but a PowerPoint presentation and a big idea if he or she has no idea what that is like; this is an extreme example, but the West Coast is probably one of the very few places where that can happen. Part of the reason for this, said Chandratillake, is because the Valley now has an investor community that is established enough for former tech entrepreneurs to have gone full circle, meaning many are now part of the funding teams themselves.

And with tolerance for risk also comes a vastly more helpful and encouraging atmosphere. Sam Shank co-founded HotelTonight, a mobile app for same-day hotel bookings, in 2010. As we met in his SoMa offices, the CEO tells me how he found the Bay Area to provide a very different experience than other places in the US. “In Chicago, when I said I was starting a business, people said: ‘That’s so risky, I’d never do that.’ In Chicago, you get the five reasons why it is not going to work. In San Francisco, you get the five things you should do to be successful. You get, here is why you are going to succeed, and some introductions to help you succeed. Everyone wants you to succeed.”

Fail better
The fact that this hyper-optimism also allows for people to make mistakes is probably one of the key differences that makes Silicon Valley such a powerhouse. This attitude is instrumental to creating a nurturing space for feisty tech geeks to try out new ideas: you cannot make an omelette without breaking a few eggs. Of course, no one has forgot what it looks like when it goes wrong: the dot-com bust was only 12 years ago. And now, heat is again building in the sector, as seen with the values attached to the Facebook float and increasingly highly priced M&A activity with billion-dollar price tags for Instagram and Yammer.

Looking at the big picture, San Francisco is in many ways the ultimate boom-and-bust town, stretching all the way back to the Gold Rush in 1849. The same attitude that meant the city was rebuilt at a pace of 15 houses per day following the 1909 earthquake, which flattened the city, may be the very same reason the Bay Area has such an impressive track record for coming up with things that literally change our lives. There is of course the hope that the Valley has learned a thing or two from its previous failures, and will avoid busting quite so spectacularly again. Fingers crossed that 56 years of experience will count for something.