‘The rise of the rest:’ Why startup hubs outside Silicon Valley are built to last
There is a regionalization movement underway in the technology startup industry that has appropriately sparked controversy and strong opinions, most recently between Peter Thiel and Steve Case. Thiel argued that Silicon Valley and New York City are the only two options for aspiring tech entrepreneurs. Case offered a counter view that new centers of innovation are forming outside of those markets, coining the phrase, “the rise of the rest.” Whether thriving tech ecosystems could flourish outside the Valley is the very question that inspired me to leave the world’s most famous hub of innovation five years ago to run an experiment and build an early-stage venture fund in Oregon.
Five years ago, the idea of the rise of the rest was not widely accepted in the inner circles of Silicon Valley and the venture capital industry. In fact, of the dozen fellow VC friends I talked to about my idea for launching a fund in Oregon, most were skeptical and worried about finding enough “venture scalable” startups outside the Valley. When I began speaking to entrepreneurs, however, I heard a very different story. They talked about the excessive cost structure in the Valley, the fierce competition for hiring talent, the pressure placed on them by their investors to get to hypergrowth and scale or die trying. Although this hypergrowth playbook is required of some startups in certain market segments where business sustainability isn’t reached until network effects at scale are achieved, a more rational path to scale can be pursued and is actually preferred for many startups.
So, five years ago I set out to understand the underlying foundational elements that comprise a thriving regional tech ecosystem, talking to many people who blazed the trail before me. I learned that it all came down to four common pillars:
- Quality of life (lower housing costs, higher relative salaries)
- Density of entrepreneurs and successful tech mentors
- Presence of universities and larger tech companies to fuel the talent needs of scaling startups
- Venture capital and earlier seed/angel funding to fuel startup growth through product market fit and revenue, at which point it becomes easier to attract capital from outside the region
Regional markets with these conditions are appearing throughout the U.S. in places like Seattle, Portland, Salt Lake City, Austin, Phoenix, and Las Vegas. Successful Silicon Valley venture capitalist Mark Kvamme left Sequoia Capital for Columbus Ohio to launch Drive Capital and has found similar compelling characteristics in communities throughout the Midwest. And in his trek across the country, Steve Case also has found the same in dozens of communities. In recent years, the Northwest has produced category-leading companies like Tableau, Jive, DocuSign, Zillow, and Zulily…to name a few. So the question transitioned from whether large consequential businesses of scale could be built in regional markets to whether this is a short-term trend or a fundamental shift.
Of course, I knew this same thing had been attempted many times in the past to varying degrees of success. So, why would it be different this time around?
The single most important underlying reason ties to technology and capital. In the 80’s, 90’s, and the first part of the 2000’s the major technology waves included heavy doses of networking equipment, hardware, and semiconductor products, which were very capital-intensive, often requiring $ 30 to $ 40 million of investor capital to deliver a working product to customers. Even the software companies of that era took north of $ 10 million in investor capital to build a go-to-market product, acquire an initial group of customers and essentially prove that they had a viable business. Because of the cloud, open source dev tools, and other technology advances, the cost of building an early go-to-market product plummeted as did the amount of capital needed to fund that phase of the startup’s life. These companies will need to raise much more capital to scale, but again that will be much easier when they have ramping revenues and real customers.
Over the past decade, software companies have been disrupting one industry after another at an accelerating rate, becoming the fastest and most capital-efficient path to value creation and have come to dominate the startup landscape. This bodes well for startups in Silicon Valley, and even more so for startups in regional markets where historically significant capital gaps have existed. With today’s capital-efficient startup, an entrepreneur can build a product and find early customer traction often utilizing less than $ 1 million in investor capital, an order of magnitude drop from the early 2000’s. This has resulted in a more granular, higher velocity of business formation, adaption to market needs, and growth.
So why will the current regionalization movement stick this time? Sure, a rising tide lifts all ships and the past decade has been an incredible one in the technology industry, especially in software. However, several events have transpired to make regionalization the new norm rather than a cyclical trend.
First, the global economic meltdown of 2008 caused many tech workers to move out of Silicon in search of less costly communities. Those people eventually started or joined new companies. Those companies, communities, and regions have had the better part of a decade to grow and mature; and many of them are now producing big winning tech businesses that any entrepreneur or investor in Silicon Valley would be proud to be part of.
The length of the current cycle has also allowed another important phenomenon to develop – one I like to call the “Recycling Effect.”
As startups launch, grow, scale, and exit, the talent eventually spins out and joins or launches new startups in the community, resulting in the recycling of talent. Similarly, the wealth that was generated by the startup recycles as well. Those who prospered most – typically founders, management team and investors – put that money right back to work. The recycling of talent and wealth into wave after wave of startups is the magic of Silicon Valley and it is now happening outside the Valley. This results in more thriving economies and more tax revenue in those regions, creating an almost viral loop of prosperity within the community.
The biggest difference during this regionalization is the recycling effect has been kicked into high-gear in many communities across the nation. The Silicon Valley model led us to this self-generating prosperity engine. We should all be very thankful that the model does work in other regions and communities; otherwise, the economic future of the nation would be dire.
Startups – GeekWire http://www.geekwire.com/2016/rise-rest-startup-hubs-outside-silicon-valley-built-last/