Monthly Archives: October 2012

What Makes Silicon Valley Work?

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Silicon Valley or the Bay Area has a completely different “vibe” for entrepreneurship. It is the epicenter of the world’s technology innovation, where 40% of all US venture capital is invested and where 90% of the highest venture returns occur. Why?

Why Silicon Valley and not New York which is filled with Ivy alumni; or Boston, home of Harvard & MIT; or even somewhere in UK or Europe or Asia? All of them have amazing engineering and business schools filled with very smart people, so why is the Bay Area the epicenter of innovation?

It comes down to the culture. The culture in Silicon Valley is completely different – where it encourages entrepreneurship to another level.  So, what is so unique about Silicon Valley culture?

1) It is OK to Fail – Yeah, you read that right. Embodying the culture, at Stanford, all our entrepreneurship professors have continually drilled into our heads – It is OK to fail! Failure is a learning process. If you start a company and it fails, then start another one. Fail fast and fail often. Go out and take risks. If you do not fail, you are not taking enough risk. Don’t be afraid to fail. Why?

Innovation by definition has a high failure rate. So, if you are afraid of the downside, you will also miss out on the tremendous possible upside. Even if you do fail, the amount you learn would be worth the cost of failure since you will not make the same mistakes again. In Silicon Valley, starting a failed company counts as experience! 

This gives Silicon Valley a very risk-seeking culture.

In India or China, if you start a company and it fails, you are considered an idiot and probably need to move to another city!

2) Trust the Young – The community trusts the young  with their ideas and does not dismiss them because of their age. The VCs on Sand Hill Road follow suit. This has given rise to entrepreneurs who have raised millions of dollars, while still in their late teens or early twenties.

This is in contrast to industries with entry level jobs, where you start at the bottom and need to be “trained” to gain experience.

The thought process is – when a new gadget comes out, who is more likely to play around with it and figure it out? A teen or his dad? The current generation of teens have been playing around with technology almost since they were learning how to walk. So, when it comes to companies revolving around technology, the young often know what they are doing and should not be dismissed.

3) Career path out of college –  Coming from undergrad at Northwestern, success there (similar to other schools in the East Coast) was more defined as landing a job in consulting or banking. Even though there was a large entrepreneurial push, the concept of becoming an entrepreneur right out of college was relatively rare.

At Stanford, entrepreneurship is more mainstream, where working on your startup after graduating is a common path apart from traditional consulting or banking jobs.  Though most of  those start-ups don’t succeed, that kind of entrepreneurial environment encourages the next Google or Sun or Cisco or Tesla to get built.

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This mindset of Silicon Valley will also seem pretty ridiculous to anyone outside the Bay Area. Imagine talking to a banker on Wall Street about it being okay to fail and trusting the young. If he does believe you, he will get himself fired.

This is also why, to learn more about why the Valley works, you will need to visit and see the culture for yourself.

Early Valuations are Bets on People

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Early stage valuations of start-ups are just bets on people – the underlying assumption being that a good team can figure out a product-market fit more easily.

In the early days, when the product is not concrete,  the initial idea can pivot, morph or get completely overhauled within a span of as little as 3-4 months. The initial team is the most crucial element of this, since the composition of the initial team will determine what direction the product takes. Swap the initial founder out with someone else and you will have a completely different product.

When it comes to markets – they should be large/have the potential to be large or you are not in the right space. If they are large, expect them to be crowded with people still trying to “crack it.” Within this large market, your product needs to “fit” into a specific area. An example is how Twitter and Facebook “fit” into the market. Facebook is more for a personal network, while Twitter is more of an information broadcasting service. Though both are in the social networking space, they are still fundamentally very different in how they “fit” within the same market.

Figuring out how your product fits into a market is called achieving product-market fit (… duh!) – arguably the only thing that early stage start-ups need to focus on. This means that initial teams need to iterate, learn, unlearn and relearn, where the initial product basically embodies all the skills, knowledge and experience of the founders to successfully fit into the market.

In the early stages for investors, when both the product and the market are not clear, it just boils down to the founders. Have they done this before? How do they think? Can they build it? Will it get traction? Will users keep coming back? Will it make money? Is it a sustainable business? and countless other issues/risks.

So, this means that if you are a first-time entrepreneur, you often need to go further before you can raise any/much capital. You will probably need to show a working product with some traction before a venture round, whereas someone who’s done it successfully several times before probably just needs to make a phone call with an idea.