January 3, 2014 6:10 pm

The long strife to reach Silicon Valley

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Other tech hubs will struggle to copy California’s success

Silicon Valley is as much a state of mind as a place – a near-mythical economy that the rest of the world (and other cities in the US) would love to emulate. The strip of land from San Francisco to San Jose is a symbol for an alliance of risk-taking entrepreneurs and venture capitalists where inventions from the silicon chip to internet social media have been developed.

As advanced economies struggle with the aftermath of the financial crisis, the Valley’s rapid growth – and equally rapid minting of billionaires – is even more attractive. As the FT reported this week, cities from London to Tel Aviv and Beijing are trying to replicate the magic, with varying degrees of success. New York is trying to draw west coast software engineers to its media industry.

Yet Silicon Valley’s lead over other regions as a base for tech start-ups has remained remarkably consistent since the days of the dotcom boom, despite concerted efforts elsewhere to mimic its ecosystem. The mix of strong academic institutions, plentiful government funding for scientific research and a vibrant private financing and entrepreneurial culture has proved hard to reproduce in new environments.

In particular, the size of the Valley ecosystem has exerted a strong gravitational pull and has made it hard for other centres to catch up. That is particularly true when it comes to finance and human talent. Despite forays outside their local market, local venture capitalists still feel most comfortable investing close to home. Entrepreneurs and investors point to a greater willingness to take big risks, and the higher valuations attracted by successful companies.

The Valley approach of force-feeding promising companies so they grow as fast as possible leads to a bigger payday for the winners. Tumblr, the New York social media start-up that was sold to Yahoo last year for $1bn, was a sign of that city’s increasing importance in digital media. But Silicon Valley’s own social media star of 2013, Twitter, pulled off an IPO that has given it a stock market value of nearly $40bn.

The talent wars sweeping through the San Francisco bay area have made rapid staff turnover a big challenge for young companies. But many start-ups rely on teams of developers elsewhere while still keeping their headquarters in Silicon Valley. The sort of deep labour pool that successful companies need to tap as they grow cannot be found elsewhere.

It is very difficult to compete against such advantages and other cities have had mixed results. One of the biggest challenges is financial. US venture capitalists are enthusiastic risk-takers and its capital markets reward successful companies that make it to IPOs with high ratings. The willingness to bet a lot on an untested venture is deeply rooted in the US business culture and start-ups in Europe often face a more sceptical investor climate.

The increasing lobbying strength of Silicon Valley also means it often gets what it wants in Washington. The passing of the 2012 Jobs Act, which made it easier for start-ups to remain private and not to disclose as much about their businesses when they file for IPOs, is one example. London is among the cities that have tried to respond but face resistance from cautious investors, wary of the industry’s record of lurching from boom to bust.

So it is hardly surprising that New York, another US centre, has made the swiftest recent progress in competing with the west coast. In the longer-term, China may have the best opportunity. Its online market rivals that of the US – and has produced winners such as Alibaba and Tencent – and its government is willing to subsidise big technology ventures. For many cities, Silicon Valley remains less a place to compete with than one to dream about.

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