At this moment of writing this blog I’m waiting for the good old KLM606 flight to bring me back to the Netherlands, where it is wet and cold… Talking about the weather. There may be a positive relation between the weather climate and the business climate. Many SV entrepreneurs I’ve interviewed mentioned the positive effects of 25 degrees and sunshine all year round.
My study in SV started seven weeks ago. I attended countless events and I officially interviewed about 30 entrepreneurs, investors and professors. During my study there was an intermezzo from 14th to 23rd of October when a group of 16 Dutch entrepreneurs came over to participate the Silicon Summit. The Silicon Summit was intensive and inspiring. We had a lot of presentations, workshops, pitch events and company visits at Google, Blackbox and Mozilla. The summit is organized every year by the Dutch Consulate in San Francisco. The goal of the summit is to inspire Dutch startups and show them the possibilities of doing business in SV. The local newspaper from Groningen published a nice article about the experiences of the entrepreneurs from Groningen.
Entrepreneurship is a lifestyle
So what did I learn? Well I am still in the process of digesting all the information but to make a start: in SV entrepreneurship is everywhere. You are surrounded by entrepreneurs while drinking a latte in the Starbucks (the Starbucks is actually the first office for many early phase startups). The density of entrepreneurs is very high and you always meet people who are involved in startups. Whether you are at a Jazz festival or a Halloween party, there is a high chance you meet entrepreneurs and end up with a great conversation. SV is designed for startups. Even the billboards and commercials along the roads are focused on startups. Entrepreneurship is a lifestyle, a lifestyle that is desired by many people.
So why is entrepreneurship a lifestyle, why are there so many startups and why do most big IT companies have their roots in SV? According to my interviews and observations there are several reason. I’ll try to sum them up:
Nothing to lose, everything to win
To start a startup you have nothing to lose and everything to win. The flexible labor market makes it easy to hire and fire. Employees are not familiar with job security so why not start for yourself. When you are young and talented you can choose to work at Google and make 200k a year. With your own startup you can change the world and hope for a successful exit that makes you a multi millionaire. However the chances of that to happen are small, it is always worth a try. And if you fail, you have lost nothing but gained a lot of experience. You can always go work for Google, but many “failed” entrepreneurs just start something new.
Entrepreneurs have a high social status in SV. Steve Jobs (Apple), Larry Ellison (Oracle), Larry Page (Google), Mark Zuckerberg (Facebook) and many others are considered as true heroes. These heroes are not unreachable Hollywood stars but actual people living in the Valley you can meet at Starbucks in Palo Alto. Young entrepreneurs identify themselves with them and are motivated to become just like them. I was in San Francisco when Steve Jobs died. During that week the Apple store was like a pilgrimage. Thousands of people brought flowers and posted messages to show their last respects.
No entry barriers
The barriers to start a business are very low. Setting up an IT startup is very cheap. You only need a laptop (MacBook), a mobile phone (Iphone), a workspace (Starbucks) and some cloud services (Google Docs, Amazon Cloud) to build your online product. There are no administrative or legislative obstacles to start a business. And you don’t have to worry about taxes because you are not making any money yet. The government doesn’t obstruct nor stimulate entrepreneurship, they are invisible and let things take their course.
Availability of resources: finance, knowledge and network
I divide the resources in three categories: 1) financial capital (money), 2) human capital (knowledge) and 3) social capital (connections).
1. There is a lot of investment capital available from informal investors and VC’s (40% of all VC investments of the USA are made in SV). These investors act pro active and very professional in their search for the best ideas, teams and entrepreneurs to invest in. An investment is considered as essential (sometimes it is a goal). In the competitive Internet business it is all about speed and money accelerates your business.
2. Silicon Valley is a hotspot for talent. The world’s best engineers, marketers and managers can be found here. Some educated at Berkeley or Stanford, but many are from outside the USA. The financial, legal and other supporting industries are specialized in startups. It often happens that these service providers do not get paid but get a stake in the startup.
3. Having the right connections is essential. It is easy to build a strong network because there are a huge numbers of network events and possibilities to have valuable unexpected meetings (serendipities). In this competitive environment it is remarkable that people are very open and willing to share knowledge and relations.
Accelerator programs play an important role to combine these resources. Ycombinator, 500 Startups and Techstars provide startups with office space, money, coaching, management and a huge network. In return they get a share of around 5%. Startups participating in an accelerator program have a huge competitive advantage. Although most of them fail, some become a big hit that compensates the losses of all others. For example Ycombinator’s Dropbox, founded in 2007, is now valued at 5 billion USD.
And most important…. culture
I want to finish with the most important factor and that is the mentality of the people. People are positive and have expectations. When they see an opportunity, they are willing to take a risk to make something of that opportunity. Young talents start or join a startup instead of working for a big firm, advisors of startups get paid in stock, investors invest in a many startups because they expect there is a billion dollar hit among them, and people are open because they know: when you do good, you receive good. This mentality is described as the pay it forward culture.
It is very clear why there are so many startups in Silicon Valley (people say about 20.000 a year). People want that lifestyle and they want to become the next big thing. But it is far from easy and the competition is very strong. The competition is not in products or markets but in getting the best resources. There are more startups looking for an investment than there is capital, the demand for skilled people is higher than the supply and to get the right connections you need some networking skills. Ultimately the best ideas, the best teams and the best-connected entrepreneurs get the best resources. So looking at the high number of startups combined with the high competition for resources it is just logical that the next wave of big IT companies will sprout from SV.
The next step
So what’s next for me? Well, my study is not finished yet. As you probably read in my earlier blog I’m looking at the factors that influence firm growth and what the differences are between SV and the Netherlands. For the coming two months I’m going to have the same interview with Dutch entrepreneurs and experts. It is not my intention to give recommendations to copy-paste SV in the Netherlands. Vivek Wadhwa (I was privileged to interview him) published an article where he explained why it is not possible to top-down implement an ecosystem like SV.
The goal of my study is to get more understanding about the factors that are important for startups to grow their business. The availability and intensity of these factors are related to the environment and together form an ecosystem. With this study I hope I can add something to the discussion what the best ways are to stimulate and facilitate Dutch startups to grow in ecosystem called the Netherlands.