Thursday, December 16th, 2010

The Silicon Valley Advantage

Lots of cities are trying to build up high tech/internet industry clusters. I think there’s room for a lot of places to significantly boost their employment and business formation here, particularly in focused areas, but the top hubs like Silicon Valley have huge advantages that mean they’ll likely stay on top of the heap for quite some time.

A brief story about a company called Formspring illustrates this. Formspring is a spin-off of an Indianapolis online form vendor called Formstack. (Actually, Formstack was originally called Formspring, but the spinoff business became so big they changed their name). Formspring was one of those crazy social media growth juggernauts that signed up something like 15 million users in only eight months.

Of course, they needed money to keep up with this, and so went looking for investors. In the interview below from July with Formspring CEO Ade Olonoh, the interviewer described this as an “iconic super-angel funding round where every bold faced Silicon Valley name put money into you guys.”

The entire process end to end lasted 12 days. Somehow they got a conversation with Steve Anderson of Baseline Ventures. After a few phone calls over the first week, the Formspring team flew out to Silicon Valley where Steve arranged about 10 meetings over two days with a who’s who of investors, people Olonoh admitted he couldn’t have even listed on a whiteboard before the process started. Shortly thereafter the funding round was closed and Formspring relocated to Silicon Valley. Here is the entire interview, if you are interested. (If the video doesn’t display, click here).

In Silicon Valley they just plain move faster than everywhere else. That’s a huge advantage. And they have a huge reservoir of strategic investors who bring not only dollars to the table, but significant experience and expertise in growing businesses.

Another advantage is talent. In staffing up the business, Formspring was able to hire a couple people who worked on Second Life. Though the competition for developers in Silicon Valley is intense right now, the talent pool is still the world’s most robust for this type of business.

Similarly, talent and access to capital led a couple of University of Chicago entrepreneurs to relocate their enterprise to Silicon Valley. As WBEZ reports in “The One That Got Away.”

They didn’t go with the intention of staying. After all, Lieb and Mintz still had another year of B-School ahead of them. But like lots of good tech companies, the train barreled down the tracks at breakneck speed.

They took part in a summer business incubator program run by Y Combinator. By the end, they got a big, fat $3 million check from the venture-capital firm Sequoia Capital and some Valley angel investors.

But just because they got the money there didn’t mean they had to stay. They could have come back to Chicago. But they didn’t. They opened their headquarters in Mountain View, California, and now have 15 employees there and are “aggressively hiring.”

Lieb says the main reason was because Huibers lived in California already. But there was another reason that speaks to Silicon Valley’s dominance.

“We knew we needed to hire a bunch of people, and being here in the Valley is really where all that technical talent is,” Lieb said in an interview.

And even though they did talk with venture capitalists in Chicago, there aren’t as many of them and they’re more cautious, Lieb says.

Now all is not doom and gloom here. I don’t think a place like Indianapolis was a great fit for Formspring. It’s a perfect fit for B2B businesses like Exact Target, but a mass-consumer social networking site is not the city’s sweet spot. So I wouldn’t feel too bad about losing the business. Similarly, WBEZ also reported how Groupon has ignited a startup boom in Chicago.

But I think this story shows some important differences in the capabilities and ways of doing business between the Midwest generally and Silicon Valley. (For example, there appears to have been a media blackout in Indy regarding the relocation. I read about it in the New York Times). It shows why the Valley has had such staying power, and why it is so hard to build and sustain an innovative tech cluster like this over time.

1 Comment
Topics: Economic Development, Technology
Cities: Chicago, Indianapolis, San Francisco

One Response to “The Silicon Valley Advantage”

  1. the urban politician says:

    What most people often don’t forget is that entrepreneurship is what built Chicago out of the swamps.

    Entrepreneurship is in Chicago’s blood. Some of the great Chicago giants of the 19th century–Marshall Field, Armour, Cyrus McCormick, Sears, Pullman, Montgomery Ward, Swift, etc–not only created great industries, but they were innovators who invented the modern business world that we currently know. It’s really quite interesting when you read the history.

    It would be great to see another huge resurgence of entrepreneurship in Chicago again, the likes of what we saw during that long gone era. While it’s likely never to happen again to that degree, there is no reason to believe Chicago lacks the spirit and talent to create great companies again.

    In Groupon, Chicago is host to the fastest growing company of all time. If that’s not a big enough affirmation, then I don’t know what is. The key is, of course, whether that translates to a whole tech community as opposed to just being an outlier. I’m betting on the former.

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