Is there a Silicon Valley advantage?

One of the advantages of being in the "job market" is the opportunity to gain some distance and reflect on some fundamental assumptions we take for granted. One such assumption for me was that "You have to start an Internet startup in Silicon Valley!" I have now come to realize that this assumption not only is false, but can be quite an impediment to success in building and growing your company.  Here are some data points that have helped me reach this conclusion:

1. There are plenty of very impressive, financially successful Internet startups that are headquartered outside of Silicon Valley, even outside of the US. Examples abound, but some companies off the top of my head are Whitepages.com (Seattle, WA), Club Penguin (Vencouver, Canada), Metro Lyrics (Vancouver, Canada), Cymax (Vancouver, Canada), and Webs.com (Silver Spring, MD). You may not have heard of some of these companies, but that may say more about the media coverage bias rather than actual financial success or user adoption.

2. Many successful Bay Area startups are recruiting heavily from outside of the Bay Area rather than locally, and have found the candidates from outside of the Bay Area to be as technically competent, with very strong work ethics coupled with a dose of humility to boot. As an example, social dating site Zoosk, which recently closed on a $30 million financing round, has recruited most of their employees from outside of the Bay Area.

3. Many Silicon Valley venture capitalists are looking outside of the Bay Area for investment opportunities. The math is as follows:

Lower valuations + lower labor/infrastructure cost + more available resources = higher likelihood of survival and success.

4. Most of the founders of successful Bay Area startups are not "locals", but first generation "immigrants" from other parts of the US/world.

Certainly, the above does not mean that in order to succeed one should sever all ties to Silicon Valley. The ecosystem of entrepreneurship that exists in Silicon Valley does not have a close second in the world and every successful startup should have a strategy about how to plug into the Valley ecosystem. But doing so does not necessarily mean you should headquarter the company from inception in Silicon Valley.

Indeed, for some startups, the right time to establish a presence in Silicon Valley may be many years after founding the company, reaching millions of users, and obtaining that elusive positive cash flow. As a matter of fact, as of December 1, I myself have joined one such startup (Webs.com) in order to help them plug into the Silicon Valley ecosystem through partnerships and collaborations now that the company has reached the scale, user base, product and platform stability that can credibly support such efforts.

So, next time you are thinking about where to start your company, don't automatically assume it has to be in Silicon Valley.

P.S. This will likely be my last post of 2009, so I wish everyone Happy Holidays and an auspicious start to 2010!

To Succeed, Tear Down Those Walls

And I mean this literally: If you want your startup to succeed in today's hyper-agile and über-competitive environment, you've got to tear down those office walls. Why?  

Because in a startup environment, communication trumps privacy!

Over the past ten years, I have visited the offices of well over 100 startups in Silicon Valley, and looking back, there has been a very strong correlation between those startups sporting an "open office" layout and their ultimate success. Here are some examples:

Powerset (acquired by Microsoft as foundation of their Bing natural language search engine) started with the whole company huddling around a large conference room for the first year in CommerceNet headquarters in Palo Alto. No executive offices, no cubicles, not even individual desks.

(Which, coming to think of it, reminds me of another quite innovative, albeit a bit older startup)

Facebook Long rows of tables with monitors facing in every direction has been characteristic of Facebook offices from the humble beginnings in scattered offices throughout downtown Palo Alto, to their new digs at the former Agilent building in Palo Alto. Here is a skateboard video tour of the new office, which illustrates that they are still true believers in the open office philosophy:



Google When they outgrew the garage and moved to 165 University Avenue, Palo Alto (also known as the "lucky building", home to other notable startups such as Logitech, Paypal and Danger) with their 8 employees in 1999, they didn't have any offices. They are still trying to maintain the open office feel, although it gets a bit harder to do once you have over 20,000 employees worldwide.

(Larry and Sergey in their startup garage. Pic from http://bit.ly/JnL9x)

Of course, just having an open office layout does not guarantee you overnight success, yet without one, you are putting your company at a distinct disadvantage versus your competitors, as they will be able to innovate and move much faster than you can. In startups, every nanosecond counts. Your employees need to be in constant communication with one another, and your job as founders/executives is to eliminate any barrier and friction in that process (coincidentally, this is one main reason it is usually not a good idea to outsource/offshore development in a startup, regardless of the immediate financial benefits).

As for those employees who come to you and tell you they need a cubicle/office because it is getting too loud for them to be productive, well, you may just want to offer them a pair of noise-canceling Bose headsets before you make any rash decisions.

Mathematical explanation of entrepreneurial bug

Not all things in life are quantifiable (you know, things like justice, love, or your experience of the color purple), but the proverbial "entrepreneurial bug" is not one of them.

As a corollary to a well-known math problem called the two-envelope paradox, it is perfectly rational for an individual to want to start one company after another and expect a higher reward after each iteration, even if the expected outcome associated with each of these endeavors is completely random (as I would argue is the case every time you start a new company)! To understand that mathematically, this is how the two-envelope paradox works (taken from the latest analysis of this paradox on PhysOrg.com):

In the two-envelope paradox, a player must choose between two envelopes, one of which contains twice as much money as the other. The player can open the envelope they choose, and then they have the option of switching envelopes. The other envelope, of course, has either twice the money or half the money as the first envelope, but the player does not know which.

It may seem that, since a player has a 50-50 chance of choosing either envelope, they have an equal chance of gaining or losing money whether they decide to switch or keep the original envelope. However, probability theory seems to confusingly show that it’s always better to switch.

For example, say the first envelope you pick has $10, so that the other envelope has either $20 or $5. Then you can calculate the expected value (i.e. the probability-weighted sum of the possible values) of the second envelope, assuming that each possibility has a 50% chance: (0.5 x $5) + (0.5 x $20) = $12.50. Since $12.50 is more than $10, it makes sense to switch. No matter which numbers you use, you always get an expected value for envelope two that is 5/4 higher than the value for the original envelope: if c is the value of the original envelope, the expected value of the second envelope is (0.5 x [0.5c]) + (0.5 x [2c]) = 5/4c.

This counter-intuitive mathematics can explain very well why so many first-time entrepreneurs try again, regardless of the success or failure of their first attempt. And why it is perfectly rational for investors to expect a higher payoff from a not-so-successful serial entrepreneur than a first-time entrepreneur.

Do "good guys finish last" in business?

I remember a few years ago the CEO of a then-successful startup told me in confidence he couldn't afford to care about ethics in his business because "you know, good guys finish last"!

That statement was shocking because that individual on a personal level had high integrity and good moral character. But market pressures combined with the demands of the Board had somehow convinced this CEO that doing right by the shareholders demanded that he put personal morality aside and do "whatever it takes" to increase the company's bottom line and competitive positioning.

This was not an individual driven by Enron-style greed or Madoff-style excesses, but someone who was merely trying to survive; someone who was simply afraid of finishing last. Was he being a good CEO or a lazy one?

When all your competitors are getting ahead through less-ethical practices (such as buying positive reviews for their product on the App Store or other social media outlets), what do you do? Do you sit back and concede the market to your competitors or do you also join in the game and start an arms race? How do you competitively price your product when your competition uses various schemes (ahem, scams!) to hide the real price of the same product from their users to give them the appearance of a bargain (as is a common practice in the calling card industry)?

The answer to these questions depends on whether you are trying to build a long-term, sustainable business or whether you plan on making a quick buck and run for the border. Because if you plan to stay in business, in the post-twitter information society, transparency is becoming the name of the game and your reputation as a trust-worthy business one of the single most determinants of survival: Sooner or later, the non-ethical businesses are found-out and abandoned by users/customers/partners/employees (I am not going to even talk about the legal dimension of unethical business practices here, and some argue that there is really no line between illegal and unethical to begin with).

My above statement is not a hypothetical or game-theoretical proposition (although there is plenty of academic literature around the topic of reputation effect in repeat-game vs. end-game scenarios - just google it), but an empirically proven observation: For instance, in ecommerce, many studies and A/B tests have proven that perception of "trust" has a very strong correlation to the conversion rates of your website. And just as an eBay-seller would not make it far without a positive reputation score, your company or service will not make it far without an overall online reputation that is positive.

Being one of the "good guys" will not ensure your success, but without it, you are guaranteed not to succeed.

Revisiting Alchemy, Valley Style

Let's be honest about this, the quintessential Silicon Valley entrepreneur is not that different from your typical alchemist dating back to the Persian Empire of 2500 years ago, as described by Wikipedia:

Alchemy (Arabic:al-kimia) (Hebrew:אלכימיה al-himia) is both a philosophy and a practice with an aim of achieving ultimate wisdom as well as immortality, involving the improvement of the alchemist as well as the making of several substances described as possessing unusual properties.

But wait, what about those less noble pursuits such as greed and let's-make-gold-out-of-cheap-metals bit?

Well, when you look at it closely, any human endeavor that can promise to get you close to "ultimate wisdom" and "immortality" (which apparently some believed to be possible through gold back in the day as the Wikipedia entry goes on to explain), inevitably becomes mixed up with financial gain and material success. And such, seems to be the lot of us Silicon Valley entrepreneurs as well.

So it is not surprising that many entrepreneurs find inspiration and motivation in Paulo Coelho's international bestseller, The Alchemist. As a matter of fact, I started my last company (jaxtr) after reading that book and finding it to be completely appropriate to quit my well-paying corporate attorney job and pursue a dream (thank you @paulocoelho).

This blog will not be about jaxtr, but about what I have learned from that experience, as well as my reflections on encounters with many other entrepreneurs, ideas and practices.