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STARTUP

San Francisco's Real Start-up Secret Sauce
 

Everywhere from New York City to Omaha would like to be the next tech start-up capital. Here's what actually makes Silicon Valley and San Francisco hotbeds of tech start-up activity.

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I didn't grow up in Silicon Valley. My parents weren't engineers. My dad was a Navy pilot; my mom was a mom. I learned to program computers in the sleepy suburbs of San Diego.  

I moved to San Francisco in 1994, because my wife had landed a great job there. Everything changed. Suddenly I was surrounded by a ton of people who were already doing exactly the same thing I wanted to do: create software that used the Internet to do amazing things. I jumped right in.  

I'd been an entrepreneur since my teens. My first company had created inventory control software for small local businesses--a safe bet that made me enough immediate income to pay for college and an apartment, but little more. But that was then. This was entirely different. Now, parked in a 300-square-foot office near the San Francisco Caltrain station, with four crazy guys in the suite next door creating one of the first 'I-S-P's (nobody even knew what that meant back then), I made a little videoconferencing program with equally little hope of generating revenue. I sold that company to another then-little software company called RealNetworks, and in 1999 used the money from RealNetworks going public to start Second Life.  

These things would not have happened in San Diego.   

Not being from Silicon Valley, I was fascinated by what was so different in the Bay Area, and what exactly it was that was so helpful to me as a 26-year-old software developer when I arrived here.  

Seems everyone has an opinion about what it is that makes Silicon Valley generate so much value and so many crazy start-ups, but I think a lot of those easy explanations are full of hubris and miss the real magic of what is happening here. Yes, Stanford is a fine engineering school, but that probably doesn't have much to do with it. And yes, there is a fantastic well-oiled network of smart VCs and investors here, but the vast majority of start-ups (even in Silicon Valley) are still funded by second mortgages and family friends. Finally, I also don't buy the theory that Northern California attracts low-serotonin thrill-seekers who love creating businesses as risky as their skiing habits.  

I think the magic of Silicon Valley (and, most visibly, San Francisco) is not in fostering risk-taking, but instead in making it safe to work on risky things. The phenomena is larger than the people: having traveled a lot, I would argue that the entrepreneurs and engineers in San Francisco are pretty much the same sorts of people as the ones you'd find anywhere.  

But there are two things happening in Silicon Valley that are qualitatively different from New York or London (or pretty much anywhere else):  First, the sheer density of tech entrepreneurs per capita is 10 times greater than the norm for other cities, and second, there is a far greater level of information sharing between entrepreneurs here.  Putting a sharper point on that second one:  In New York City they ask you to sign NDA's, and in San Francisco we don't.  And what may feel a bit risky for the one turns out to have a big positive benefit for the many.   

Working with my team at Coffee & Power, we discovered that we could query LinkedIn to tell us the number of tech founders and co-founders in a major metropolitan area, and that by dividing that number by the overall population, we could get an index of founders per capita.  Looking at a graph of how the Bay Area compares to other metro areas in this index is immediately telling--San Francisco has about twice the density of the next-highest city (Boston), and about five times the density of New York.  

In a founder-dense city like San Francisco, which further has two peak neighborhoods where tech companies congregate (SoMa and the Mission), what this means is that you can't walk down the street without (almost literally) running into someone else who is starting a tech company.  If you are sitting in a coffee shop or a bar, it means you are sitting across from someone else who might be able to hire you.    

So in practice, if you are young software developer or entrepreneur in San Francisco, you can choose to work at a start-up that will have a more than 50 percent chance of going out of business in the next 18 months without risking the embarrassment of running out of money and having to move back in with your parents.  Because when that start-up does fail, you will park yourself back at that coffee shop, open your laptop, and wait. Within one week you will most likely have another job or will have found another co-founder, and be back in business. Since you probably have two or three months of living expenses saved up, if you can get a new job in a week, this isn't actually risky at all. While tech ventures are individually risky, a sufficiently large number of them close to each other makes the experience of working in start-ups safe for any one individual. I like to visualize this as a series of lily pads in a pond, occasionally submerging as their funding runs out. If you are a frog, and there are enough other lily pads nearby, you'll do just fine.  

The graph of founder-density by city suggests a classic power law, which we see in network effect systems where "the rich get richer." And that is what we see in the graph--so apparently the benefits of having a lot of entrepreneurs in one area increase with their numbers. Beyond simply having a lot of people near you to work with, I believe that the openness and willingness to share inherent to Silicon Valley is a big driver in this effect.  

That's because once you reduce the risk of failure by having a lot of people around who will hire you next, everyone becomes more open and friendly about what they are working on, which then further amplifies the benefits of having a lot of people around. In other words, if you are a 3-D developer looking for a new 3-D project to work on (like my new company, High Fidelity!) and people are talking a lot about what they are working on, you will find that project even faster.   

If you want to create a vibrant start-up ecosystem somewhere else that is competitive with San Francisco and Silicon Valley (and this is starting to happen right now in places such as Boulder and Austin), you want to do two things: You want to pack the people working together into as dense an area as possible, with public areas and co-working venues where they will see each other constantly, even when they aren't working in the same company. And then you want to encourage them to let down their guard and be as open as possible about what they are doing. 

Also, consider this: If the magic of San Francisco is simply driven by the natural result of having so many of the same sort of people pile up in one place, then this means that as technology continues to inexorably lower the communication barriers between us, we will see more of these magical places pop up, as we are seeing with Boulder and Austin.

Finally, if virtual reality at some point offers the ability to communicate in as natural and compelling a way as we do face-to-face in San Francisco, we can expect a sudden disruption as the biggest "city" of the tech future goes 100 percent online.  

IMAGE: Basil D Soufi/Wikimedia
Last updated: May 14, 2013

PHILIP ROSEDALE is a lifelong entrepreneur and technology innovator. Previously CTO at RealNetworks, founder and CEO Linden Lab, creator of virtual world Second Life, recently co-founded High Fidelity to explore next-gen virtual reality.
@PhilipRosedale




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