Why Silicon Valley Is Not A Great Role Model For The Rest of America | Technological Leadership Institute
Many areas of the world think they can copy Silicon-Valley strategies to build a great economy. Many politicians are very willing to spend other peoples’ money to encourage this strategy. Many financiers outside Silicon Valley think they can copy Silicon Valley venture-capital (VC) strategies to create fortunes. Many angel investors think they can find acorns.
Many entrepreneurs outside Silicon Valley also think they can copy Silicon Valley’s capital-intensive strategies to build giant companies by writing business plans and then seeking funds to grow. Can they succeed?
Imitating Silicon Valley strategies can be a high-risk, low-return strategy for area governments, financiers or entrepreneurs in the Rest of America. Here’s why:
- Since 80 percent of VC-funded ventures fail, and no one, including Silicon Valley, has figured out how to avoid failures as part of a VC strategy, the Rest of America is likely to fail in at least 80 percent of VC-funded ventures
- The top Silicon Valley venture capitalists do well because they fund billion-dollar home runs — and that is the key difference between them and the other venture capitalists, especially those outside Silicon Valley. One home run, like a Google or Facebook, pays for many, many, many failures. As an example, the VC investors in eBay earned about $2.4 billion from a $7 million investment — in 18 months. The annualized return is astronomical. The Rest of America can only drool.
- The number of billion-dollar home runs outside Silicon Valley has been negligible. Without home-runs like Facebook and Uber, VC portfolios don’t do well, and VC funds wither unless they can get state funding or state incentives
- And interestingly, when there have been billion-dollar home runs outside Silicon Valley, they have often been funded by Silicon Valley VCs (like Microsoft and Amazon.com), or Silicon Valley angels and moved to Silicon Valley (like Facebook).
The VC-funded ventures in the Rest of America have not often dominated their industries. But VCs have to cash out and find attractive exits such as initial public offerings (IPOs) or strategic sales. IPOs have not been attractive for most ventures in the Rest of America. So to cash out from these ventures, VCs sell them — often to Silicon Valley technology-focused companies that are dominating their emerging markets. This means that, in the long run, the Rest of America may not have much to show for their investment or for the risk taken.
Can the Rest of America build giant companies that dominate emerging industries — and keep them? To do so, they will need to beat Silicon Valley’s entrants, who usually have more money. It may be possible, but there are not many historical examples. As noted above, two that come to mind are Amazon.com and Microsoft, both of which got Silicon Valley VC funding.
So what can the Rest of America do?
One strategy is to copy the Silicon Valley VC-funded strategy. This has resulted in many incubators and accelerators, but except for a few successes such as Snap from Southern California, the Rest of America has not built too many billion-dollar ventures. One of them, Oculus Rift, was sold, for a few billion, to Facebook and wrapped into the Silicon Valley infrastructure. The track record outside Silicon Valley for the VC strategy has not been good.
Can the Rest of America find a way to build big businesses? That is the billion-dollar question. If you look at billion-dollar entrepreneurs in the Rest of America, about 90 percent of them grew without venture capital. Yes, without. These were entrepreneurs, such as Steve Ells, Kevin Plank, Thai Lee, Richard Burke and Vijay Goradia, who grew without venture capital. You may not have heard of many of them because their ventures have not gone public or they have not sought the public attention that VCs crave for their billion-dollar successes.
The difference between the billion-dollar entrepreneurs in Silicon Valley and outside is that the outsiders learned how to grow without venture capital. They were focused not just on developing a great opportunity but on becoming a great entrepreneur. They built their business by developing finance-smart skills — and learning to grow big without capital.
MY TAKE: When going against a juggernaut, you don’t attack head-on. You need to be smart to win. The Rest of America and the rest of the world needs to develop dominating entrepreneurs who can grow without capital.
Dr. Dileep Rao has more than 20 years of experiencing financing businesses and ventures using venture capital, leases, debt and subordinated debt. He also bought and turned around several companies. Since retiring, he has been writing, teaching, and hopefully thinking. He has also interviewed extremely successful entrepreneurs such as Glen Taylor and Bob Kierllin. Currently, he is writing books about how to build giant businesses without capital. Dr. Rao teaches in the Master of Science in Management of Technology degree program.
This article was originally written for Forbes, and republished with the author's consent.