The Silicon Valley Startup Advantage

Updated on October 7, 2019
R Nicholson profile image

Robert is a Silicon Valley entrepreneur who provides business and technical consulting services for startups and small-to-medium companies.

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Silicon Valley has achieved an almost mythic status as the birthplace and home of the high tech economy. It is perhaps the greatest center of innovation and wealth creation in the history of the world. The statistics tell an impressive story:

  • Sixty-six of the 2018 Fortune 1000 companies, including Alphabet (Google), Apple, Cisco, Facebook, HP, Intel, Oracle, Tesla, and Yahoo, are headquartered in Silicon Valley region, which includes San Francisco. [Morais] The region is also home to some of the world’s largest privately held companies, such as AirBnB.
  • The Silicon Valley region produces 15.8% of California’s GDP, or 1.5% of the entire US GDP. [Massaro, page 6]
  • In 2016, 46% of all venture capital funding was invested in the Silicon Valley region. [Buyouts Insider, page 31]
  • The region accounts for 13% of all patents filed in the United States. [Massaro, page 36]

NOTE: In recent years, the Silicon Valley high tech economy has expanded north into San Francisco. Following the lead of the Joint Venture Silicon Valley Institute for Regional Studies, I have included San Francisco in regional statistics.

It’s impossible to estimate the ripple effect of the Silicon Valley tech economy – the increases in economic efficiency, the offices and factories around the world, and the hundreds of millions of jobs that have been created based on Silicon Valley ideas and innovations.

Silicon Valley has been so successful that dozens of places have tried to replicate its success, ranging from Silicon Alley (New York), to Silicon Glen (Scotland), to Billy-Can Valley (Australia). These efforts have achieved some positive results in spurring local economies, but none has succeeded in creating a hub for innovation on the scale of Silicon Valley. These attempts fallen short, despite the best efforts of local and regional governments and corporations, because Silicon Valley itself was not “created.” It evolved organically and accidentally from a fortuitous combination of location, people, resources, and events.

Launching in the Valley gives companies some big advantages for startups, as we will see, and that’s why so many successful companies are born there.

Silicon Valley History

In a sense, Silicon Valley was born over 100 years ago, in 1909, when Stanford University president David Starr Jordan invested in Lee de Forest’s vacuum tube. Stanford continued to support technology innovators, producing graduates like Bill Hewlett and David Packard (who founded HP), and Russell Varian (who founded Varian Associates).

Following World War II, many veterans settled in the Bay Area and attended Stanford University. The influx of students encouraged the university to establish the Stanford Industrial Park, a kind of early startup incubator.

In the 1950s, William Shockley, the inventor of the transistor, moved to the area and established Shockley Semiconductor Laboratory. Eventually, several of his employees left to form companies of their own, including Intel and Advanced Micro Devices.

History Museum at Intel company headquarters.
History Museum at Intel company headquarters. | Source

During the Cold War, government investment helped the early semiconductor companies to grow rapidly, which in turn established the area’s reputation as a center for technology.

The growing pool of high tech talent and the educational and investment resources of Stanford University continued to drive new tech ventures, gave rise to Stanford Research Institute (where the computer mouse was invented), Xerox Palo Alto Research Center (which pioneered object-oriented programming, the Ethernet, and laser printers), Hewlett-Packard, and Apple Computer.

In the 1970s, investment funds fueled in part by the wealth of earlier entrepreneurs gave rise to the venture capital business, which provided funding for new companies.

By the 1990s, the key components of the Silicon Valley ecology were well established: outstanding educational resources, a large pool of talented technology workers, ready capital, and a culture that encouraged the formation of new ventures.

Silicon Valley spawned a host of new companies, including Yahoo!, Google, Facebook, Twitter, Oracle, Cisco, Salesforce, and Uber. It became a magnet for new college graduates and tech workers from around the world, as well as for investment funding. Other areas launched initiatives to build competing technology centers, but Silicon Valley had an insurmountable lead.

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The Silicon Valley Ecosystem

The Valley’s ecosystem developed over several decades, so it’s not surprising that it’s rich and complex. To break down the complexity, I’m going to talk about each of the key components of that ecosystem. Remember, all the components are strongly connected by a network of personal and business relationships, and those relationships are part of what makes Silicon Valley unique.

Academia

Stanford University may have been the birthplace of Silicon Valley, but it’s far from the only important academic institution. University of California at Berkeley has a world-class computer science program and is close enough to feed a steady stream of graduates into the Valley ecosystem. In addition, there are many second-tier schools with strong computer science and engineering programs, including San Jose State University, Santa Clara University, and University of California at Santa Cruz. Several local two-year community colleges offer inexpensive technical courses and are feeder schools to the universities.

These schools draw students from around the world, and many students stay after graduation to work for local companies. Silicon Valley companies can rely on a near endless supply of bright, talented, and well-educated graduates entering the workforce. Tech workers can take classes on an ongoing basis to earn advanced degrees or to enhance their skills. For instance, when I worked for Hewlett-Packard, the company paid my tuition to earn my Master’s degree in computer engineering at Stanford University.

The relationship between business and academia works both ways. Many faculty members are drawn from local industry, and companies often provide grants, software, and equipment to universities. As a result, coursework is very “real world” oriented, and new graduates are ready to enter the workforce and are immediately productive.

Stanford University
Stanford University | Source

The Workforce

The high concentration of tech companies in the Valley is self-perpetuating. Because the companies provide high-paying jobs, skilled workers are drawn to the region. Larger companies actively recruit from the top schools all around the world. Because some of the world’s most advanced tech companies are in Silicon Valley, workers can continue to learn on the job.

The many skilled workers provide a pool of talent for startups, and many employees leave to start companies of their own. Obviously, employers don’t want to lose good employees, but this is an accepted part of the Valley culture. By changing companies, employees are exposed to new ideas and learn new skills. People who stay too long at one company may actually be looked down on as being “stale.”

Another advantage of the Silicon Valley workforce is diversity. An amazing 38% of the area’s residents were born outside of the US. Workers from other countries and cultures provide different points of view and insights that you can’t get from a homogeneous workforce. They can provide first-hand knowledge and language skills when the company wants to launch their products and services in other countries.

Companies

In addition to attracting skilled workers, the high concentration of tech companies in Silicon Valley creates many opportunities for partnerships. Companies often float product ideas past nearby companies through formal or informal discussions. There’s a good chance that managers and executives at any two tech companies in the Valley have worked together before, or at least have mutual acquaintances who can provide introductions.

Companies often provide one another with equipment and software for compatibility testing, and even launch joint development projects. For example, while managing a software organization at Oracle, I had a lab full of equipment provided by Apple, HP, Silicon Graphics, DEC, and IBM, as well as “on call” engineering consultants at each company to support our development efforts. An integration lab I managed at Sun Microsystems had networking equipment on loan from Cisco.

Because there are so many business opportunities in Silicon Valley, many companies from outside the area, or even outside the United States, maintain offices in Silicon Valley. For startups, these local offices can provide convenient and cost-effective access to representatives of overseas companies.

Oracle Company Headquarters
Oracle Company Headquarters | Source

Funding

According to the National Venture Capital Association, 46% of all venture funding flows into Silicon Valley [Buyouts Insider, page 31]. In addition to formal venture funds, there is a large pool of angel investment, private funding, and corporate funding available for early-stage companies.

More importantly, the Silicon Valley community makes it relatively easy to obtain introductions to investors, as well as help and coaching to prepare for pitches and meetings.

Services

Most companies start with a small number of people. The initial team is typically skilled in product development, marketing, and sometimes general management. But founders quickly learn that additional skills are needed in many areas: legal, finance, HR, PR, and so on.

In Silicon Valley, it’s easy to find attorneys, accountants, and consultants who understand the specific needs of startups. They allow the founding team to focus on building and marketing the product, while they take care of tasks like payroll, employment policies, accounting systems, IP protection, and so on.

With the right introductions, some service providers may offer a sliding fee scale or deferred payment. They may even accept company equity as partial payment.

Clients and Customers

It may seem strange to list clients and customers as a significant part of the Silicon Valley ecosystem, but it’s important to understand that businesses and individuals in the region are used to dealing with startup companies. In other areas, customers may not be willing to take a risk on a company with no track record, but that is less true in the Valley.

Because they are used to working with startups, many companies in the Valley even have venture capital funds. It’s not unusual for a business-to-business (B2B) startup in Silicon Valley to have customers who are also investors.

Networking

A significant percentage of the residents of Silicon Valley are involved in the high tech economy, and there are a large number of venues and events where you can expand your network. This is important, because reaching investors, service providers, and customers relies on knowing the right people.

Because people in Silicon Valley have so many connections, it’s impossible to know which contacts will be important. For that reason, successful entrepreneurs in Silicon Valley spend a great deal of time networking.

Some venture firms won’t even talk to entrepreneurs without a personal introduction, on the theory that the success of the startup is dependent on its ability to network.

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Cooperation

Even though Silicon Valley is an incredibly competitive business environment, people are amazingly willing to help one another. There is a “pay it forward” attitude that encourages people and companies to support one another, knowing it’s likely that their paths will cross again in the future.

Business negotiations generally focus on finding fair, win-win solutions where each party benefits.

You need to be very careful not to take advantage of the cooperative culture. If you ask for too much, or if you fail to meet commitments you’ve made, it will likely come back to haunt you in the future. Silicon Valley has a long memory — I’ve encountered people who hold grudges decades after events.

But if you play fair, you’ll likely find more help in Silicon Valley than anywhere else.

The Airport and Hotels

Silicon Valley is the hub of the high tech industry. People need to visit the Valley, and people employed there need to travel to satellite offices, partner sites, tradeshows, and customers.

The San Francisco and San Jose international airports provide excellent connections to cities throughout the world.

The many hotels in the area cater to business travelers. Unlike many areas that depend on tourism, local hotels tend to be busy during the week, and relatively empty on weekends.

San Francisco International Airport
San Francisco International Airport | Source

Life in Silicon Valley

Life in Silicon Valley revolves around the tech industry. Sit quietly in any restaurant, and you’ll hear people all around you talking about technology or business deals.

Certainly, not everyone works in the tech industry, but everyone probably has friends, neighbors, a spouse, or family members who do, so it’s very hard to get away from the constant buzz of “tech talk.”

Many people in Silicon Valley work long hours, bring work home with them, hang out with coworkers in their free time, and are expected to be “on call” for emergencies. People in Silicon Valley are passionate about what they do. Employees often need to be told to go home or to take time off.

The high expectations, long hours, and competition in the workplace can be very stressful. Only recently have companies started to recognize that constant stress makes people less productive and leads to burnout. As a result, some companies are instituting policies to ensure that employees take more time away from the job.

To compete for workers, companies in Silicon Valley offer a wide range of benefits and perks, including subsidized or free cafeterias, on-site fitness centers, and even car washing, dry cleaning, hair styling and massage services.

Companies provide many perks, including on-site haircuts!
Companies provide many perks, including on-site haircuts! | Source

Whether for work or leisure, time is an incredibly important commodity in the Valley. People’s lives are scheduled, and people are expected to be on time and prepared for meetings and appointments. This fast pace even extends to family members; kids are shuttled between classes and activities, and rarely just play.

The long hours and tight schedules create a work hard/play hard culture, and high tech workers have the money to pursue their hobbies. Whatever your interests, you’ll likely find a place to pursue them in Silicon Valley, if you can find the time!

You’ll also be exposed to many different cultures. More than a third of Silicon Valley residents were born outside of the US [Massaro, page 15], and in the workplace, the figure is over 50%. Workers in the Valley readily accept one another’s culture and religion, as long as everyone pulls his or her weight. Though not perfect by any means, Silicon Valley aspires to be a meritocracy, and it mostly succeeds.

A final factor that should be mentioned is the climate. The weather is moderate year round. It’s often quite possible to have a meeting at an outdoor café table in mid-February. The climate is a big factor in attracting and retaining talent!

Visitors at Apple's headquarters
Visitors at Apple's headquarters | Source

The Negatives

The biggest Silicon Valley drawbacks are a direct product of the region’s success.

Housing is incredibly expensive. In 2018, the median single-family home price in the United States was $261,600 [NAR]. However, in Silicon Valley, the median price was $1.34 million.

The region is far behind in meeting targets for low-cost housing. People who don’t have high-paying jobs in the tech industry are forced to commute from outlying areas. In East Palo Alto, a relatively poor community in the heart of Silicon Valley, rising rents and housing prices have forced many people from their homes. It is estimated that 1/3 of the school children in East Palo Alto are homeless [Gee].

The cost of living is very high in the Valley. High property values and high salaries drive up the cost of doing business, and the costs are passed on to consumers.

The region’s highway system has not seen significant upgrades since the 1980s Traffic often grinds to a halt during commute hours, and pollution is a growing problem.

There is very little mass transit: a single commuter rail line that runs the length of the Peninsula, the aging BART system that runs from the northern part of the peninsula to San Francisco, and a fragmented system of bus routes.

Although the area has excellent restaurants, shopping malls, and recreational facilities, they are usually expensive and crowded, and it can be nearly impossible to find parking near popular destinations.

While major employers like Apple and Google are still building major facilities in the area, there’s increasing pressure to find new locations outside of Silicon Valley, where employees can afford a better standard of living.

Silicon Valley - looking toward San Jose
Silicon Valley - looking toward San Jose | Source

Conclusions

The Silicon Valley ecosystem provided tremendous resources for companies that locate there, and these advantages are very hard to duplicate elsewhere. However, there are downsides as well: high costs, and a rising cost of living that makes it hard to attract new employees from outside the area.

Some companies are now trying to have the best of both worlds: building their headquarters in the Valley, and quickly launching satellite offices elsewhere, or recruiting a remote workforce.

These are actually good signs. The Valley is evolving and changing, but will continue to be the leader in the tech world for many years to come.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

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    © 2019 Robert Nicholson

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