E2E: ATXnology

What The Economist Got Wrong About the Decline of Silicon Valley

This post originally appeared on Michael’s Forbes blog on September 18, 2017. You can read the original post on his blog here.

I never thought I would start a blog post with such an audacious claim about the journalistic acumen of The Economist. However, having just finished reading The Economist’s September 1st cover story on Silicon Valley titled: “a victim of its own success,” I felt compelled to note some items that the highly-regarded publication missed in its cover story.

As a quick aside added for perspective only, I worked in the tech industry in Silicon Valley for nearly 20 years, living there from 1997 to 2015. I decided to leave the Valley and relocate to Austin, Texas to start a venture capital firm called Next Coast Ventures. You might expect that I would celebrate any publication’s declaration of the “death of the Valley” as support for my own personal decision, but that’s not the case.

Many of the observations in the article about the challenges of living in Silicon Valley are dead on and support the assertion that the Valley has “peaked.” I’m going to highlight some of the more salient points in the article below because they’re noteworthy and I agree with them. However, it’s the conclusions the article drew from these assumptions that I disagree with.

Here’s what they got right:

The Valley is an extremely expensive place to start a company. As noted in the article, one founder “reckons that startups pay at least four times more to operate in the Bay Area that in most other American cities.” I am not sure it is four times more expensive, but in my experience, the engineering talent in the Valley is at least twice as expensive as it is in markets like Austin or Salt Lake City. This cost difference is not just for engineering talent in the Valley anymore – it is across the entire organization. So when an entrepreneur starts a company outside of the Valley, the capital required is lower and will last longer, allowing founders to avoid that nasty little thing called FOUNDER’S DILUTION.

New technologies are making it much, much easier to start a company just about anywhere. The article notes that “thanks to the tools that the Valley’s own firms have produced, from smartphones to video calls to messaging apps, team can work effectively from different offices and places.” Now, more than ever, talent can be sourced and located anywhere – so the need for entrepreneurs to limit their talent sourcing to one specific geography is simply irresponsible. This assertion, however, should not be seen as “anti-Valley,” but rather a great opportunity for anyone competing in the war for talent, regardless of geographic location.

The article is right about innovation happening everywhere: “Capital is becoming more widely available to bright sparks everywhere: tech investors increasingly trawl the world, not just California, for hot ideas.” At my firm, Next Coast Ventures, we are consistently amazed at the quality and quantity of great ideas from impressive entrepreneurs we see every day both in at our office in Austin and the Next Coast markets we routinely visit. The Economist article sees this as a strike against the Valley – however, I think this is the beginning of an incredibly exciting story about innovation and expansiveness, and the ability to build great businesses just about anywhere.

Per the vivid pictured painted by the article, the Valley is a tough place to live: “the nastier features of the Bay Area life: clogged traffic, discarded syringes and shocking inequality.” And don’t forget ridiculously expensive housing prices. I lived in the Valley for a long time and these factors have only gotten worse, not better, over the past 20 years. I miss the creative energy of the Valley and would argue there is no place like it on earth, but it is expensive, crowded, and in some ways, a bizarre place to live and certainly a hard place to raise a family.

Competition for talent, especially engineers, is intense: “Apple and Facebook pay their employees so generously that startups struggle to attract talent.” This is very, very important point for any entrepreneur looking to start a business. Five or ten years ago, startups in the valley could lure away talent with the promises of big equity upside thanks to low pay and stagnant equity prices at the tech behemoths like HP or IBM. But now at companies like Facebook, the median salary of an engineer is not only $240,000 (according to The Economist’s article), but Facebook’s stock has also increased 268% over the past five years. Therefore, the risk-reward equation for an employee with a hefty salary and competitive stock options to leave a large company to go to a startup is a much, much harder calculation than it has been historically in the Valley.

These are all significant, astute data points that are certainly pointing to a tangible shift in the innovation and investment ecosystem in the Valley, but the conclusions the article draws from these inflection points is where my aforementioned strong disagreement with the esteemed Economist comes in.

Here’s what they got wrong:

All of these points are compelling reasons for any entrepreneur to consider starting and growing a company outside of the Valley. However, I disagree that all of these signs point to less innovation, lower opportunity and the inevitable downfall of the Valley. I would assert, rather than “peak Valley,” this all points to the massive opportunity for “Next Coast” markets to help drive overall global innovation and entrepreneurship.

I simply do not agree that these are “signs that they Valley’s influence is peaking.” The article highlights that “in 2013 Silicon Valley investors put half their money into startups outside the Bay Area; now it is close to two-thirds.” The flow of capital into “Next Coast markets” is not a sign that Valley’s influence is waning – far from it. Ask any entrepreneur if they would turn down interest from the preeminent Ventures firms in the Valley (Benchmark, KP, A16Z, etc.) and they would say “heck no.” Rather, this flow of capital is really a good sign of what Steve Case calls “The Rise of the Rest.” That is: innovation is happening everywhere – and the Valley will always be the epicenter – but it is now ALSO happening in a much more prevalent manner in markets outside of the Valley. It is shortsighted to believe that as talent, innovation and capital spread from the Valley that its influence won’t come with it – and there is clearly enough to go around.

In summary, I would assert that the article is only half right – the data points they highlight about Silicon Valley are correct, but their assumptions about what that means for the future of innovation are wrong. What is really happening is not as the article claims a “warning that innovation everywhere is becoming harder,” but rather a timely, exciting opportunity for areas outside of Silicon Valley – what we call “Next Coast markets” – to grow and prosper as additional, rather than replacement, innovation hubs. Cities like Austin may never replicate the Valley (and that is okay), but instead are well on their way to becoming a different, but equally appealing, innovation hub for the next generation of great technology and technology-related companies – and we’re excited to be here working with those companies every day.

“It is shortsighted to believe that as talent, innovation and capital spread from the Valley that its influence won’t come with it – and there is clearly enough to go around.”

E2E: ATXnology

November Dose of ATXnology

As entrepreneurs, we like to share all the content we can’t seem to put down. We send you this content in our Quarterly Dose of ATXnology newsletter, but here’s some monthly content we’re loving as well. This is what we can’t stop obsessing over this month.

Diversity and Inclusion with Erik Larson

As we continue to roll out our new original content platform: E2E, check out one of our latest posts with one of our portfolio CEOs on the effect diversity and inclusion, or lack thereof, can have on ROI.

Thank You for Being Late

Pulitzer Prize-winning author Thomas Friedman writes his “optimist’s guide to thriving in the age of accelerations,” one of the greatest books we’ve read in years. How did we get to where we are? This book seeks to explain.

Know Thyself, Know Thy Leader: Steps To Hiring A Successful Sales Leader

Our co-founder Mike Smerklo writes a piece for Forbes about his experience as a CEO trying to build a well-oiled sales team – and all the roadblocks he hit along the way.

As Silicon Valley Gets ‘Crazy,’ Midwest Beckons Tech Investors

The New York Times wrote a great article that hits on something we already knew to be true: the tech scenes in Texas and the Midwest are booming, and investors are taking note.

Why I Decided to Leave Silicon Valley for Austin

In his ‘Ask Me Anything’ on Reddit, thought leader Tim Ferriss goes through the thought-provoking reasons why he relocated to Austin, sparking a conversation among Reddit users on the trend.

Don't want to miss any of the content we're obsessing over each month?

E2E: ATXnology

October Dose of ATXnology

Next Coast Ventures

As entrepreneurs, we like to share all the content we can’t seem to put down. We send you this content in our Quarterly Dose of ATXnology newsletter, but we’re going to start sharing some monthly content we’re loving as well. Here’s what we can’t stop obsessing over this month.

The Defiant Ones

A true portrait of what it takes to be a creative genius and a revolutionary businessman – and how it’s a result of hard work, not of genius.

Principles: Life and Work

Narrated by Ray Dalio himself, the entrepreneur shares the unconventional principles he has developed and utilized over his career to make him a successful investor – and a happy human.

On the Shoulders of Giants

The Atlantic started very powerful series on mentorship in the workplace and the crucial role it plays. We especially liked: building mentorship out of trauma and the importance of women mentoring women.

After the End of the Startup Era

Does Silicon Valley think the era of golden startups is dead? “We live in a new world now, and it favors the big, not the small,” says TechCrunch.

Don’t want to miss any of the content we’re obsessing over each month?
E2E: ATXnology

Austin Redefining the Sweet Spot: Solving Real Problems for Real People

As an investor, I love the Austin market. We have a strong entrepreneur base that has matured with leaders now on their second or third company. On top of this existing talent, we are also seeing tons of great business minds moving in from other markets and pushing forward some very innovative ideas.

The second quarter of this year was a blockbuster for our investment community: startups here received nearly $387 million investment dollars from the venture capital community. That was more than twice what VC’s pumped into Dallas and Houston startups – combined.

Zeynep Young

Venture Partner

Compared to its Silicon Valley and New York counterparts, entrepreneurs in Austin are often aiming for the sweet spot instead of swinging for the fences. While Silicon Valley dreams up grand ideas that can be out of touch with the mass market, Austin entrepreneurs and investors are focused on solving real problems for real people.

As Austin’s vibrant ecosystem of entrepreneurial activity gets even hotter, it’s in the right place to take the game up a notch and redefine what the next sweet spot is for successful innovation.

The sweet spot

We don’t see a lot of pitches in Austin that make us say: ‘This is ridiculous.’ Austin has a much more realistic sense of what the market is going to buy both in terms of consumer and enterprise. I find that Austin entrepreneurs are usually asking themselves: ‘How do we solve real problems?’

For instance, we don’t see a lot of Juicero-like deals. Do entrepreneurs here think somebody is going to buy a $700 juice machine that just squeezes a packet? Probably not, but in a particularly zealous place like Silicon Valley, an idea like that gets $100 million in funding.

Sometimes Austin’s focus on viability can make these ideas seem less ambitious, a little more controlled – creating viable multi-million dollar companies instead of unicorns. But aiming for that sweet spot means there’s a market that Austin’s rising entrepreneurial ecosystem can uniquely capture. I like to think of this sweet spot not as un-ambitious, but of a place where problems are real, the ideas are just crazy enough, and the right type of people are there to execute.

Austin is the right place right now. We have an ever-growing base of experience and the right opportunities springing up. With the opening of Dell Medical School, I hope to see more biotech and medical device companies start here. The University of Texas at Austin also has one of the largest computer science departments in the country, which I believe is highly undervalued, and it serves as a fresh source of technical talent every year, but we’re not just a high-tech town anymore. Austin is also quietly becoming a CPG town with hits like Kendra Scott and Deep Eddy taking off on the national stage.

Crazy enough?

Typically, it is not the audaciousness of an idea that determines whether it will receive our investment dollars. When an entrepreneur is pitching us, there are very few ideas that we’ve never heard before. What we want to see is a great fit between the entrepreneur and the market. That is hard to come by and valuable when you find it.

So while I want to hear about the revolutionary idea, what I want to hear more about is why this team? Because trust me, we’ve heard permutations of this sweet-spot idea many times before. So why is this the team to solve this challenge? Is there a difference in talent or are there operational incentives? There needs to be something to give me confidence that this is the team to capitalize on this idea.

I believe it’s more important to have that edge than it is to have an idea that is swinging for the fences.

The next evolution

With these resources paired with healthy levels of venture capital dollars, it will be fascinating to see where Austin ends up over the next few years. I believe we’ll become a city with multiple innovation threads that will further develop our breadth of experience and our depth of talent, spurring the next evolution of the sweet spot.

E2E: ATXnology

Help Us Get to SXSW’s 2018 Lineup

Wow, SXSW is coming soon and for a reasonably new resident of Austin – cheers to two years! – it is incredibly exciting time for me and for my venture firm, Next Coast Ventures. I am almost embarrassed to admit that I am a “south-by’ virgin, having only heard great things about this event, but never personally attended.

However, that is all about to change. This is also an especially exciting time because the venture firm I co-founded with long-time Austinite Tom Ball will – hopefully! – be making its first appearance at SXSW in 2018. We are thrilled to have an opportunity to host what we think will be a killer panel presentation, but we need some help (see below).

The Next Coast Mantra

For a little background, Tom and I wanted to start a firm in Austin based on a simple, but powerful, mantra: “By entrepreneurs for entrepreneurs.” That is, we look to partner with amazing entrepreneurs who are laser-focused on building disruptive businesses in massive markets, and help them by bringing our own personal experience to the table. We are thematic investors, which means that we focus on expansive themes that have the potential for disruption – and then seek out great entrepreneurs who are pursuing this disruption with passion and vigor.

We also believe that Austin is THE best place for an entrepreneur to start and build a business, or as we like to call it: The Next Coast of innovation. This is where SXSW comes in. We think that it embodies the spirit, ethos and crucial content that drives this entrepreneurial activity.

So, the good news is, we know in our gut that we have put together a panel that will be highly additive to the SXSW experience. One that we are tremendously proud to moderate. The bad news is, we can’t bring this panel to life without you. Before we solicit your help, let us whet your appetite with some insight on the genesis of our idea.

Big Themes for Big Entrepreneurs

One of our key themes is what we call “digital natives becoming digital consumers” and we think this is a really, really big theme. Like death-of-retail big. We believe that digital natives think very differently, and this mindset will not just offer, but demand the opportunity to completely remake traditional industries. In short: we don’t think any industry is safe from the power that this new mindset brings to the economy.

Old way of retail is dead. What's next?

Two great examples of this are what’s happening in e-commerce and healthcare. The old-world ways of buying goods – get in car, drive to mall, shop, purchase, drive home – are coming under attack from every direction. Healthcare is no different – go see a doctor, drive to a lab, take a test, wait for results. We think this needs a radical overhaul.

And how will this happen? Great entrepreneurs, innovative ideas, new mindsets (i.e. digital natives) and making a little capital. Now that we have piqued your interest, let me give you the details of what you can expect from our SXSW panel.

Our Panel Idea

Lucky for us, we found two of these great entrepreneurs leading two exciting Austin-based companies that are attacking these spaces.

Our first panelist is the CEO of Phlur, a digital fragrance company that is reinventing how people think about beauty. Didn’t think that people would want to buy fragrance online? Wrong. The company has proven that you can still foster a customer community selling your beauty products online, and do so in a sustainable way. Eric Korman, the founder and CEO of Phlur, is deeply committed to the brand’s ecological footprint. He is the former president of Ralph Lauren Digital and Global E-Commerce and former president of Ticketmaster Entertainment. He has experience as a CEO of a public company, and as a CEO of a rising startup. Invaluable insight for a SXSW audience, in my humble opinion.

Eric Korman

CEO of Phlur

Our second panelist is Julia Cheek, the CEO and Founder of EverlyWell, which is a next-generation health testing platform empowering consumers to order, self-collect, and understand lab tests. EverlyWell is one of the fastest-growing consumer healthcare startups in recent history. Julia is dedicated to empowering female entrepreneurs and was named the number one female entrepreneur to watch by CIO magazine for 2017. She is also a two-time world-champion equestrian. Like I said: Could these panelists be more interesting? Julia is going to be able to speak to every young female in the SXSW crowd that thinks they have the next groundbreaking idea. At a time when the female voice has come under fire in the entrepreneur community, it is crucial to give women like Julia a stage to speak about her experience.

Julia Cheek

CEO of EverlyWell

Julia and Eric aren’t just at the forefront of the digital upheaval of healthcare and beauty, they both have their fingers on the pulse of what is happening in Texas’ entrepreneurial ecosystem. Not to sound too confident, but I genuinely believe budding entrepreneurs would learn a tremendous amount about thinking outside the box, and scaling a business, while they watch a dynamic conversation between these two CEOs – moderated by yours truly.

How You Can Help

So here’s how you can help. We need you to follow the steps below to vote for our SXSW panel idea and help us bring this idea to life. We would love the chance to see you down in Austin next March and show you what the rumored Texas hospitality is all about at our new office space right in the heart of downtown.

Thank you so much in advance for your support, and remember: keep Austin weird.

  1. Go here.
  2. Set up a SXSW account.
  3. Search “Digital Natives” or click this link.
  4. Vote for our panel!
  5. Be a trooper and share our panel idea for others to vote!