Posts from Silicon Valley

This weekend finds NYC in between Internet Week (which I largely missed because of my London trip) and Disrupt NYC (which I will be at on and off this coming week). So the development of NYC as a startup hub is very much on my mind. And so I thought I'd post about the development of startup hubs.

This theory, which I like the call The Darwinian Evolution of Startup Hubs, is not new and I certainly didn't come up with it. But I think it is important for everyone to understand and so I'm going to blog about it.

If you study Silicon Valley, what you see is something that looks like a forest where trees grow tall, produce seeds that drop and start new trees, and eventually the older trees mature and stop growing or worse, die of disease and rot, but the new trees grow up even taller and stronger.

In my mental model of Silicon Valley, the first "tree" was Fairchild Semiconductor (founded in 1957) which begat Intel (founded 1968) which begat Apple (1976) and Oracle (1977), which begat Sun (1982), Silicon Graphics (1981), and Cisco (1984) which begat Siebel (1993) and Netscape (1994), which begat Yahoo! (1995) and eBay (1995), which begat Google (1998) and PayPal (1998), which begat YouTube (2005), Facebook (2004), and LinkedIn (2003) which begat Twitter (2006) and Zynga (2007), which begat Square (2010), Dropbox (2008), and many more.

If I left out important foundational companies of this mental model, please forgive me. That was not meant to be a comprehensive history. It was meant to illustrate how this evolutionary scenario plays out over time.

If you drill down a bit deeper, you see that the founders, investors and early employees generate a tremendous amount of wealth from these big successes. The later employees don't make as much wealth but they do learn a ton and make enough money that they don't need to work for someone else and so they strike out on their own and are often funded by the folks who made the big money in the prior startup. That's how the seed drops from the tree and starts a new tree growing. This continues on and on and on.

If you look at that history of silicon valley, you see that in the forty year history (since Intel's formation), there have been close to ten cycles of maturation and new company formation, and those cycles are getting shorter and the number of important foundational companies that are formed each cycle are increasing.

That makes total sense since this darwinian evolutionary model is non linear. One company begets two and those two companies beget four, and so on and so forth. Of course there are exogenous factors that also play out, like technology changes, financial market cycles, and the availability and cost of talent, and they impact how fast the startup hub economy expands.

This darwinian evolutionary model of startup hub development is not limited to silicon valley. We have seen it play out in other places, most notably Boston, and increasingly in NYC. It is also playing out in markets like Boulder Colorado and Austin Texas and many other parts of the US and many parts of the world.

When I look at a startup hub, I like to figure out what the "Fairchild Semiconductor" of that market was and when it got started. That tells me how far along the development cycle that startup hub is. In NYC, that was Doubleclick which was founded in 1996, the same year as my first venture capital firm, Flatiron Partners, which was founded on two premises, that the Internet would be big and that NYC would be an important locus of Internet innovation. We did not invest in Doubleclick (sadly) but we did invest in a lot of interesting Internet companies in NYC in the late 90s.

So NYC's startub ecosystem is 16 years old now. And we are two cycles in. The companies that are getting started and funded right now in NYC are akin to the Apple/Oracle stage of silicon valley. If you want to push, you could suggest that we are three cycles in now and the companies that are getting funded right now are akin to the Sun/Silicon Graphics/Cisco era. That might be right.

But in any case, NYC's tech sector is not anywhere close in terms of fertility to silicon valley. It will be there in another 25 to 30 years. And silicon valley will be even further along. 

Unless, of course, something else happens.

The technological revolution that preceded the digital revolution was autos and airplanes. They were invented in the late 19th and early 20th centuries and the first commercial startups emerged in the first decade of the 20th century.  The auto/airplane revolution played out until the 1960s/1970s. That suggests that a technology revolution lasts around 75 years.

The transistor was invented in the late 1940s and by 1958 we had commercial startups working on the technology. So if this revolution is anything like the last, the next big thing will be invented any day now and within a decade or two we will be on to the next technology revolution.

And in that case, all bets are off. Silicon Valley could become the next Detroit and who knows what will be the next Silicon Valley.

But of course, all of this is conjecture. History doesn't repeat itself. But it does rhyme. That comes from Samuel Clemens (aka Mark Twain). One of my favorite people ever.

The WSJ says some venture funds hit pause on big deals. The Journal describes

a group of venture capitalists dialing back on certain deals after a breathless year of venture investing that had some comparing 2011 to the late 1990s dot-com bubble. Many venture capitalists said they now are increasingly passing on companies seeking frothy valuations, and some are trying to get off the beaten path to find cheaper deals.

I am not a fan of this start and stop style of investing. Nobody can time markets. You can't deliver great returns to your investors by being a momentum investor during some periods and a value investor in others.

I believe the only way to be a top performing investor in any asset class is to have a disciplined investment strategy and approach and apply it consistently and actively in all markets all the time.

I am proud that our firm has been investing at about the same rate of new investments per year for almost eight years now. It hasn't gone up much but it also has not gone down much. We will never be the most active venture capital firm. But we will never be inactive either. We are open for business as much today as any other day in the past eight years. If you are building a large network of engaged users that has the potential to disrupt a big market, please talk to us about what you are doing.

The media has had a lot of fun over the past week watching AOL, Huffington Post, TechCrunch, and Mike Arrington figure out how to move on. I feel badly for the TechCrunch crew including MG, Erick, Sarah, and many others. They are awesome at what they do and I feel that they've been left dangling as this soap opera has played out.

I do not feel badly for Mike. He's a bigtime player in silicon valley and he will be fine. Contrary to what many in the media say, he does not need TechCrunch as a platform to be influential. He is influential becuase of who he is, not where he writes. His reputation is made and as long as he finds his next platform, be it a venture fund, a blog, or both (how can anyone have both a blog and a venture fund????), he will remain a hugely influential force in silicon valley and tech.

But TechCrunch is a big question mark. If AOL can keep the rest of the team together, then TechCrunch has a bright future. No company is so reliant on one person that they can't survive that person's departure. But if others move on, including the people I mentioned above, then TechCrunch could lose its swag, as my son would put it. Yes TechCrunch gets scoops. That happens because it has a huge audience of the right readers and people in tech choose to leak to TechCrunch to reach that audience. But TechCrunch also has a voice, a swagger, a "fuck you" attitude that comes from Mike. That can also live on without Mike if AOL allows it. They need to keep the remaining team, the voice, and that attitude if they want to remain at the top of the world of tech media.

There's also a super awesome asset inside TechCrunch that doesn't get much attention. It is Crunchbase. There have been many attempts to build premium databases for the venture capital and startup world. All of them suck. But Crunchbase, which is free, almost open, almost peer produced like Wikipedia, is fantastic. Whatever happens to TechCrunch AOL, please don't mess up Crunchbase. It is the premier data asset on the tech/startup world and an incredible example of how free beats paid in the online world we live in.

If AOL can't retain the TechCrunch team, can't maintain its voice and swagger, then TechCrunch will cease to be relevant and the audience will move on. Most likely to a new media property which most likely will be started by some number of ex TechCrunch employees. That's how it goes in media these days. Big companies don't control media assets as strongly as they used to. It doesn't cost much to publish news these days once you know what the news is. See Dan Frommer's Splatf for a great example of what can be done by one person working part time.

So I'm hoping that TechCrunch remains vital and the remaining team stays on. But I'm not terribly worried about it. The TechCrunch audience, including me, will find new sources of news, information, and entertainment elsewhere if that's what needs to happen.

Steve Blank says in his New Rules For The New Internet Bubble:

hiring talent in Silicon Valley is the toughest it has been since the dot.com bubble

I'm hearing this from everyone I know in Silicon Valley. And you can see the evidence on the web.

Joshua Schachter posted this on his twitter feed yesterday. This is what a new developer gets when they show up at work at Tasty Labs.

Quora posted this on their website yesterday.

I guess the developer setup is a key part of the recruiting war in Silicon Valley. Tasty Labs earns their name with the inclusion of Dr Pepper in the standard dev setup.

But seriously, there is a war for talent, particularly developer talent, going on. Not just in Silicon Valley but also in NYC and many other places around the country.

Companies, small and large, are resorting to all sorts of creative ideas to recruit. Free lunches, free yoga, pushing code day one, cool schwag, options, RSUs, pretty much whatever it takes.

We are watching this anxiously. It is likely to get worse before it gets better. But we are not just sitting around biting our nails. We are working with our portfolio companies to help in lots of ways. And I think it is making a difference. If you want to work in the USV portfolio, here is the USV portfolio jobs page. And if you want to drink Dr Pepper and write code with Joshua Schachter, here is how to do that.

We have enjoyed an amazing run in the web startup and investing space over the past five or six years. In this sector of startupland, company creation is up, investment is up, there are plenty of success stories, and not all of them are based on quick flips and takeouts. There is real revenue flowing through web companies and many web startups formed in the last five or six years are operating profitably. It has been good to be a web entrepreneur and a web VC, and I think it will continue to be for quite some time.

However, there are a few storm coulds out there that we need to be watching. In particular, I think the competition for "hot" deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I'd be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

We are also seeing a massive talent war for software engineers going on in Silicon Valley and it is spilling over into other regions. The story by Mike Arrington this morning about a Google engineer is just one example. There are many more examples of poaching by companies driving up salaries, equity packages, and stay and join bonuses.

You might say, "this is good for entrepreneurs and software engineers, they are finally being valued what they are worth." Maybe. But I think both of these situations are unsustainable. And anything that is unsustainable will eventually stop happening. And when it stops happening, there will be a dislocation event that will cause people to change their behavior.

Of course if you are a VC or a HR person in a web company, you don't know when that event will happen and you have to operate your business until then. So we will see this behavior and other troubling things continue to happen for some time to come. When will it stop? Who knows? But be prepared for it to end. And when it does, things will be different. And we should all be prepared for that time.