April 2009

Recently I realized I'd been holding two ideas in my head that would explode if combined.

The first is that startups may represent a new economic phase [blocked], on the scale of the Industrial Revolution.

I'm not sure of this, but there seems a decent chance it's true.

People are dramatically more productive as founders or early employees of startups—imagine how much less Larry and Sergey would have achieved if they'd gone to work for a big company—and that scale of improvement can change social customs.

The second idea is that startups are a type of business that flourishes in certain places that specialize [blocked] in it—that Silicon Valley specializes in startups in the same way Los Angeles specializes in movies, or New York in finance. [1]

What if both are true?

What if startups are both a new economic phase and also a type of business that only flourishes in certain centers?

Recently I realized I'd been holding two ideas in my head that would explode if combined.

The first: startups may be a new economic phase [blocked], on the scale of the Industrial Revolution—founders are far more productive than at a big company, enough to change social customs.

The second: startups flourish only in places that specialize [blocked] in them, as Los Angeles does in movies, or New York in finance.

What if both are true—both a new economic phase and a business that only flourishes in certain centers?

Two ideas of mine collide: startups may be a new economic phase like the Industrial Revolution, and they may flourish only in certain specialized places. What if both are true?

If so, this revolution is going to be particularly revolutionary.

All previous revolutions have spread.

Agriculture, cities, and industrialization all spread widely.

If startups end up being like the movie business, with just a handful of centers and one dominant one, that's going to have novel consequences.

There are already signs that startups may not spread particularly well.

The spread of startups seems to be proceeding slower than the spread of the Industrial Revolution, despite the fact that communication is so much faster now.

If so, this revolution is going to be particularly revolutionary. All previous revolutions—agriculture, cities, industrialization—spread widely. If startups end up like the movie business, with one dominant center, the consequences will be novel.

And there are signs: startups seem to be spreading slower than the Industrial Revolution did, despite communication being so much faster now.

If both are true, this revolution would be strange: all previous revolutions spread widely, but startups seem to be spreading slowly despite faster communication.

Within a few decades of the founding of Boulton & Watt there were steam engines scattered over northern Europe and North America.

Industrialization didn't spread much beyond those regions for a while.

It only spread to places where there was a strong middle class—countries where a private citizen could make a fortune without having it confiscated.

Otherwise it wasn't worth investing in factories.

But in a country with a strong middle class it was easy for industrial techniques to take root.

An individual mine or factory owner could decide to install a steam engine, and within a few years he could probably find someone local to make him one.

So steam engines spread fast. And they spread widely, because the locations of mines and factories were determined by features like rivers, harbors, and sources of raw materials. [2]

Steam engines spread fast wherever there was a strong middle class—where a citizen could keep a fortune, so factories paid off, and an owner could install one and soon find someone local to make it. And they spread widely, because mines and factories were sited by rivers, harbors, and raw materials.

Industrialization spread fast because any factory owner in a country with a strong middle class could install a steam engine and soon find one made locally—and spread widely because mines and factories followed rivers and harbors.

Startups don't seem to spread so well, partly because they're more a social than a technical phenomenon, and partly because they're not tied to geography.

An individual European manufacturer could import industrial techniques and they'd work fine.

This doesn't seem to work so well with startups: you need a community of expertise, as you do in the movie business. [3] Plus there aren't the same forces driving startups to spread.

Once railroads or electric power grids were invented, every region had to have them.

An area without railroads or power was a rich potential market.

But this isn't true with startups.

There's no need for a Microsoft of France or Google of Germany.

Governments may decide they want to encourage startups locally, but government policy can't call them into being the way a genuine need could.

Startups don't spread so well—partly because they're more social than technical, partly because they're not tied to geography. A manufacturer could just import industrial techniques; startups need a community of expertise, as in movies. And the forces differ: once railroads existed every region needed them, but there's no need for a Microsoft of France.

Governments may want to encourage startups, but policy can't call them into being the way a genuine need could.

Startups spread poorly because they're social rather than technical, aren't tied to geography, and face no market force demanding a Microsoft of France. Government policy can't call them into being.

How will this all play out?

If I had to predict now, I'd say that startups will spread, but very slowly, because their spread will be driven not by government policies (which won't work) or by market need (which doesn't exist) but, to the extent that it happens at all, by the same random factors that have caused startup culture to spread thus far.

And such random factors will increasingly be outweighed by the pull of existing startup hubs.

Silicon Valley is where it is because William Shockley wanted to move back to Palo Alto, where he grew up, and the experts he lured west to work with him liked it so much they stayed.

Seattle owes much of its position as a tech center to the same cause: Gates and Allen wanted to move home.

Otherwise Albuquerque might have Seattle's place in the rankings.

Boston is a tech center because it's the intellectual capital of the US and probably the world.

And if Battery Ventures hadn't turned down Facebook, Boston would be significantly bigger now on the startup radar screen.

But of course it's not a coincidence that Facebook got funded in the Valley and not Boston.

There are more and bolder investors in Silicon Valley than in Boston, and even undergrads know it.

My guess: startups spread, but very slowly, driven not by policy (which won't work) or market need (which doesn't exist) but by the same random factors that spread startup culture so far—factors increasingly outweighed by the pull of existing hubs.

Silicon Valley is where it is because Shockley wanted to move back to Palo Alto, and the experts he lured west stayed; Seattle, because Gates and Allen wanted to move home. And if Battery Ventures hadn't turned down Facebook, Boston would loom larger.

But it's no coincidence Facebook got funded in the Valley, not Boston: there are more and bolder investors there, and even undergrads know it.

My prediction: startups spread very slowly, driven not by policy or market need but by the same random factors that built today's hubs—factors increasingly outweighed by the pull of those hubs.

Boston's case illustrates the difficulty you'd have establishing a new startup hub this late in the game.

If you wanted to create a startup hub by reproducing the way existing ones happened, the way to do it [blocked] would be to establish a first-rate research university in a place so nice that rich people wanted to live there.

Then the town would be hospitable to both groups you need: both founders and investors.

That's the combination that yielded Silicon Valley.

But Silicon Valley didn't have Silicon Valley to compete with.

If you tried now to create a startup hub by planting a great university in a nice place, it would have a harder time getting started, because many of the best startups it produced would be sucked away to existing startup hubs.

Recently I suggested a potential shortcut: pay startups to move [blocked].

Once you had enough good startups in one place, it would create a self-sustaining chain reaction.

Founders would start to move there without being paid, because that was where their peers were, and investors would appear too, because that was where the deals were.

In practice I doubt any government would have the balls to try this, or the brains to do it right.

I didn't mean it as a practical suggestion, but more as an exploration of the lower bound of what it would take to create a startup hub deliberately.

The most likely scenario is (1) that no government will successfully establish a startup hub, and (2) that the spread of startup culture will thus be driven by the random factors that have driven it so far, but (3) that these factors will be increasingly outweighed by the pull of existing startup hubs.

Result: this revolution, if it is one, will be unusually localized.

The recipe for a hub is a first-rate research university [blocked] in a place so nice rich people want to live, suiting both founders and investors. That yielded Silicon Valley—but Silicon Valley didn't have Silicon Valley to compete with. A new one would struggle now, its best startups sucked away to existing hubs.

I once suggested a shortcut: pay startups to move [blocked], until enough in one place triggered a chain reaction. But no government would have the balls to try it, or the brains to do it right; I meant it as the lower bound of what building a hub deliberately would take.

So the likely scenario: no government builds a hub, and the random factors driving spread are increasingly outweighed by the pull of existing hubs. This revolution, if it is one, will be unusually localized.

Building a new hub now is hard: the recipe is a great university in a nice place, but new hubs lose their best startups to old ones. My pay-startups-to-move shortcut was a lower bound, not a real plan—so the revolution will be unusually localized.

Notes

[1] There are two very different types of startup: one kind that evolves naturally, and one kind that's called into being to "commercialize" a scientific discovery. Most computer/software startups are now the first type, and most pharmaceutical startups the second. When I talk about startups in this essay, I mean type I startups. There is no difficulty making type II startups spread: all you have to do is fund medical research labs; commercializing whatever new discoveries the boffins throw off is as straightforward as building a new airport. Type II startups neither require nor produce startup culture. But that means having type II startups won't get you type I startups. Philadelphia is a case in point: lots of type II startups, but hardly any type I.

Incidentally, Google may appear to be an instance of a type II startup, but it wasn't.

Google is not pagerank commercialized.

They could have used another algorithm and everything would have turned out the same.

What made Google Google is that they cared about doing search well at a critical point in the evolution of the web.

[2] Watt didn't invent the steam engine. His critical invention was a refinement that made steam engines dramatically more efficient: the separate condenser. But that oversimplifies his role. He had such a different attitude to the problem and approached it with such energy that he transformed the field. Perhaps the most accurate way to put it would be to say that Watt reinvented the steam engine.

[3] The biggest counterexample here is Skype. If you're doing something that would get shut down in the US, it becomes an advantage to be located elsewhere. That's why Kazaa took the place of Napster. And the expertise and connections the founders gained from running Kazaa helped ensure the success of Skype.

There are two types of startup: one that evolves naturally (which I mean here), and one called into being to commercialize a discovery. The second spreads easily but neither requires nor produces startup culture, so it won't get you the first.

Google may look like the second type but wasn't: it's not pagerank commercialized. What made Google Google is that they cared about doing search well at a critical point in the web's evolution.

Watt didn't invent the steam engine—his separate condenser made it far more efficient—but he transformed the field so thoroughly it's most accurate to say he reinvented it.

The biggest counterexample is Skype: if you're doing something that would get shut down in the US, being elsewhere is an advantage, as Kazaa's founders found before building it.

There are two kinds of startup—the natural kind and the kind made to commercialize a discovery; only the first makes startup culture. Google was the first kind. Watt reinvented the steam engine. Skype shows being elsewhere can help.

Thanks to Patrick Collison, Jessica Livingston, and Fred Wilson for reading drafts of this.

Thanks to Patrick Collison, Jessica Livingston, and Fred Wilson for reading drafts of this.

Thanks to those who read drafts.