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Innovation Hubs – The Next Craze

Model that Was Proven – Silicon Valley

The success of Silicon Valley in San Francisco is famous globally. With tech giants like Google and Facebook carrying its banner, Silicon Valley continues to prove its strength, building 32 new unicorns in 2018.

Ranking 1st in the 2019 Global Startup Ecosystem Ranking by Startup Genome, Silicon Valley boasts excellent scores in almost every area that matters – performance, funding, research, connectedness, talent, knowledge, experience. It is clearly a giant in this field with an ecosystem value of USD 312 billion, nearly 5x of USD 64 billion for New York City to secure its place as second.

Looking at its success, every other major city around the world has started to compete in this race to establish its own tech hub. As such, it can attract talents, foreign investments, technological (human and machine) growths, completed with a global reputation that creates a cycle to cause exponential growth in all three areas. For governments, it reeks of development opportunities for the economy and its people.

Struggle of Silicon Valley

Despite this image of a self-sustaining growth model, the Valley has started to face some headwinds in continuing its pace. While the local share of Venture Capital (VC) flowing into Silicon Valley continues to rise, albeit arguably losing the global share, its share in the number of VC deals has dropped. VCs are starting to source for other investment opportunities.

Pressure Points

1. Costs

The cost of living in San Francisco has skyrocketed, likely due to the success of tech companies, with the overall cost of living nearly 3 times the average U.S. cost of living. The cost of housing is nearly thrice that of the national median and twice that of New York.

With such high costs, companies would face much higher operating expenses for office spaces and employee compensations. Keeping low costs is a goal of almost every startup, be it funded or not. Investors will rather spend on costs that can increase returns such as research and development, assets and inventory. It is no wonder that both founders and VCs are looking at other cities where funds can be put to more productive use than high rental fees and inflated employee salaries.

2. Talents

One of the biggest draws from Silicon Valley used to be its pool of talents – tech talents in specific. With its connections with top institutions such as Stamford and a global reputation, it has been wildly successful in attracting talents. However, times are changing, and the definition of talent is shifting away from pure academics to other factors, reducing the attractiveness of Silicon Valley.

The rising costs in San Francisco have not been helpful in the situation as equivalent salaries are worth much more in other cities, pushing talents further out of reach. One of the fastest growing cities is Seattle, USA. It has an average software engineer salary of USD 180,000 after adjusting for cost of living. This is 34.3% higher than the adjusted salary of USD 134,000 in San Francisco. A LinkedIn report even shows that San Francisco contributed the largest number of workers moving to Seattle in 2017 at a rate of 9.71 per 10,000 members.

3. Culture

Another constraint on talents is one of the hottest topics regarding employment today – culture. 86% of millennials (aged 22-37) who dominate the younger workforce, and technology talent pool, will rather work at a company with goals and values they can identify with than of a higher pay. The infamously low retention rates of these tech giants are evident. The median employee tenure at Apple was 2.0 which seemed high compared to the 1.1 at Google, with millennial median employee ages of 31 and 29 respectively.

4. Data Privacy and Security

As the home for the giant unicorns, many are successful from artificial intelligence (AI) and data – Google and Facebook. The idea of monetising data has seeped into the DNA of Silicon Valley. Yet the ethics regarding the use of data is being challenged daily, with consumers becoming increasingly aware of how much personal data these companies have.

A tweet by Netflix backfired and creeped many netizens out as the company tried to flex its data capabilities. The famous, or infamous Facebook has also been under strong political fire as U.S. lawmakers question them heavily on how data is collected and used. Even Google is unable to shy away from the ongoing pressure.

Such culture and reputation of mistreating and monetising user data as much as possible is likely to be disconcerting and may drive talents away to new startups that are coming up with solutions to help users protect more data instead.

5. Workforce Diversity

Another highly voiced issue is the lack of diversity in Silicon Valley, be it educational, racial or gender diversity. Diversity is a widely propagated concept today and it is necessary to provide equal opportunities to everyone. It is important for companies to prevent overlooking talents and to attract talents that value the incorporation in a company.

Silicon Valley has built a strong culture among itself, but not the necessarily one that is attractive to the current generation of the workforce. That can be its weakest link.

Will Silicon Valley be Superseded?

Just as Apple is positioning itself as a high-end tech brand and Indian Creek Island Road is known for its expensive houses, Silicon Valley has established its brand as a high-end innovation hub. The prevailing problems do not signal the end for Silicon Valley, but a niche market of companies and investors it can attract.

Companies are constantly looking for large funding rounds and of course investors with deep pockets. They may even shift from alluring startups to attracting small, medium enterprises (SMEs) who have gone through several rounds of funding and are looking to scale up rather than to simply exit through acquisitions.

However, its biggest threat is the competition for talents. Money and fame are no longer the recipes for the best employees. There will have to be changes to the culture in Silicon Valley as to how companies are groomed to treat consumers and employees well, or it may spell disaster.

Global Innovation Scene

North America is losing its shareholding in the VC industry quickly, even though it remains strong. Capital is diversifying itself geographically in a globalised economy. The factors previously mentioned are all contributors to the growing success of tech hubs around the world. China, for example, is performing well with 2 cities in the top 10 within the span of 5 years.

Globalisation effect:

  • Education: Increasingly available with talents blooming in every other city.
  • Infrastructure & Policy Development: Funding and supports are extending its global reach rapidly.
  • Purchasing Power: As developing countries grow their middle-income population, untapped populations like those in Southeast Asia are gaining attractiveness.

Silicon Valley and by extension, USA, is no longer the best option for founders to build their businesses nor the sole birthplace for unicorns.

Will this be the Same Inevitably?

Following the model of Silicon Valley may result in similar problems in the future. Rising costs is already a real concern with ballooned housing prices and talent costs.

Like any other business, it is important for these hubs to have an intended brand and messages to attract VCs and startups. It is not a matter of which is right, but which to choose.

If strong attractiveness is the focus, ensure that it is incorporated in the culture. Make decisions based on long-term social impact, rather than short-term economic gains. This may include limiting employee sizes of a certain number to prevent overcrowding and inflated real estate prices. It can also mean diversifying the size of startups to attract VCs with smaller funds.

Ultimately, the rules of demand and supply continue to shape the markets – labour, economic and financial. Silicon Valley answered the call for a more connected, more efficient way of handling technology, attributing to its great success today. Understanding the demand of the market is key for innovation hubs to attract talents and cultivate successful companies. A culture to adapt rather than to defend must be present to continue creating feasible solutions, especially in a space where the competition is growing aggressively.

About BlackStorm Consulting

BlackStorm Consulting is a boutique growth consultancy firm that specialises in corporate strategy, profit management and investment management. We mainly serve clients in four sectors: FinTech, Gaming, Technology, Media and Telecommunications (TMT), and Manufacturing.

Our clients and connections are internationally present and range from small and medium sized businesses, MNCs, to government agencies.