This blog post will provide an overview of what it takes to clone Silicon Valley. I will also review Yachay, the latest Ecuadorian effort to replicate the Valley and in order to provide more in-depth understanding of the current startup landscape, I reflect on Andreesen’s thoughts on creating 50 different valleys as well as an essay by Vivek Wadhwa on how the Silicon Valley can’t be replicated in combination with other resources like Paul Graham’s essay about buying Silicon Valley.
Also, to explain Silicon Valley’s culture to those who don’t live here, I list my top reasons why the Valley works and what other parts of the world should be doing to make it work (see table below). We will look at the mindset during California’s Gold Rush and match it to the current “software-eats-world” era to establish the underlying entrepreneurial culture that is at the core of innovation. I also talk about my personal experience starting Tangelo by building a high caliber team that has helped launch three startups and has delivered over 200 technology projects for our clients.
Silicon Valley thrives in a Gold Rush mentality. Silicon Valley has found gold in software development and technological innovation and everyone around the world wants a piece of it. It just seems so easy from far away to make a quick fortune in only a few years by selling a startup or going IPO. Let’s look at the history of the San Francisco Bay Area and the monumental Ecuadorian initiative to clone it.
For the past few decades, Silicon Valley has attracted top talent from all over the world. Highly skilled people move here with hopes of working for a high growth startup. The motivations vary widely. Some are looking to tackle the ultimate technological challenge and others are comfortable working as hired guns looking to cash in the crazy exuberance of startups loaded with venture capital.
During the original California Gold Rush in 1849, people from all over the world came to northern California in search of fortune. The first few got lucky and made quick fortunes. Just as it happened during the Gold Rush, a few of the top tech companies of our day got lucky as well. Companies such as Yahoo!, Facebook, Google, and Twitter to name a few have grown to become sustainable high-growth companies.
But for every smashing success there are thousands of losers. As it happened during the gold rush, not everyone found gold but everyone drank the kool-aid and wanted in. According to American History, the Gold Rush made some extremely rich, but not necessarily who you might think:
The first lucky arrivals were able to find nuggets of gold in the streambeds. These people made quick fortunes. It was a unique time in history where individuals with literally nothing to their name could become extremely wealthy. The gold was free for whoever was lucky enough to find it. It is no surprise that gold fever hit so heavily. Yet the majority of those who made the trek out West were not so lucky. The individuals who became the richest were in fact not these early miners but were instead entrepreneurs who created businesses to support all of the prospectors. It is easy to think of all the essentials the sheer number of new inhabitants would need in order to live. Businesses sprang up to meet their needs. Some of these businesses are still around today including Levi Strauss and Wells Fargo.
San Francisco represents an opportunity for people now as it did in 1849 and it continues to capture the imagination of entrepreneurs.
But sometimes it is better to sell the shovels than to look for gold and that is exactly what Levi Strauss and Wells Fargo did and they became extremely successful by clothing the hopefuls and securing the money they made.
This Gold Rush is different. Software can be created anywhere in the world and that possibility ignites people’s imagination. They don’t have to necessarily come to Silicon Valley to make it happen anymore. Chile, Brazil, Argentina, Colombia, Canada, Germany and a long list of countries are actively trying to clone Silicon Valley. The same is happening in American cities such as New York, Miami, Chicago and many others.
One of the main hurdles to success is that they are trying to replicate Silicon Valley’s surface not its culture. To paraphrase Steve Jobs, what matters is not how it looks, it is how it works. There’s is nothing inherently special about the geography of the Valley. If anything, the location of Stanford and Palo Alto in reference to San Francisco or San Jose is inconvenient and the suburban sprawl often makes the commute unbearable.
But then there’s Silicon Valley’s culture –– the things that you don’t see on the surface, the things that you learn only if you’ve been here and have started a company or have joined an early stage startup.
Marc Andreesen, the co-founder of Netscape and Andreesen-Horowitz recently wrote an article about Silicon Valley and what it would take to create valuable models and not just worthless copies. He argues that the value lies in specialization rather than governmental support or controlled innovation:
…the freedom to create new technologies without having to ask the powers that be for their blessing. Entrepreneurs can take advantage of the difference between opportunities in different regions, where innovation in a particular domain of interest may be restricted in one region, allowed and encouraged in another, or completely legal in still another. For example, the laws and guidelines for using drones or taxing bitcoin already vary widely across the globe, just as they do for ride-sharing services across different cities in the U.S.
I largely agree with this framework. If a country reduces the regulatory hurdles to starting and growing a company and it has an inviting immigration policy, it can benefit immediately from the digital revolution. There’s no better way to illustrate this than a current and real life example.
Yachay And The Ecuadorian Bet For Technological Supremacy
There is a small country on the equator, abundant with natural resources, that has a burning desire to leapfrog into the wealth-generating era of technological innovation. The President of this tiny but fiery country is the visionary-in-chief and he has set aside one billion dollars to fund the implementation of this technological paradise.
This utopian scenario is happening in Ecuador, the place where I was born. I have been living in Silicon Valley for over 14 years and I am extremely excited to see this idea take shape. Though my hope is high, I have a great deal of concern that the vision can sink in a sea of highly inefficient processes and policies that are so typical of any South American country.
There are things that make Silicon Valley’s innovation engine fire sparks and that is largely due to the culture. This culture would not have been able to flourish without the support of the government.
Here’s a side by side comparison of what works in Silicon Valley when starting a company and the current policies in Ecuador
|Silicon Valley Policy and Culture||Current Ecuadorian Policy and Culture|
|Starting a company takes a few minutes and it can be done online for a minimal fee.||Starting a company can take many weeks to months following many complicated steps. Many fees and taxes are required and you have to prove a dollar value of the company before it has even been formed and have money in the bank to show you can support the company.|
|Hiring people is easy. There’s no red tape or any type of strict regulation. If you pay your taxes you are in good standing, the government will not interfere.||There are many governmental protections for workers, so it is difficult to have a trial period for employees and and there are many restrictions in firing employees. Firing employees can be cost prohibitive for a small company. Long-term contractors are prohibited and must become employees of the company.|
|Investors and companies understand that traction trumps profits in the short term. Highly valued companies such as Google, Facebook, Pinterest, Twitter reported losses and took many years to figure out how they would be profitable. (Some companies are still figuring it out.)||Companies that report losses for more than 5 years are shut down by the government.|
|Business processes such as hiring, paying taxes, accounting and banking is highly efficient and can be automated to a large extent.||Many transactions must happen in person instead of online. The entrepreneur is often concerned about obscure regulations that can shut down the business from one day to the next.|
|Credit is easily accessible||Interest rates are high and it can be extremely difficult to obtain loans. There are even many obstacles in simply opening up a savings account.|
|Equipment is readily available and fixable and anyone can get computers and software quickly and efficiently. For example, if I am starting a software company I don’t have to worry about my laptop failing and having to wait months to get a new one or to having to pay a government-driven protectionist tax on foreign goods.||If computer equipment fails, people often must wait months to get for replacements and then they must pay high tariffs, or government-driven protectionist taxes on foreign goods. The latest technology is not readily available.|
|Unless you are completely careless, the government will not shut down your business. The IRS wants the income from your business and does not want to shut you down.||In South America, government officials are keen on “catching” noncompliant businesses and then shutting them down.|
|The entrepreneurial culture of the Valley gives entrepreneurs a ready-to-go support network where people help each other while at the same time competing against each other.||Entrepreneurism is lonely and isolating and there is no vibrant community of support. Corruption rules the culture.|
How can Ecuador actually make this vision a reality? Start by systematically considering and creating their regulatory competitive advantage. Here are some points that can help make this happen:
Get the infrastructure right
Hector Rodriguez, the current General Manager, understands that a new city should include a robust university with comfortable amenities such as stores, health clinics, schools, child care centers, transportation and other basic infrastructure that will attract and foster a vibrant community. Though the vision is extremely lofty, it is actually sound and comparable to other pie-in-the sky ideas set forth by folks like Peter Thiel and the Island Nation project he supports.
Build an ecosystem not only a university
Building a top tier educational institution that is at the heart of Yachay is a smart move that will attract top talent. But that alone is not enough to spur an entrepreneurial culture. If you look at Stanford and the innumerable companies that its graduates have started, you can see how a top notch university helps fuel an entrepreneurial community. However, without the support of investors these companies would have never existed.
Culture trumps location
Yachay is located two hours from Quito, the capital of Ecuador. The best parallel is Palo Alto, CA which is located in between two major US cities: San Jose and San Francisco. This small city became the capital of the world for startups and there were other factors that ignited the startup revolution in this area. Yachay’s disadvantage is that the culture could become homogeneous. If you have a mix of people with diverse backgrounds and experiences, it helps to build a creative culture. According to Vivek Wadhwa in an article titled “Why Silicon Valley Can’t Be Copied” he explains the success of Silicon Valley and attributes it to culture malleability.
The reasons were, at their root, cultural. It was Silicon Valley’s high rates of job-hopping and company formation, its professional networks and easy information exchange, that lent the advantage. Valley firms understood that collaborating and competing at the same time led to success—an idea even reflected in California’s unusual rule barring non-compete agreements. The ecosystem supported experimentation, risk-taking, and sharing the lessons of success and failure. In other words, Silicon Valley was an open system—a giant, real-world social network that existed long before Facebook.
Can Ecuador, or any other developing country copy the Silicon Valley startup machine? That is the question that Rafael Correa’s government is trying to answer right now as they embark in possibly one of the most ambitious South American initiatives.
Yachay’s Opportunity And What Ecuador Should Do
Ecuador is building Yachay, a standalone city that is currently an uninhabited Andean Valley. It’s a literal blank slate in terms of infrastructure, policy and human resources that can be an ideal location devoted to serve what C.Z. Nnaemeka from M.I.T calls the unexotic underclass.
This is Ecuador’s attempt to leapfrog into the next economic frontier. The “City of Knowledge” as it has come to be known, is surrounded by mountains, Andean valleys and its purpose is to help Ecuador evolve from an oil-based economy into the innovation hub of South America.
In a recent article in the Miami Herald, Jim Wyss provides an interesting point of view into Yachay. His analysis, at no fault of his own, is similar to other articles written by CNET and other publications and it is reflected in the type of people that are interviewed for the articles. They are academics, not entrepreneurs and there is a big difference between both. Academics are great at analyzing markets, not at creating new ones. For instance, a civil engineer that is building noble malleable materials in a lab does not know how to actually build a construction company. Steve Wozniak designed the first Apple Computer but it would have been highly unlikely that he would have built Apple, the company. Academics fuel research, not entrepreneurship.
For this great experiment to work, there needs to be a complete culture shift and government reform to incentivize, not punish new businesses. The great opportunity for Ecuador lies upon deregulation and specialization of resources that are available within the country.
This city can become a magnet for talent from across the globe and to entice the local and foreign talent to stay, the immigration and economic systems need to accommodate the new arrivals by welcoming them and not putting burdens to financial success.
Yachay’s system should be such that a company can incorporate quickly and start hiring local talent right away. The tax system should provide stability so that entrepreneurs can attempt to build moon shots without the concern that the government might come after them if they fail. Big corporations need to see the value of investing in innovation rather than stagnate in old school business and governmental models.
The opportunity is ripe for the taking and Ecuador has the opportunity to succeed where many have failed.
Tangelo, the company I founded over six years ago, is based on my personal belief that innately talented people from abroad can compete with top Silicon Valley companies. My job is to find those opportunities to prove it. Over four years ago, we established a program called the Tangelo Startup House to bring Silicon Valley’s culture to Ecuador and Argentina and we are succeeding. We have built three companies from scratch that have been highlighted at conferences such as Google I/O and DEMO.
We have experienced the ups and downs of building an ecosystem around Tangelo and have learned an incredible amount about the intricacies of building an innovative team and we are eager to share it just as every other entrepreneur in Silicon Valley is eager to support a new one.