Xtech 2006: Paul Graham – How American are Startups?

Sitting in the Grand Ballroom of the Hotel Grand Krapolinsky Krasnapolsky in central Amsterdam, at yet another conference. This is the third in three weeks, and I’ll be glad when next week comes and I don’t have to think about writing a presentation. Well, for a few weeks at least.

First up:

Paul Graham – How American are Startups?

‘m here to talk about start-ups. Well, if I was giving a talk about start-ups in the US, there’d be a lot more people here, so maybe that says something, or maybe I’m reading too much into it.

Could you recreate Silicon Valley elsewhere? With the right 10,000 people, yes. It used to be that geography was important, but now it’s having the right people. You need two kinds of people to create a start-up: rich people and nerds. Towns become start-up hubs when there are rich people and nerds. NYC could not be a start-up hub because there are lots of rich people but no nerds. Result: no start-ups. Pittsburgh has the opposite problem – lots of nerds, no rich people. Uni of Washington yeilded a hi-tech community in Seattle, but Pittsburgh has a problem with the weather, and no beautiful old city, so rich people don’t want to live in Pittsburgh.

Do you need rich people? Would it be best if the gov’t invested? no. You need rich people, because they tend to have experience and connections, and the fact that it’s their money makes them really pay attention. The idea of gov’t beaurocrats making start-up decisions is comic, it’d be like mathmaticians running Vogue… or editors of Vogue running a maths journal. Start-ups funded by burocrats would be competing with start-ups run by rich people who have their own money on the line.

Start-ups are people, not the buildings. Creating business parks doesn’t help start-ups, because start-ups do not use that kind of space. Where a start-up starts it stays, so all you need your three guys sitting round a kitchen table. If you can get rich people and nerds together, you can recreate Silicon Valley.

Smart people like smart people and will go where they are, so universities are good. First rate compsci depts are important to this, preferably one of the top handful in the world, and has to stand up to MIT and Stanford. Professors consider one factor only – they are attracted by good colleagues. So if you can attract the best people then you will create a chain reaction which would be unstoppable. Just takes about half a billion, which is within the reach of any developed country.

But you need a place where investors want to live and students want to live when they graduation. It needs to be a major air travel hub so people can travel easy. Investors and nerds have similar taste because most investors used to be nerds. Taste can’t be too different, but also can’t be too mainstream.

Like the rest of the creative class, nerds want to live somewhere with personality, that’s not mass produced. To create a start-up hub, you need a town that doesn’t have mass development of large tracts of land [so, no Milton Keynes then?]. Most personality is found in older towns. Pre-war apartments are built better, and people like them more.

You can’t build a Silicon Valley, you let it grow.

Any town’s personality needs to have a good nerd personality. Nerds like towns where people walk around smiling, so not LA because people don’t walk around, or NYC where people don’t smile.

Nerds will pay a premium to live where there are smart people. They like quiet, sunlight, hiking. A nerd’s idea of paradise is Berkeley or Boulder. The start-up hubs in the US are very young-feeling, but not new towns. Want a place that tolerates oddness. Get an election map and avoid the red bits.

To attract the young, you need a city with a live centre. None of the start-up hubs have been turned inside out like some Americans have. Young people do not want to live in suburbs.

Within the US, Boulder and Portland have the most potential. They are both only a great university short of being a start-up hub.

The US has some significant advantages:

1. Allows immigration. Would be impossible to reproduce Silicon Valley in Japan, because most of the people there speak with accents and the Japanese don’t allow immigration. It has to be a Mecca, and you can’t have a Mecca if you don’t let people in.

2. Won’t work in a poor company. India might one day produce a Silicon Valley, because it has the right people but it’s still very poor. US has never been as poor as some countries are now, so we have no data to say how you get from poor to Silicon Valley. There may be a ‘speed limit’ to the evolution of an economy.

3. The US is not (yet) a police state. China might want to create a Silicon Valley, but their tradition of an autocratic central gov’t goes back a long way. Gets you efficiency but not imagination. Can build things, but not sure it can design things. Hard to have new ideas about tech without having new ideas about politics, and many new tech ideas do have political implications so if you squash dissent you squash new ideas. Singapore suffers a similar problem.

4. Need really good unis, and their US has those. Outside of the US, people think of Cambridge in the UK, then pause. The best professors seem to be all spread out, instead of concentrated, so that hinders them because they don’t have good colleagues, and their institutions don’t act as a Mecca.

Germany used to have the best universities, until the 30s. If you took all the Jews out of any university in the US, there’d be a huge hole, so as there are few Jews in Germany, perhaps that would be a lost cause.

5. You can fire people. One of the biggest obsticles are the rigid labour laws in Europe, which is bad for start-ups because they have the least ability to deal with the beurocracy. Start-ups need to be able to fire people because they need to be flexible. EU public opinion will tolerate people being fired in industries where they care about performance, but that seems limited to football.

6. Work is less identified by employment in the US. EU has the attitude that the employer should protect the employee. Employment has shed these paternalistic overtones, which makes it easier for start-ups to hire people, and easier to start start-ups. In the US, most people still think they need to get a job, but the less you identify work with employment the easier it is to start your own company. All you have to do is imagine it.

A year after the founding of Apple, long after they had sold their stuff, Steve Wozniak was still working for HP. When Jobs found someone to give them venture funding, on the condition that Woz quit, he initially refused.

7. America is not too fussy. If there are any laws regarding businesses, you can assume that start-ups will break them because they don’t know them and don’t care. They get run out of places that they shouldn’t be run out of, like garages or apartments. Try that in Switzerland and you’d likely get reported. To get start-ups you need the just right amount of regulation.

8. US has a huge domestic market. Start-ups usually begin by selling locally, which works because their is a huge domestic market. In Sweden, for example, the market is smaller. The EU was created to form an international market, but everyone still speaks different languages. But it seems as if everyone educated person in Europe now speaks English, if present trends continue, more will.

9. Funding. Start-up funding doesn’t only come from VCs, but also from business angels. Google might not have got where they were without angel funding of $100k. All you need to do to get that process started is to get a few start-ups going, but the cycle is slow. It takes five years for a successful start-up to produce a potential angel investors. You need angels as well as VCs.

10. America has a more relaxed attitude to careers. In the EU, the idea is that everyone has a specific occupation, but in the US things are more haphazard. That’s a good thing. A start-up founder is not the type of career a high-school kid will choose – they choose conservatively. Start-ups are not things you plan, so you are more likely to get them in a society that allows career changes on the fly.

Compsci was supposed to provide researchers, but in actual fact most students are there because they are curious.

Americas schools might be a benefit – they are so bad, that people wait til college before they make their decisions about what their career will be.

This list is not meant to suggest America is the best place for start-ups. It should be possible not to duplicate, but improve on Silicon Valley. what’s wrong with SV?

– It’s too far away from San Francisco. You either live in the Valley, or commute from SF. Would be better if the Valley was actually interesting, but it’s the worst sort of strip development.

– Bad public transportation. There’s a train, which is not so bad by American standards but by Eu standards, its’ awful. So design a town for trains, bikes and walking and cars last, but it’ll be a long time before the US does that.

– Have lower capital gains taxes. Low income tax isn’t so much of an issue, but capital gains is. Lowering the tax instantly increases returns on stocks, as opposed to real estate, so to encourage start-ups, have low cap gains. But decreases in cap gains disproportionately favour the rich. Belgium as cap gains of 0.

– Smarter immigration policy. People running Silicon Valley are aware of the shortcomings of the US immigration system, and since 2001 it has become very paranoid. What fraction of the smart people who want to come to the Valley want to actually do get in? Half? The US policy keeps out most smart people and puts the majority in crap jobs. A country which got immigration right coudl become a Mecca for smart people simply by letting them in.

So basic recipe for a start-up hub is a great university and a nice town. You could improve on Silicon Valley easily. Just let people in.

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