May 2006(This essay is derived from a keynote at Xtech.)Startups happen in clusters. There are a lot of them in SiliconValley and Boston, and few in Chicago or Miami. A country thatwants startups will probably also have to reproduce whatever makesthese clusters form.I've claimed that the recipe is agreat university near a town smartpeople like. If you set up those conditions within the US, startupswill form as inevitably as water droplets condense on a cold pieceof metal. But when I consider what it would take to reproduceSilicon Valley in another country, it's clear the US is a particularlyhumid environment. Startups condense more easily here.It is by no means a lost cause to try to create a silicon valleyin another country. There's room not merely to equal Silicon Valley,but to surpass it. But if you want to do that, you have tounderstand the advantages startups get from being in America.1. The US Allows Immigration.For example, I doubt it would be possible to reproduce SiliconValley in Japan, because one of Silicon Valley's most distinctivefeatures is immigration. Half the people there speak with accents.And the Japanese don't like immigration. When they think about howto make a Japanese silicon valley, I suspect they unconsciouslyframe it as how to make one consisting only of Japanese people.This way of framing the question probably guarantees failure.A silicon valley has to be a mecca for the smart and the ambitious,and you can't have a mecca if you don't let people into it.Of course, it's not saying much that America is more open toimmigration than Japan. Immigration policy is one area where acompetitor could do better.2. The US Is a Rich Country.I could see India one day producing a rival to Silicon Valley.Obviously they have the right people: you can tell that by thenumber of Indians in the current Silicon Valley. The problem withIndia itself is that it's still so poor.In poor countries, things we take for granted are missing. A friendof mine visiting India sprained her ankle falling down the stepsin a railway station. When she turned to see what had happened,she found the steps were all different heights. In industrializedcountries we walk down steps our whole lives and never think aboutthis, because there's an infrastructure that prevents such a staircasefrom being built.The US has never been so poor as some countries are now. Therehave never been swarms of beggars in the streets of American cities.So we have no data about what it takes to get from the swarms-of-beggarsstage to the silicon-valley stage. Could you have both at once,or does there have to be some baseline prosperity before you get asilicon valley?I suspect there is some speed limit to the evolutionof an economy. Economies are made out of people, and attitudes canonly change a certain amount per generation.[1]3. The US Is Not (Yet) a Police State.Another country I could see wanting to have a silicon valley isChina. But I doubt they could do it yet either. China still seemsto be a police state, and although present rulers seem enlightenedcompared to the last, even enlightened despotism can probably onlyget you part way toward being a great economic power.It can get you factories for building things designed elsewhere.Can it get you the designers, though? Can imagination flourishwhere people can't criticize the government? Imagination meanshaving odd ideas, and it's hard to have odd ideas about technologywithout also having odd ideas about politics. And in any case,many technical ideas do have political implications. So if yousquash dissent, the back pressure will propagate into technicalfields. [2]Singapore would face a similar problem. Singapore seems very awareof the importance of encouraging startups. But while energeticgovernment intervention may be able to make a port run efficiently,it can't coax startups into existence. A state that bans chewinggum has a long way to go before it could create a San Francisco.Do you need a San Francisco? Might there not be an alternate routeto innovation that goes through obedience and cooperation insteadof individualism? Possibly, but I'd bet not. Most imaginativepeople seem to share a certain prickly independence,whenever and wherever they lived. You see it in Diogenes tellingAlexander to get out of his light and two thousand years later inFeynman breaking into safes at Los Alamos.[3]Imaginative peopledon't want to follow or lead. They're most productive when everyonegets to do what they want.Ironically, of all rich countries the US has lost the most civilliberties recently. But I'm not too worried yet. I'm hoping oncethe present administration is out, the natural openness of Americanculture will reassert itself.4. American Universities Are Better.You need a great university to seed a silicon valley, and so farthere are few outside the US. I asked a handful of American computerscience professors which universities in Europe were most admired,and they all basically said "Cambridge" followed by a long pausewhile they tried to think of others. There don't seem to be manyuniversities elsewhere that compare with the best in America, atleast in technology.In some countries this is the result of a deliberate policy. TheGerman and Dutch governments, perhaps from fear of elitism, try toensure that all universities are roughly equal in quality. Thedownside is that none are especially good. The best professorsare spread out, instead of being concentrated as they are in theUS. This probably makes them less productive, because they don'thave good colleagues to inspire them. It also means no one universitywill be good enough to act as a mecca, attracting talent from abroadand causing startups to form around it.The case of Germany is a strange one. The Germans invented themodern university, and up till the 1930s theirs were the best inthe world. Now they have none that stand out. As I was mullingthis over, I found myself thinking: "I can understand why Germanuniversities declined in the 1930s, after they excluded Jews. Butsurely they should have bounced back by now." Then I realized:maybe not. There are few Jews left in Germany and most Jews I knowwould not want to move there. And if you took any great Americanuniversity and removed the Jews, you'd have some pretty big gaps.So maybe it would be a lost cause trying to create a silicon valleyin Germany, because you couldn't establish the level of universityyou'd need as a seed.[4]It's natural for US universities to compete with one another becauseso many are private. To reproduce the quality of American universitiesyou probably also have to reproduce this. If universities arecontrolled by the central government, log-rolling will pull themall toward the mean: the new Institute of X will end up at theuniversity in the district of a powerful politician, instead ofwhere it should be.5. You Can Fire People in America.I think one of the biggest obstacles to creating startups in Europeis the attitude toward employment. The famously rigid labor lawshurt every company, but startups especially, because startups havethe least time to spare for bureaucratic hassles.The difficulty of firing people is a particular problem for startupsbecause they have no redundancy. Every person has to do theirjob well.But the problem is more than just that some startup might have aproblem firing someone they needed to. Across industries andcountries, there's a strong inverse correlation between performanceand job security. Actors and directors are fired at the end ofeach film, so they have to deliver every time. Junior professorsare fired by default after a few years unless the university choosesto grant them tenure. Professional athletes know they'll be pulledif they play badly for just a couple games. At the other end ofthe scale (at least in the US) are auto workers, New York Cityschoolteachers, and civil servants, who are all nearly impossibleto fire. The trend is so clear that you'd have to be willfullyblind not to see it.Performance isn't everything, you say? Well, are auto workers,schoolteachers, and civil servants happier than actors,professors, and professional athletes?European public opinion will apparently tolerate people being firedin industries where they really care about performance. Unfortunatelythe only industry they care enough about so far is soccer. Butthat is at least a precedent.6. In America Work Is Less Identified with Employment.The problem in more traditional places like Europe and Japan goesdeeper than the employment laws. More dangerous is the attitudethey reflect: that an employee is a kind of servant, whom theemployer has a duty to protect. It used to be that way in Americatoo. In 1970 you were still supposed to get a job with a bigcompany, for whom ideally you'd work your whole career. In returnthe company would take care of you: they'd try not to fire you,cover your medical expenses, and support you in old age.Gradually employment has been shedding such paternalistic overtonesand becoming simply an economic exchange. But the importance ofthe new model is not just that it makes it easier for startups togrow. More important, I think, is that it it makes it easier forpeople to start startups.Even in the US most kids graduating from college still think they'resupposed to get jobs, as if you couldn't be productive without beingsomeone's employee. But the less you identify work with employment,the easier it becomes to start a startup. When you see your careeras a series of different types of work, instead of a lifetime'sservice to a single employer, there's less risk in starting yourown company, because you're only replacing one segment instead ofdiscarding the whole thing.The old ideas are so powerful that even the most successful startupfounders have had to struggle against them. A year after thefounding of Apple, Steve Wozniak still hadn't quit HP. He stillplanned to work there for life. And when Jobs found someone togive Apple serious venture funding, on the condition that Woz quit,he initially refused, arguing that he'd designed both the Apple Iand the Apple II while working at HP, and there was no reason hecouldn't continue.7. America Is Not Too Fussy.If there are any laws regulating businesses, you can assume larvalstartups will break most of them, because they don't know what thelaws are and don't have time to find out.For example, many startups in America begin in places where it'snot really legal to run a business. Hewlett-Packard, Apple, andGoogle were all run out of garages. Many more startups, includingours, were initially run out of apartments. If the laws againstsuch things were actually enforced, most startups wouldn't happen.That could be a problem in fussier countries. If Hewlett and Packardtried running an electronics company out of their garage inSwitzerland, the old lady next door would report them to the municipalauthorities.But the worst problem in other countries is probably the effortrequired just to start a company. A friend of mine started a companyin Germany in the early 90s, and was shocked to discover, amongmany other regulations, that you needed $20,000 in capital toincorporate. That's one reason I'm not typing this on an Apfellaptop. Jobs and Wozniak couldn't have come up with that kind ofmoney in a company financed by selling a VW bus and an HP calculator.We couldn't have started Viaweb either.[5]Here's a tip for governments that want to encourage startups: readthe stories of existing startups, and then try to simulate whatwould have happened in your country. When you hit something thatwould have killed Apple, prune it off.Startups are marginal. They're started by the poor and thetimid; they begin in marginal space and spare time; they're startedby people who are supposed to be doing something else; and thoughbusinesses, their founders often know nothing about business. Youngstartups are fragile. A society that trims its margins sharplywill kill them all.8. America Has a Large Domestic Market.What sustains a startup in the beginning is the prospect of gettingtheir initial product out. The successful ones therefore make thefirst version as simple as possible. In the US they usually beginby making something just for the local market.This works in America, because the local market is 300 millionpeople. It wouldn't work so well in Sweden. In a small country,a startup has a harder task: they have to sell internationally fromthe start.The EU was designed partly to simulate a single, large domesticmarket. The problem is that the inhabitants still speak manydifferent languages. So a software startup in Sweden is still ata disadvantage relative to one in the US, because they have to dealwith internationalization from the beginning. It's significantthat the most famous recent startup in Europe, Skype, worked on aproblem that was intrinsically international.However, for better or worse it looks as if Europe will in a fewdecades speak a single language. When I was a student in Italy in1990, few Italians spoke English. Now all educated people seem tobe expected to-- and Europeans do not like to seem uneducated. Thisis presumably a taboo subject, but if present trends continue,French and German will eventually go the way of Irish and Luxembourgish:they'll be spoken in homes and by eccentric nationalists.9. America Has Venture Funding.Startups are easier to start in America because funding is easierto get. There are now a few VC firms outside the US, but startupfunding doesn't only come from VC firms. A more important source,because it's more personal and comes earlier in the process, ismoney from individual angel investors. Google might never have gotto the point where they could raise millions from VC funds if theyhadn't first raised a hundred thousand from Andy Bechtolsheim. Andhe could help them because he was one of the founders of Sun. Thispattern is repeated constantly in startup hubs. It's this patternthat makes them startup hubs.The good news is, all you have to do to get the process rolling isget those first few startups successfully launched. If they stickaround after they get rich, startup founders will almost automaticallyfund and encourage new startups.The bad news is that the cycle is slow. It probably takes fiveyears, on average, before a startup founder can make angel investments.And while governments might be able to set up local VC fundsby supplying the money themselves and recruiting people from existingfirms to run them, only organic growth can produce angel investors.Incidentally, America's private universities are one reason there'sso much venture capital. A lot of the money in VC funds comes fromtheir endowments. So another advantage of private universities isthat a good chunk of the country's wealth is managed by enlightenedinvestors.10. America Has Dynamic Typing for Careers.Compared to other industrialized countries the US is disorganizedabout routing people into careers. For example, in America peopleoften don't decide to go to medical school till they've finishedcollege. In Europe they generally decide in high school.The European approach reflects the old idea that each person has asingle, definite occupation-- which is not far from the idea thateach person has a natural "station" in life. If this were true,the most efficient plan would be to discover each person's stationas early as possible, so they could receive the training appropriateto it.In the US things are more haphazard. But that turns out to be anadvantage as an economy gets more liquid, just as dynamic typingturns out to work better than static for ill-defined problems. Thisis particularly true with startups. "Startup founder" is not thesort of career a high school student would choose. If you ask atthat age, people will choose conservatively. They'll choosewell-understood occupations like engineer, or doctor, or lawyer.Startups are the kind of thing people don't plan, so you're morelikely to get them in a society where it's ok to make career decisionson the fly.For example, in theory the purpose of a PhD program is to train youto do research. But fortunately in the US this is another rulethat isn't very strictly enforced. In the US most people in CS PhDprograms are there simply because they wanted to learn more. Theyhaven't decided what they'll do afterward. So American grad schoolsspawn a lot of startups, because students don't feel they're failingif they don't go into research.Those worried about America's "competitiveness" often suggestspending more on public schools. But perhaps America's lousy publicschools have a hidden advantage. Because they're so bad, the kidsadopt an attitude of waiting for college. I did; I knew I waslearning so little that I wasn't even learning what the choiceswere, let alone which to choose. This is demoralizing, but it doesat least make you keep an open mind.Certainly if I had to choose between bad high schools and gooduniversities, like the US, and good high schools and bad universities,like most other industrialized countries, I'd take the US system.Better to make everyone feel like a late bloomer than a failed childprodigy.AttitudesThere's one item conspicuously missing from this list: Americanattitudes. Americans are said to be more entrepreneurial, and lessafraid of risk. But America has no monopoly on this. Indians andChinese seem plenty entrepreneurial, perhaps more than Americans.Some say Europeans are less energetic, but I don't believe it. Ithink the problem with Europe is not that they lack balls, but thatthey lack examples.Even in the US, the most successful startup founders are oftentechnical people who are quite timid, initially, about the idea ofstarting their own company. Few are the sort of backslappingextroverts one thinks of as typically American. They can usuallyonly summon up the activation energy to start a startup when theymeet people who've done it and realize they could too.I think what holds back European hackers is simply that they don'tmeet so many people who've done it. You see that variation evenwithin the US. Stanford students are more entrepreneurial thanYale students, but not because of some difference in their characters;the Yale students just have fewer examples.I admit there seem to be different attitudes toward ambition inEurope and the US. In the US it's ok to be overtly ambitious, andin most of Europe it's not. But this can't be an intrinsicallyEuropean quality; previous generations of Europeans were as ambitiousas Americans. What happened? My hypothesis is that ambition wasdiscredited by the terrible things ambitious people did in the firsthalf of the twentieth century. Now swagger is out. (Even now theimage of a very ambitious German presses a button or two, doesn'tit?)It would be surprising if European attitudes weren't affected bythe disasters of the twentieth century. It takes a while to beoptimistic after events like that. But ambition is human nature.Gradually it will re-emerge.[6]How To Do BetterI don't mean to suggest by this list that America is the perfectplace for startups. It's the best place so far, but the samplesize is small, and "so far" is not very long. On historical time scales, what we have now is just aprototype.So let's look at Silicon Valley the way you'd look at a productmade by a competitor. What weaknesses could you exploit? How couldyou make something users would like better? The users in this caseare those critical few thousand people you'd like to move to yoursilicon valley.To start with, Silicon Valley is too far from San Francisco. PaloAlto, the original ground zero, is about thirty miles away, and thepresent center more like forty. So people who come to work inSilicon Valley face an unpleasant choice: either live in the boringsprawl of the valley proper, or live in San Francisco and endurean hour commute each way.The best thing would be if the silicon valley were not merely closerto the interesting city, but interesting itself. And there is alot of room for improvement here. Palo Alto is not so bad, buteverything built since is the worst sort of strip development. Youcan measure how demoralizing it is by the number of people who willsacrifice two hours a day commuting rather than live there.Another area in which you could easily surpass Silicon Valley ispublic transportation. There is a train running the length of it,and by American standards it's not bad. Which is to say that toJapanese or Europeans it would seem like something out of the thirdworld.The kind of people you want to attract to your silicon valley liketo get around by train, bicycle, and on foot. So if you want tobeat America, design a town that puts cars last. It will be a whilebefore any American city can bring itself to do that.Capital GainsThere are also a couple things you could do to beat America at thenational level. One would be to have lower capital gains taxes.It doesn't seem critical to have the lowest income taxes,because to take advantage of those, people have to move.[7]Butif capital gains rates vary, you move assets, not yourself, sochanges are reflected at market speeds. The lower the rate, thecheaper it is to buy stock in growing companies as opposed to realestate, or bonds, or stocks bought for the dividends they pay.So if you want to encourage startups you should have a low rate oncapital gains. Politicians are caught between a rock and a hardplace here, however: make the capital gains rate low and be accusedof creating "tax breaks for the rich," or make it high and starvegrowing companies of investment capital. As Galbraith said,politics is a matter of choosing between the unpalatable and thedisastrous. A lot of governments experimented with the disastrousin the twentieth century; now the trend seems to be toward themerely unpalatable.Oddly enough, the leaders now are European countries like Belgium,which has a capital gains tax rate of zero.ImmigrationThe other place you could beat the US would be with smarter immigrationpolicy. There are huge gains to be made here. Silicon valleys aremade of people, remember.Like a company whose software runs on Windows, those in the currentSilicon Valley are all too aware of the shortcomings of the INS,but there's little they can do about it. They're hostages of theplatform.America's immigration system has never been well run, and since2001 there has been an additional admixture of paranoia. Whatfraction of the smart people who want to come to America can evenget in? I doubt even half. Which means if you made a competingtechnology hub that let in all smart people, you'd immediately getmore than half the world's top talent, for free.US immigration policy is particularly ill-suited to startups, becauseit reflects a model of work from the 1970s. It assumes good technicalpeople have college degrees, and that work means working for a bigcompany.If you don't have a college degree you can't get an H1B visa, thetype usually issued to programmers. But a test that excludes SteveJobs, Bill Gates, and Michael Dell can't be a good one. Plus youcan't get a visa for working on your own company, only for workingas an employee of someone else's. And if you want to apply forcitizenship you daren't work for a startup at all, because if yoursponsor goes out of business, you have to start over.American immigration policy keeps out most smart people, and channelsthe rest into unproductive jobs. It would be easy to do better.Imagine if, instead, you treated immigration like recruiting-- ifyou made a conscious effort to seek out the smartest people and getthem to come to your country.A country that got immigration right would have a huge advantage.At this point you could become a mecca for smart people simply byhaving an immigration system that let them in.A Good VectorIf you look at the kinds of things you have to do to create anenvironment where startups condense, none are great sacrifices.Great universities? Livable towns? Civil liberties? Flexibleemployment laws? Immigration policies that let in smart people?Tax laws that encourage growth? It's not as if you have to riskdestroying your country to get a silicon valley; these are all goodthings in their own right.And then of course there's the question, can you afford not to? Ican imagine a future in which the default choice of ambitious youngpeople is to start their own companyrather than work for someone else's. I'm not sure that will happen,but it's where the trend points now. And if that is the future,places that don't have startups will be a whole step behind,like those that missed the Industrial Revolution.Notes[1]On the verge of the Industrial Revolution, England was alreadythe richest country in the world. As far as such things can becompared, per capita income in England in 1750 was higher thanIndia's in 1960.Deane, Phyllis, The First Industrial Revolution, CambridgeUniversity Press, 1965.[2] This has already happened once in China, during the MingDynasty, when the country turned its back on industrialization atthe command of the court. One of Europe's advantages was that ithad no government powerful enough to do that.[3]Of course, Feynman and Diogenes were from adjacent traditions,but Confucius, though more polite, was no more willing to be toldwhat to think.[4]For similar reasons it might be a lost cause to try to establisha silicon valley in Israel. Instead of no Jews moving there, onlyJews would move there, and I don't think you could build a siliconvalley out of just Jews any more than you could out of just Japanese.(This is not a remark about the qualities of these groups, just theirsizes. Japanese are only about 2% of the world population, andJews about .2%.)[5]According to the World Bank, the initial capital requirementfor German companies is 47.6% of the per capita income. Doh.World Bank, Doing Business in 2006, http://doingbusiness.org[6]For most of the twentieth century, Europeans looked back onthe summer of 1914 as if they'd been living in a dream world. Itseems more accurate (or at least, as accurate) to call the yearsafter 1914 a nightmare than to call those before a dream. A lotof the optimism Europeans consider distinctly American is simplywhat they too were feeling in 1914.[7]The point where things start to go wrong seems to be about50%. Above that people get serious about tax avoidance. The reasonis that the payoff for avoiding tax grows hyperexponentially (x/1-xfor 0 < x < 1). If your income tax rate is 10%, moving to Monacowould only give you 11% more income, which wouldn't even cover theextra cost. If it's 90%, you'd get ten times as much income. Andat 98%, as it was briefly in Britain in the 70s, moving to Monacowould give you fifty times as much income. It seems quite likelythat European governments of the 70s never drew this curve.Thanks to Trevor Blackwell, Matthias Felleisen, JessicaLivingston, Robert Morris, Neil Rimer, Hugues Steinier, Brad Templeton, Fred Wilson, and Stephen Wolfram for readingdrafts of this, and to Ed Dumbill for inviting me to speak.
