Thursday, Feb 26 2015

What Makes Silicon Valley the Hotspot for Technology Startups?

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What Makes SV the Hotspot for Technology Startups

The San Francisco Bay Area is perhaps better known as Silicon Valley—the place where multi-billion dollar tech companies are born. SV is the home of household names in technology: Google, Apple, Facebook, HP, Yahoo!, Netflix, eBay, and hundreds more thrive in this area. Tech-leaning entrepreneurs salivate at the prospect of starting up here, and the brightest IT talent flocks to SV in hopes of being snagged by one of the giants.

But why is this particular place Silicon Valley? How does the Bay Area continue to incubate the best and most innovative tech companies that survive for the long haul? Here are a few of the reasons technology lives in SV, and fizzles out in other areas.

The Silicon Valley state of mind       

Many entrepreneurs starting out in SV share a number of similar traits that uniquely position them for unprecedented success. Among them are a willingness to collaborate and a strong competitive drive, as well as openness to innovation, experimentation, and even failure.

But perhaps the most important piece of the SV puzzle is dedication. Innovators and entrepreneurs come to Silicon Valley with the knowledge that building a hugely successful, standout technology company does not happen overnight—and they’re willing to make the long-term commitment that represents the only path to success of Google proportions.

Not for profit—yet

In Silicon Valley—and to some extent Seattle, the only other area to come close with the production of more than one multi-billion-dollar tech giant—profits are often not the first concern of a startup daring to dream big. This idea seems to fly in the face of sound business theory, because why start a business if you’re not going to make money?

That’s not to say that Silicon Valley startups aren’t interested in money. It’s simply not that high on the list of requirements for the earliest stages of the long-term plan. For instance, Facebook and Twitter both focused on growing massive and unprofitable user bases, waiting years before introducing any type of monetization to their networks. Seattle-based global online retail giant Amazon has continually operated in the red since the company’s inception in 1994.

One of the main issues with this type of approach is sustainability. Long-term operation without immediate profit is not only high-risk, but also requires substantial investment of resources. And many non-Silicon Valley investors simply aren’t equipped to provide this type of financial investment, which results in early exits and sellouts in order to turn a profit, rather than staying the required course and placing big bets on developing massive companies.

Truly, madly visionary

Attempting a Silicon Valley style breakout requires a certain level of instability—a kind of systematic irrationality that allows startups and entrepreneurs to disregard logic, pass over sound business decisions, and take chances that from the outside can appear downright disastrous.

Most investors and entrepreneurs, rather than investing ten years or more in building an enormous technology corporation, prefer to grow the company to nine or ten figures and then flip it into a near or mid-term payday. And in perhaps a majority of instances, this is the right choice. Selling a fledgling company to a larger conglomerate provides the personnel and financial resources that can make or break a success. But for many in SV, there’s a greater willingness to roll the dice, and hope the company stands on its own.

One of the most well-known examples of this type of apparent insanity that can ultimately pay off occurred in 2006, when a struggling and unprofitable social network turned down what appeared to be the deal of a lifetime. Founder and CEO Mark Zuckerberg, was 22 years old, and the company had been launched less than two years before Yahoo! offered $1 billion to buy Facebook.

The company’s three-person board turned down the offer, despite elder advisors’ attempts to convince Zuckerberg to accept. The reason the young CEO gave for their refusal was that Yahoo! “had no definitive idea about the future. They did not properly value things that did not exist, so they were therefore undervaluing the business.”

As it turned out, Zuckerberg’s choice to stick to his guns was the right one. Facebook is now worth more than $200 billion, and the CEO’s personal net worth is over $33 billion.

Success in Silicon Valley hinges on dedication, ambition, and a vision to build a technology company that will be around forever. It’s more than a place—it’s a state of mind that serves as an inspiration for entrepreneurs and startups everywhere.