Is Silicon Valley Really Coming to an End?

Posted on Aug 27, 2012 | 19 comments


By now you probably know that David Sacks, co-founder of PayPal and founder of both Geni & Yammer made some observations on Facebook that Silicon Valley “as we know it” was coming to an end.

He says

“In order to create a successful new company, you have to find an idea that
(1) has escaped the attention of the major Internet companies, which are better run than ever before;

(2) is capable of being launched and proven out for ~$5M, the typical seed plus series A investment; and

(3) is protectable from the onslaught of those big companies once they figure out what you’re onto.

How many ideas like that are left?”

My 3.5 minute response on Bloomberg is here in this interview I did with Emily Chang.

He didn’t mean to make a media storm out of it – it was a simple comment on his Facebook page. But then Marc Andreessen weighed in – as did I and several others – and the media picked up on his comments. They were stark in that he had just sold his company to Microsoft for a reported $1.2 billion less than 5 years after it was created.

Once he realized that the media was paying attention he narrowed his argument to:

“Internet is not a young growth forest anymore. There are giant redwoods. They have large canopies. Not much grows in the canopy. 

Fortunately the forest is expanding, overrunning traditional industries. Entrepreneurs can still build big businesses on the outskirts.”

He gives a nice little 6-minute video interview on Bloomberg reinforcing these ideas.

Where David is Totally Right

David encourages entrepreneurs to stay away from the big tech firms (such as Google, Facebook, Microsoft, Apple) because they are hard to compete with.

I have often encouraged entrepreneurs to “think bigger” and take on industries that are not immediately sexy but solve bigger problems. I have noted that we are over-weight as an industry in apps for restaurants, bars & music because many young entrepreneurs launch applications in areas they know. No wonder there’s a growth in video game companies and photo apps.

I believe there needs to be more focus on reinventing eduction, healthcare, energy and even less noble industries such as television, telephony and financial services.

Where I Might Expand the Argument

But it’s kind of hard to say “don’t plant near the big trees” when you just completed a big sale to Microsoft building an app that they should have created and dominated. And that Salesforce.com should have been able to eat for lunch with the millions they’ve spent promoting Chatter.

And Facebook wouldn’t have had to spend $1 billion buying Instagram.

And Twitter wouldn’t exist. Who needed them in a Facebook-dominated world.

And Dropbox & Box.net in a Google, Microsoft, Apple world.

I believe entrepreneurs should, in David’s words, “build big businesses on the outskirts” but I don’t believe that Silicon Valley tech giants will outmaneuver startups. It simply hasn’t played out in history.

As I point out in my video

  • We once thought Microsoft was a monopoly on the Internet due to IE. Laughable now.
  • We once thought the merger of AOL/Time Warner needed to be investigated by the DOJ. Laughable.
  • We once thought nobody could unseat Google since all inbound traffic to the web came from them. Enter social media and its importance as a traffic source.
  • Is Facebook unstoppable? Of course not.

Most large companies (tech or otherwise) have two functions that make it hard to drive the most successful early-stage innovation.

1. The Innovators Dilemma – which means that if you have large customers with big profit margins it’s impossible to throw that all away to destruct your industry. I described that here in this post.

2.  Talent – in a world where startup founders are rewarded handsomely for taking risks of building their own startup companies and where the press shines a brighter light on them, much of the early-stage company traction will come from startups. It’s true that big companies can do a “fast follow” but the structure isn’t in place for a mid-level tech manager to work the kind of hours and attract the kind of talent that it takes to really break through.

Plus, the mid-level tech managers (which may be phenomenally talents but prefer a more risk-averse lifestyle and job) will often not get the full attention and resources from the host company to compete. That’s the biggest frustration I hear from talented people at bigger tech companies.

So I tell entrepreneurs to either build businesses at the edge of the forrest OR focus on businesses that drive deflationary economics. I think this is a really powerful concept and can be built right alongside the Redwood trees.

And a Final Note on Whether Silicon Valley Opportunities Remain

As per my video, think about the data in the following slide. In this world it’s hard to argue that the opportunity set isn’t larger.

I remember a discussion with an older VC who told me that in the early 90’s they wondered whether the VC industry had a future. It seemed like “all of the big ideas had been done” in technology. This was obviously prior to the Internet and everything that led to: (mobile smartphones, social networks, new payment technologies, etc.).

The future certainly looks brighter to me. Not just in Silicon Valley but in LA, NY, Seattle and other major tech markets. That’s why I say, “It’s Morning in VC & the Startup World.

And my fear? The only thing that slows us down?

Our inability to cost-effectively educate large numbers of people to compete in the future world where software really does begin to eat the world (in Marc Andreessen’s wise words).

And then along comes amazing companies like General Assembly, Treehouse, Codeacademy and many more to take on that challenge.

  • PaleolithicDiet

    Good post. One should also note the tremendous opportunities for innovation in hardware being afforded by rapid advances in digital fabrication/3D printing – and wholesale disruption of manufacturing. We’re still a few years out but Kickstarter is a good bellwether for the coming hardware storm.

  • http://bothsidesofthetable.com msuster

    Totally agree. I’m just less versed in hardware categories. But there seems to be a renaissance

  • rohit_mod

    Yes ! sentient hardware is required and will be a core innovation area for the next decade. consumer oriented, manufacturing, utility (robots), etc.
    For enterprise, data-centers, and service providers, the cloud now enables workload specific servers (hi1.4xlarge from amazon for instance) that dramatically increase performance for high throughput applications like netflix at a much lower cost.
    when software is king, commodity hardware just isn’t good enough.

  • http://byJess.net/ Jess Bachman

    Of course there are still big ideas out there. If there is anything human beings are terrible at, it’s predicting the future. The biggest idea in the past twenty years could be 6 months out but our collective optics are terrible.

    As for SV, it seems that people want to solve their own problems, and so SV tries to solve SV problems, so you end up up “warby parker for t-shirts” or “API’s in cloud”. The rest of america has a different set of problems, so I think the next truly big ideas will come from Portland, Ohio, Atlanta, etc.

    Also, the majors have their own gravitational pull on best practices. It actually may not be the best thing to “login with facebook” or “gamify” something. It can be hard to do something different when your neighbors is making billions doing it one particular way.

  • http://twitter.com/msuster Mark Suster

    “It actually may not be the best thing to “login with facebook” or “gamify” something.”

    Wish more people understood this.

  • http://devblog.ailon.org Alan Mendelevich

    Not sure IE is a good example. Microsoft has been forced to stop pushing it the way they wanted to push it. We can’t possibly know what would’ve happened if the antitrust trials never happened.

  • http://blog.ideatransplant.com Jan Schultink

    Could be a Business Insider link bait headline :-)

    People continue to look at innovation along the “technology”-axis, while in effect the real innovation is applied technology inside a vertical (AirBNB is a hotel industry innovation, not a tech one) and that type of innovation is here to stay.

  • Hania

    It’s funny because I am at the moment writing an article on the history of Silicon Valley from the 1900s to 1970. It truly enforces what you said.

    “I believe entrepreneurs should, in David’s words, “build big businesses on the outskirts” but I don’t believe that Silicon Valley tech giants will outmaneuver startups. It simply hasn’t played out in history.”
    ===>Prior and during the second world war, the electronics industry in Santa Clara County was very tiny compared to the massive establishment on the Est coast. BCA, Westinghouse,GE and RCA in particular were real bullies when it came to protect their patents, as they would take any company in Court if it dared competing with them (reminds me of a certain company today ;- ). It had two side effects :
    -It nurtured a regionalism (a movement to develop a strong indigenous industry against the domination -to not say exploitation- of the Est coast-More info here : http://tinyurl.com/9zfxwxv ) and encouraged the small californian firms to collaborate. Frederick Terman, aka “the father of Silicon Valley,”spoke of a “spirit of cooperation, almost a booster spirit.” He opposed it to the implacable competition and rigidity of the Eastern companies : “I think it was ‘every man for himself’ much more back [east]. [East Coast] manufacturers would never cooperate [on standards for vacuum tubes], partly because of the patent situation.”
    -It urged these firms to specialized in tiny niche markets and to find new processes, using different components, etc., to avoid the frontal confrontation with the eastern giants. Long story short, Hewlett-Packard, Eitel-McCullough, Litton industries, etc., became the best at what they did. In fact, GE itself couldn’t even produce a prototype that was half-good as the Eitel-McCullough’s tubes.

    “And my fear? Our inability to cost-effectively educate large numbers of people to compete in the future world[..].”
    ===>When Frederick Terman came back as the rector of Stanford’s engineering department in 1946, he understood that the region needed to reach a critical mass of talents in order to develop a strong industry, able to compete with Boston. To quote him : “A strong and independent industry must, however, develop its own intellectual resources of science and technology. For industrial activity that depends on imported brains and second-hand ideas cannot hope to be more than a vassal that pays tribute to its overlords, and is permanently condemned to an inferior competitive position.”

    Today the same dynamics apply but instead of tiny companies in the Santa Clara country VS. Eastern establishment, it is startups VS big companies all WITHIN Silicon Valley. Funny how History repeats itself ;-

  • http://www.samelawrence.com/ Sam E. Lawrence

    You added an extra “a” in Codecademy. “CodeAcademy” is an entirely different business, but also may be worth mentioning. Just a nit-picky typo, but thought you ight like to know. :)

  • wfjackson3

    I agree that there is going to be a hardware revolution. I am a little less sure of a coming wholesale disruption of manufacturing. Time will tell I suppose.

  • http://www.binpress.com/ Eran Galperin

    Great article. I think the way that technology is evolving and rapidly invading every aspect of our professional and personal lives, there will always be opportunities for new businesses and innovations that no one has seen before. I don’t see this trend stopping, unless we completely stagnate technologically wise.

    Whenever an investor tells me “Great idea, but what’s stopping [Apple | Google | Microsoft] from just doing it themselves?” I know they simply don’t know what they’re talking about. The giant tech companies do a few things well, but like you say in the article – historically they had few successes outside of their core businesses. Like they say in sports – I’d always bet on the field against the favorites.

  • http://WWW.FAKEGRIMLOCK.COM FAKE GRIMLOCK

    POST-MANUFACTURING WORLD IS NEXT REVOLUTION.

    FUTURE ONLY LOOK LIMITED WHEN LIMIT EYES TO LAST REVOLUTION.

  • http://veespo.com David Semeria

    +10

    I’ve yet to see a “what happened after we added gamification chart” that went beyond 6 months.

    Coincidence? Je ne crois pas….

  • http://www.startupmanagement.org/ William Mougayar

    That was my first reaction too :)

  • http://www.startupmanagement.org/ William Mougayar

    I think what David is implying is not to mount frontal attacks on the big tech incumbents, but that is never the best start-up strategy anyways.

    But even if you build on the outskirts, big companies can still come along to buy you and burry you. E.g. there is no significant trace of FriendFeed into Facebook, and who know if we will see the Sparrow innovations inserted into Gmail.

    No matter what, startups have to gain a lot of traction and grow fast. What happens then is subject to a lot of different end-point scenarios.

  • kateflame

    when you have a culture of innovation, all sorts of things come out – Airbnb, dropbox, api in cloud, throw sheep at my friends app. The claim that the next big idea will come from ohio may not be so true. Besides, valley is built by the immigrants :-)

  • http://influitive.com/ Abdallah Al-Hakim

    At the core, people develop new businesses and technologies because they feel passionate about a problem and want to solve it. While it is not a guarantee of success, it is an important component needed to consider first before worrying about big tech giants. Having said that, I am excited by new innovations in manufacturing and it seems to be picking up traction again in Silicon Valley

  • http://WWW.FAKEGRIMLOCK.COM FAKE GRIMLOCK

    ANSWER IS NEVER MORE ENGINEERS.

    IS ALWAYS LESS THINGS THAT DO MORE.

  • https://plus.google.com/u/0/b/114718778524214371963/114718778524214371963/posts kidmercury

    innovator’s dilemma is exactly why sacks is right. software companies seeking to give stuff away for free in exchange for user data that will be monetized via intermediation and personalization. they’re competing directly with big data incumbents google and amazon with this strategy.

    the future is outside the valley. engineering is important, but value is shifting to other disciplines. mark invests in some media startups and is leveraging LA for that. that’s an example of doing it right.