Friday, December 10, 2010

Silicon Valley's Secret Sauce

Via Ace, FLG learns of this Chatham House paper on China. Its primary focus is one that FLG is constantly harping on:
we should consign linear thinking to spreadsheets, and try to understand the consequences and flashpoints resulting from economic and political processes.

Small aside:
FLG tried to bring this point up to his fellow MBA classmates when the discussion during the class break turned to China. One classmate said that since FLG hadn't been to China that he had no idea how dynamic it felt over there. FLG immediately asked if that's because of all the new, cool buildings. "Yes," the classmate replied. "That's what I thought," FLG said. "Look, economies aren't solely on cool buildings. They're tangible and nice to look at and all, but that doesn't mean China is on some inexorable path to economic predominance. This is a one time shift from agriculture to industry, and increase in inputs. Because they are so big the shift is taking a long time, but it's still a one-time shift. And I'm pretty sure they cannot keep their present form of government after the shift and still be successful. In fact, there are strong signs that it's a real estate bubble over there." Everybody poo-poo'd FLG on that one. BTW, FLG is constantly distraught that his fellow classmates are so enamored of buzzwords and fads. It's almost like they take the Tom Friedman Kool-aid intravenously. Generally they're smart people, but not also very deep thinkers. End of aside.

The main point of this here post is about Silicon Valley's secret sauce:
You can certainly create world leadership in the production of screen-based goods and green energy products and processes along the Yangtse Delta, but this is not the equivalent of a Silicon Valley, which thrives on adversarial conflict in innovation, proprietary ownership of processes, patents and copyrights, and the absence of hierarchy and political interference.

This is one of those things that FLG thinks most people miss, including the people who try to copy the formula elsewhere. They all think it's a matter of good schools, strong IP protections, and letting entrepreneurial people do their innovation thing. That's all well and good, and they're all parts of it. But the secret sauce, why other people try to copy it and often fail, is they forget the finance part.

Silicon Valley is the tip of the spear in reallocating capital to new and productive activities. It's not just the absence of political interference, it's also the presence of bunch of finance people (angel investors, venture capital firms, etc) that provide capital. Furthermore, the Anglo-Saxon market-based financial system facilitates this process even more because it provides an exit strategy for those investors (IPOs), as well as additional liquidity.

FLG understands why people focus on the engineering and patents. Most people naturally see the product and the processes that went into their development. The engineers and programmers who made it happen. Finance is something that sort of happens in the background. Or as a benefit after the product has been developed for a job well-done. But FLG really think that is Silicon Valley's secret sauce -- finance. Well, it's a combination of educational institutions, entrepreneurial talent, and finance, but finance is the one people don't see and in many ways is the hardest to copy. There are plenty of good schools in the world and plenty of smart people with interesting ideas coming out of those schools. It's really a matter of acquiring and deploying resources to execute those ideas, and then doing it again. This isn't to disparage the skills, hard work, and creativity of the entrepreneurs and engineers in Silicon Valley, but simply to say that the infrastructure to provide them capital is what makes Silicon Valley special.

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