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The Silicon Valley mirror-tocracy

Are these startups relevant to anyone outside the bubble?

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Open ... And Shut In the latest round of Silicon Valley navel-gazing, CNN's recent airing of Black in America gets technology prophet and pundit Michael Arrington on the record as not "know[ing] a single black entrepreneur."

Well, maybe he doesn't. After all, for all the talk about Silicon Valley as a meritocracy, the truth is that it's more of a "mirror-tocracy," as Mitch Kapor argues, with white and Asian male VCs funding entrepreneurs who largely look just like them. Compounding this problem, Silicon Valley is overly focused on the short-term picture, as Facebook CEO Mark Zuckerberg declares. Does this mean that entrepreneurs would be better served staffing up outside the Valley? Perhaps.

I've long felt that Silicon Valley ends up producing products that largely look like itself, solving first world problems that few others share beyond the rarefied air of Silicon Valley or other high-income metro areas. Hence, VCs can get really excited about Birchbox ("samples of beauty products delivered to your door") or Diddit ("comprehensive experience guide with a powerful social platform" (?!)).

These things aren't going to sell well in Indonesia. Or Indiana.

Which is OK: not every investment needs to target the entire planet, or the less affluent members of the global population. Entrepreneurs are right to focus on markets where they can see a clear path to revenue.

The problem is that Silicon Valley may be particularly poorly suited to fund and figure out how to market beyond its largely white and Asian male demographics, as a ZDNet story highlights. VCs tend to pattern-match when investing, and so tend to invest in others from their immediate social network. Entrepreneurs, in turn, tend to build products for others like themselves. How could they do otherwise? It's hard to effectively build for an audience you don't understand.

And it turns out that diversity is critically important for the success of technology success, as some studies have shown. Is Silicon Valley the counterexample? If so, it's a very big one. Stirring the Silicon Valley pot a different way, Mark Zuckerberg says if he were to start Facebook again, he'd keep it in Boston:

If I were starting now I would do things very differently. I didn’t know anything. In Silicon Valley, you get this feeling that you have to be out here. But it’s not the only place to be. If I were starting now, I would have stayed in Boston. [Silicon Valley] is a little short-term focused and that bothers me.

It's hard to focus on the long-term in an area that is so heavily focused on short-term outcomes. While there are plenty of examples of companies that grew up in Silicon Valley and managed to get big without cashing out too early (Facebook being one of them, Google another), when I look at the open-source software market, the best companies almost invariably come from outside Silicon Valley. Red Hat, JBoss, Alfresco, MySQL, etc. All grew up outside the Valley and, critically, took a long time growing up.

Interestingly, Google and Facebook somehow managed to grow up in the crucible of Silicon Valley, without being forced to grow revenues or profits too fast. It's unclear why they somehow escaped the short-termism that Zuckerberg derides, but it's clear that some VCs "get" the importance of letting a company grow up on its own terms, as Edison Ventures partner David Nevas illustrates:

As a VC, we are shooting for the big outcome, and more often than not this requires several major shifts in a business model for a company over its lifetime. If a company locks in too early and starts generating revenue in a way that turns out not to be scalable, it becomes much more difficult to change course later on.

So why do some companies manage to grow up at a more leisurely pace in the Valley, while so many are rushed to a fast exit? I suspect it has much to do with progress they're making in other areas. Google didn't generate a profit for years, but it was generating rapid adoption. Same with Facebook. Ironically, Chicago-based Groupon is also generating rapid adoption, but it's generating red ink at an even faster pace. By the "Silicon Valley is short term" logic, Groupon's investors should be giving it a long leash to take years to iron out its business model and IPO when its fiscal house is in order. Famously, it's doing the exact opposite. Nor is it clear that technology outside Silicon Valley is more inclusive of women, varying ethnicities, etc. Silicon Valley has its problems, clearly, but are they worse than the technology markets in Boston, New York, Atlanta, or London? I've yet to see any conclusive data that suggest so.

In short, Silicon Valley may be a poor place to start a demographically inclusive, long-term focused startup. But, paraphrasing Winston Churchill, it may be the "worst place to start a company except all the others that have been tried." Until someone can show a market that builds better companies, it's hard to argue against its success. ®

Matt Asay is senior vice president of business development at Strobe, a startup that offers an open source framework for building mobile apps. He was formerly chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears twice a week on The Register.

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