Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

February 3, 2012

Why Silicon Valley?

What drives our local economy? What are the area’s competitive advantages?

In the early 1980’s I lead a bus tour of the area’s “Golden Triangle” for a group of British pension investors. The introduction of the PC was transforming information technology and Silicon Valley was booming My audience were board members who looked at the larger picture. I was thrown this question: “History shows that after the introduction of a technology the winners are usually the low cost providers. Why won’t this entire industry move to a cheaper location, like Austin or Asia?” Sure, I found words to come out of my mouth, but frankly, I was stumped.

Since that day, I've been an avid student of Silicon Valley. Yes, manufacturing largely moved out, but the headquarters and design functions stayed. Why? Local companies seem to thrive while many of the pioneers in other parts of the United States (Wang, DEC, Compaq, NCR) were acquired or disappeared. Why? The new-new-thing always seems to either start in Silicon Valley or move here in order to blossom. Why?

The Start-Up Story is Well Known: Silicon Valley has an infrastructure for innovation second to none.

In reality and in the movie, “Social Network” Sean Parker tells Mark Zuckerberg "take your company to Silicon Valley if you want it to get it off the ground".

A startup in the Bay Area can contract out all aspects of its development, including product design. Every category of engineer and scientist is here; willing to be lured by the chance to be part of an IPO. Most important the money is here: Bay Area’s share of Venture Capital continues to grow and is now approaching 40%.

The minnows need to be here but why do the whales swim in a Silicon Valley Pod? Not widely recognized is the transformation of Information Technology (IT).

There was a time when single firms (IBM, DEC, HP) dominated IT and could provide total solutions – like tall Sequoias reaching from the ground to the sky. These tall trees could be planted anywhere. Not anymore. Today IT solutions evolve through specialization, fragmentation, competition and collaboration, and have created a multitude of interdependent players, fast on their feet but needing to run as a herd. Sudden shifts in technological direction push established firms together to avoid being left behind. The goal is to anticipate a change of direction: Then do whatever it takes to keep up: Establish networks for intelligence, collaborate, imitate, and steal talent to keep up with the herd.

As such Silicon Valley consolidates its hold on emerging technology. If you are not here, you might find yourself isolated from the herd and vulnerable. Consider AOL and RIM Blackberry. AOL came back to Palo Alto. RIM is moving engineering here (though perhaps too late). Even Microsoft is growing its Silicon Valley campus, home to Bing.  Dell plans to double its Silicon Valley work force to 1500 employees in 2012.
Your collaborator today could become your competitor tomorrow, look at Apple and Google. In IT the old adage “keep your friends close and your enemies closer" still rings true, and in Silicon Valley it is truer than ever.

The world of Information Technology only needs one center. 
Perhaps the most important answer to "Why Silicon Valley?" is so obvious that it is often overlooked.
Fresh vegetables may need a local market for every few thousand people. The market for money has regional centers for each currency, and is united at two world centers, London and New York to accommodate time zones, currencies, tax laws and regulations.
The world of IT needs only one center. There is a single world-wide currency in IT, electrons, with only two denominations, Zeros and Ones. The Internet bridges time zones, languages and to a large degree outpaces regulations. To move a market center requires that market participants have a motive. Such a move will not happen; there is simply no compelling reason for another world IT center, besides Silicon Valley.

The half life of an engineer's education is 10-years and falling.
Why would a talented engineer join a major company at a location far from the center.  The Bay Area survives on its ability to attract the 20-something new talent from around the world and retrain the 30-something engineer whose specialty is no longer in demand.  Talent drives innovation.  In tech, old talent gets stale quickly and needs to be replaced with cutting edge new talent. The estimated half-life for an engineer's training is 10-years.  The Bay Area has the colleges, universities and institutes to offer continuing education for the 35-year old engineer who needs to be retreaded, but also attracts the fresh talent that brings the companies that foster more innovation that is taught in Silicon Valley first – a virtuous cycle.