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May 2006  
  
 _(This essay is derived from a keynote at Xtech.)_  
  
Startups happen in clusters. There are a lot of them in Silicon Valley and
Boston, and few in Chicago or Miami. A country that wants startups will
probably also have to reproduce whatever makes these clusters form.  
  
I've claimed that the recipe is a great university near a town smart people
like. If you set up those conditions within the US, startups will form as
inevitably as water droplets condense on a cold piece of metal. But when I
consider what it would take to reproduce Silicon Valley in another country,
it's clear the US is a particularly humid environment. Startups condense more
easily here.  
  
It is by no means a lost cause to try to create a silicon valley in another
country. There's room not merely to equal Silicon Valley, but to surpass it.
But if you want to do that, you have to understand the advantages startups get
from being in America.  
  
**1\. The US Allows Immigration.**  
  
For example, I doubt it would be possible to reproduce Silicon Valley in
Japan, because one of Silicon Valley's most distinctive features is
immigration. Half the people there speak with accents. And the Japanese don't
like immigration. When they think about how to make a Japanese silicon valley,
I suspect they unconsciously frame it as how to make one consisting only of
Japanese people. This way of framing the question probably guarantees failure.  
  
A silicon valley has to be a mecca for the smart and the ambitious, and you
can't have a mecca if you don't let people into it.  
  
Of course, it's not saying much that America is more open to immigration than
Japan. Immigration policy is one area where a competitor could do better.  
  
**2\. The US Is a Rich Country.**  
  
I could see India one day producing a rival to Silicon Valley. Obviously they
have the right people: you can tell that by the number of Indians in the
current Silicon Valley. The problem with India itself is that it's still so
poor.  
  
In poor countries, things we take for granted are missing. A friend of mine
visiting India sprained her ankle falling down the steps in a railway station.
When she turned to see what had happened, she found the steps were all
different heights. In industrialized countries we walk down steps our whole
lives and never think about this, because there's an infrastructure that
prevents such a staircase from being built.  
  
The US has never been so poor as some countries are now. There have never been
swarms of beggars in the streets of American cities. So we have no data about
what it takes to get from the swarms-of-beggars stage to the silicon-valley
stage. Could you have both at once, or does there have to be some baseline
prosperity before you get a silicon valley?  
  
I suspect there is some speed limit to the evolution of an economy. Economies
are made out of people, and attitudes can only change a certain amount per
generation.   
  
**3\. The US Is Not (Yet) a Police State.**  
  
Another country I could see wanting to have a silicon valley is China. But I
doubt they could do it yet either. China still seems to be a police state, and
although present rulers seem enlightened compared to the last, even
enlightened despotism can probably only get you part way toward being a great
economic power.  
  
It can get you factories for building things designed elsewhere. Can it get
you the designers, though? Can imagination flourish where people can't
criticize the government? Imagination means having odd ideas, and it's hard to
have odd ideas about technology without also having odd ideas about politics.
And in any case, many technical ideas do have political implications. So if
you squash dissent, the back pressure will propagate into technical fields.
  
  
Singapore would face a similar problem. Singapore seems very aware of the
importance of encouraging startups. But while energetic government
intervention may be able to make a port run efficiently, it can't coax
startups into existence. A state that bans chewing gum has a long way to go
before it could create a San Francisco.  
  
Do you need a San Francisco? Might there not be an alternate route to
innovation that goes through obedience and cooperation instead of
individualism? Possibly, but I'd bet not. Most imaginative people seem to
share a certain prickly independence, whenever and wherever they lived. You
see it in Diogenes telling Alexander to get out of his light and two thousand
years later in Feynman breaking into safes at Los Alamos.  Imaginative
people don't want to follow or lead. They're most productive when everyone
gets to do what they want.  
  
Ironically, of all rich countries the US has lost the most civil liberties
recently. But I'm not too worried yet. I'm hoping once the present
administration is out, the natural openness of American culture will reassert
itself.  
  
**4\. American Universities Are Better.**  
  
You need a great university to seed a silicon valley, and so far there are few
outside the US. I asked a handful of American computer science professors
which universities in Europe were most admired, and they all basically said
"Cambridge" followed by a long pause while they tried to think of others.
There don't seem to be many universities elsewhere that compare with the best
in America, at least in technology.  
  
In some countries this is the result of a deliberate policy. The German and
Dutch governments, perhaps from fear of elitism, try to ensure that all
universities are roughly equal in quality. The downside is that none are
especially good. The best professors are spread out, instead of being
concentrated as they are in the US. This probably makes them less productive,
because they don't have good colleagues to inspire them. It also means no one
university will be good enough to act as a mecca, attracting talent from
abroad and causing startups to form around it.  
  
The case of Germany is a strange one. The Germans invented the modern
university, and up till the 1930s theirs were the best in the world. Now they
have none that stand out. As I was mulling this over, I found myself thinking:
"I can understand why German universities declined in the 1930s, after they
excluded Jews. But surely they should have bounced back by now." Then I
realized: maybe not. There are few Jews left in Germany and most Jews I know
would not want to move there. And if you took any great American university
and removed the Jews, you'd have some pretty big gaps. So maybe it would be a
lost cause trying to create a silicon valley in Germany, because you couldn't
establish the level of university you'd need as a seed.   
  
It's natural for US universities to compete with one another because so many
are private. To reproduce the quality of American universities you probably
also have to reproduce this. If universities are controlled by the central
government, log-rolling will pull them all toward the mean: the new Institute
of X will end up at the university in the district of a powerful politician,
instead of where it should be.  
  
**5\. You Can Fire People in America.**  
  
I think one of the biggest obstacles to creating startups in Europe is the
attitude toward employment. The famously rigid labor laws hurt every company,
but startups especially, because startups have the least time to spare for
bureaucratic hassles.  
  
The difficulty of firing people is a particular problem for startups because
they have no redundancy. Every person has to do their job well.  
  
But the problem is more than just that some startup might have a problem
firing someone they needed to. Across industries and countries, there's a
strong inverse correlation between performance and job security. Actors and
directors are fired at the end of each film, so they have to deliver every
time. Junior professors are fired by default after a few years unless the
university chooses to grant them tenure. Professional athletes know they'll be
pulled if they play badly for just a couple games. At the other end of the
scale (at least in the US) are auto workers, New York City schoolteachers, and
civil servants, who are all nearly impossible to fire. The trend is so clear
that you'd have to be willfully blind not to see it.  
  
Performance isn't everything, you say? Well, are auto workers, schoolteachers,
and civil servants _happier_ than actors, professors, and professional
athletes?  
  
European public opinion will apparently tolerate people being fired in
industries where they really care about performance. Unfortunately the only
industry they care enough about so far is soccer. But that is at least a
precedent.  
  
**6\. In America Work Is Less Identified with Employment.**  
  
The problem in more traditional places like Europe and Japan goes deeper than
the employment laws. More dangerous is the attitude they reflect: that an
employee is a kind of servant, whom the employer has a duty to protect. It
used to be that way in America too. In 1970 you were still supposed to get a
job with a big company, for whom ideally you'd work your whole career. In
return the company would take care of you: they'd try not to fire you, cover
your medical expenses, and support you in old age.  
  
Gradually employment has been shedding such paternalistic overtones and
becoming simply an economic exchange. But the importance of the new model is
not just that it makes it easier for startups to grow. More important, I
think, is that it it makes it easier for people to _start_ startups.  
  
Even in the US most kids graduating from college still think they're supposed
to get jobs, as if you couldn't be productive without being someone's
employee. But the less you identify work with employment, the easier it
becomes to start a startup. When you see your career as a series of different
types of work, instead of a lifetime's service to a single employer, there's
less risk in starting your own company, because you're only replacing one
segment instead of discarding the whole thing.  
  
The old ideas are so powerful that even the most successful startup founders
have had to struggle against them. A year after the founding of Apple, Steve
Wozniak still hadn't quit HP. He still planned to work there for life. And
when Jobs found someone to give Apple serious venture funding, on the
condition that Woz quit, he initially refused, arguing that he'd designed both
the Apple I and the Apple II while working at HP, and there was no reason he
couldn't continue.  
  
**7\. America Is Not Too Fussy.**  
  
If there are any laws regulating businesses, you can assume larval startups
will break most of them, because they don't know what the laws are and don't
have time to find out.  
  
For example, many startups in America begin in places where it's not really
legal to run a business. Hewlett-Packard, Apple, and Google were all run out
of garages. Many more startups, including ours, were initially run out of
apartments. If the laws against such things were actually enforced, most
startups wouldn't happen.  
  
That could be a problem in fussier countries. If Hewlett and Packard tried
running an electronics company out of their garage in Switzerland, the old
lady next door would report them to the municipal authorities.  
  
But the worst problem in other countries is probably the effort required just
to start a company. A friend of mine started a company in Germany in the early
90s, and was shocked to discover, among many other regulations, that you
needed $20,000 in capital to incorporate. That's one reason I'm not typing
this on an Apfel laptop. Jobs and Wozniak couldn't have come up with that kind
of money in a company financed by selling a VW bus and an HP calculator. We
couldn't have started Viaweb either.   
  
Here's a tip for governments that want to encourage startups: read the stories
of existing startups, and then try to simulate what would have happened in
your country. When you hit something that would have killed Apple, prune it
off.  
  
_Startups aremarginal._ They're started by the poor and the timid; they begin
in marginal space and spare time; they're started by people who are supposed
to be doing something else; and though businesses, their founders often know
nothing about business. Young startups are fragile. A society that trims its
margins sharply will kill them all.  
  
**8\. America Has a Large Domestic Market.**  
  
What sustains a startup in the beginning is the prospect of getting their
initial product out. The successful ones therefore make the first version as
simple as possible. In the US they usually begin by making something just for
the local market.  
  
This works in America, because the local market is 300 million people. It
wouldn't work so well in Sweden. In a small country, a startup has a harder
task: they have to sell internationally from the start.  
  
The EU was designed partly to simulate a single, large domestic market. The
problem is that the inhabitants still speak many different languages. So a
software startup in Sweden is still at a disadvantage relative to one in the
US, because they have to deal with internationalization from the beginning.
It's significant that the most famous recent startup in Europe, Skype, worked
on a problem that was intrinsically international.  
  
However, for better or worse it looks as if Europe will in a few decades speak
a single language. When I was a student in Italy in 1990, few Italians spoke
English. Now all educated people seem to be expected to-- and Europeans do not
like to seem uneducated. This is presumably a taboo subject, but if present
trends continue, French and German will eventually go the way of Irish and
Luxembourgish: they'll be spoken in homes and by eccentric nationalists.  
  
**9\. America Has Venture Funding.**  
  
Startups are easier to start in America because funding is easier to get.
There are now a few VC firms outside the US, but startup funding doesn't only
come from VC firms. A more important source, because it's more personal and
comes earlier in the process, is money from individual angel investors. Google
might never have got to the point where they could raise millions from VC
funds if they hadn't first raised a hundred thousand from Andy Bechtolsheim.
And he could help them because he was one of the founders of Sun. This pattern
is repeated constantly in startup hubs. It's this pattern that _makes_ them
startup hubs.  
  
The good news is, all you have to do to get the process rolling is get those
first few startups successfully launched. If they stick around after they get
rich, startup founders will almost automatically fund and encourage new
startups.  
  
The bad news is that the cycle is slow. It probably takes five years, on
average, before a startup founder can make angel investments. And while
governments _might_ be able to set up local VC funds by supplying the money
themselves and recruiting people from existing firms to run them, only organic
growth can produce angel investors.  
  
Incidentally, America's private universities are one reason there's so much
venture capital. A lot of the money in VC funds comes from their endowments.
So another advantage of private universities is that a good chunk of the
country's wealth is managed by enlightened investors.  
  
**10\. America Has Dynamic Typing for Careers.**  
  
Compared to other industrialized countries the US is disorganized about
routing people into careers. For example, in America people often don't decide
to go to medical school till they've finished college. In Europe they
generally decide in high school.  
  
The European approach reflects the old idea that each person has a single,
definite occupation-- which is not far from the idea that each person has a
natural "station" in life. If this were true, the most efficient plan would be
to discover each person's station as early as possible, so they could receive
the training appropriate to it.  
  
In the US things are more haphazard. But that turns out to be an advantage as
an economy gets more liquid, just as dynamic typing turns out to work better
than static for ill-defined problems. This is particularly true with startups.
"Startup founder" is not the sort of career a high school student would
choose. If you ask at that age, people will choose conservatively. They'll
choose well-understood occupations like engineer, or doctor, or lawyer.  
  
Startups are the kind of thing people don't plan, so you're more likely to get
them in a society where it's ok to make career decisions on the fly.  
  
For example, in theory the purpose of a PhD program is to train you to do
research. But fortunately in the US this is another rule that isn't very
strictly enforced. In the US most people in CS PhD programs are there simply
because they wanted to learn more. They haven't decided what they'll do
afterward. So American grad schools spawn a lot of startups, because students
don't feel they're failing if they don't go into research.  
  
Those worried about America's "competitiveness" often suggest spending more on
public schools. But perhaps America's lousy public schools have a hidden
advantage. Because they're so bad, the kids adopt an attitude of waiting for
college. I did; I knew I was learning so little that I wasn't even learning
what the choices were, let alone which to choose. This is demoralizing, but it
does at least make you keep an open mind.  
  
Certainly if I had to choose between bad high schools and good universities,
like the US, and good high schools and bad universities, like most other
industrialized countries, I'd take the US system. Better to make everyone feel
like a late bloomer than a failed child prodigy.  
  
**Attitudes**  
  
There's one item conspicuously missing from this list: American attitudes.
Americans are said to be more entrepreneurial, and less afraid of risk. But
America has no monopoly on this. Indians and Chinese seem plenty
entrepreneurial, perhaps more than Americans.  
  
Some say Europeans are less energetic, but I don't believe it. I think the
problem with Europe is not that they lack balls, but that they lack examples.  
  
Even in the US, the most successful startup founders are often technical
people who are quite timid, initially, about the idea of starting their own
company. Few are the sort of backslapping extroverts one thinks of as
typically American. They can usually only summon up the activation energy to
start a startup when they meet people who've done it and realize they could
too.  
  
I think what holds back European hackers is simply that they don't meet so
many people who've done it. You see that variation even within the US.
Stanford students are more entrepreneurial than Yale students, but not because
of some difference in their characters; the Yale students just have fewer
examples.  
  
I admit there seem to be different attitudes toward ambition in Europe and the
US. In the US it's ok to be overtly ambitious, and in most of Europe it's not.
But this can't be an intrinsically European quality; previous generations of
Europeans were as ambitious as Americans. What happened? My hypothesis is that
ambition was discredited by the terrible things ambitious people did in the
first half of the twentieth century. Now swagger is out. (Even now the image
of a very ambitious German presses a button or two, doesn't it?)  
  
It would be surprising if European attitudes weren't affected by the disasters
of the twentieth century. It takes a while to be optimistic after events like
that. But ambition is human nature. Gradually it will re-emerge.   
  
**How To Do Better**  
  
I don't mean to suggest by this list that America is the perfect place for
startups. It's the best place so far, but the sample size is small, and "so
far" is not very long. On historical time scales, what we have now is just a
prototype.  
  
So let's look at Silicon Valley the way you'd look at a product made by a
competitor. What weaknesses could you exploit? How could you make something
users would like better? The users in this case are those critical few
thousand people you'd like to move to your silicon valley.  
  
To start with, Silicon Valley is too far from San Francisco. Palo Alto, the
original ground zero, is about thirty miles away, and the present center more
like forty. So people who come to work in Silicon Valley face an unpleasant
choice: either live in the boring sprawl of the valley proper, or live in San
Francisco and endure an hour commute each way.  
  
The best thing would be if the silicon valley were not merely closer to the
interesting city, but interesting itself. And there is a lot of room for
improvement here. Palo Alto is not so bad, but everything built since is the
worst sort of strip development. You can measure how demoralizing it is by the
number of people who will sacrifice two hours a day commuting rather than live
there.  
  
Another area in which you could easily surpass Silicon Valley is public
transportation. There is a train running the length of it, and by American
standards it's not bad. Which is to say that to Japanese or Europeans it would
seem like something out of the third world.  
  
The kind of people you want to attract to your silicon valley like to get
around by train, bicycle, and on foot. So if you want to beat America, design
a town that puts cars last. It will be a while before any American city can
bring itself to do that.  
  
**Capital Gains**  
  
There are also a couple things you could do to beat America at the national
level. One would be to have lower capital gains taxes. It doesn't seem
critical to have the lowest _income_ taxes, because to take advantage of
those, people have to move.  But if capital gains rates vary, you move
assets, not yourself, so changes are reflected at market speeds. The lower the
rate, the cheaper it is to buy stock in growing companies as opposed to real
estate, or bonds, or stocks bought for the dividends they pay.  
  
So if you want to encourage startups you should have a low rate on capital
gains. Politicians are caught between a rock and a hard place here, however:
make the capital gains rate low and be accused of creating "tax breaks for the
rich," or make it high and starve growing companies of investment capital. As
Galbraith said, politics is a matter of choosing between the unpalatable and
the disastrous. A lot of governments experimented with the disastrous in the
twentieth century; now the trend seems to be toward the merely unpalatable.  
  
Oddly enough, the leaders now are European countries like Belgium, which has a
capital gains tax rate of zero.  
  
**Immigration**  
  
The other place you could beat the US would be with smarter immigration
policy. There are huge gains to be made here. Silicon valleys are made of
people, remember.  
  
Like a company whose software runs on Windows, those in the current Silicon
Valley are all too aware of the shortcomings of the INS, but there's little
they can do about it. They're hostages of the platform.  
  
America's immigration system has never been well run, and since 2001 there has
been an additional admixture of paranoia. What fraction of the smart people
who want to come to America can even get in? I doubt even half. Which means if
you made a competing technology hub that let in all smart people, you'd
immediately get more than half the world's top talent, for free.  
  
US immigration policy is particularly ill-suited to startups, because it
reflects a model of work from the 1970s. It assumes good technical people have
college degrees, and that work means working for a big company.  
  
If you don't have a college degree you can't get an H1B visa, the type usually
issued to programmers. But a test that excludes Steve Jobs, Bill Gates, and
Michael Dell can't be a good one. Plus you can't get a visa for working on
your own company, only for working as an employee of someone else's. And if
you want to apply for citizenship you daren't work for a startup at all,
because if your sponsor goes out of business, you have to start over.  
  
American immigration policy keeps out most smart people, and channels the rest
into unproductive jobs. It would be easy to do better. Imagine if, instead,
you treated immigration like recruiting-- if you made a conscious effort to
seek out the smartest people and get them to come to your country.  
  
A country that got immigration right would have a huge advantage. At this
point you could become a mecca for smart people simply by having an
immigration system that let them in.  
  
**A Good Vector**  
  
If you look at the kinds of things you have to do to create an environment
where startups condense, none are great sacrifices. Great universities?
Livable towns? Civil liberties? Flexible employment laws? Immigration policies
that let in smart people? Tax laws that encourage growth? It's not as if you
have to risk destroying your country to get a silicon valley; these are all
good things in their own right.  
  
And then of course there's the question, can you afford not to? I can imagine
a future in which the default choice of ambitious young people is to start
their own company rather than work for someone else's. I'm not sure that will
happen, but it's where the trend points now. And if that is the future, places
that don't have startups will be a whole step behind, like those that missed
the Industrial Revolution.  
  
  
  
  
  
**