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February 2009  
  
A lot of cities look at Silicon Valley and ask "How could we make something
like that happen here?" The organic way to do it is to establish a first-rate
university in a place where rich people want to live. That's how Silicon
Valley happened. But could you shortcut the process by funding startups?  
  
Possibly. Let's consider what it would take.  
  
The first thing to understand is that encouraging startups is a different
problem from encouraging startups in a particular city. The latter is much
more expensive.  
  
People sometimes think they could improve the startup scene in their town by
starting something like Y Combinator there, but in fact it will have near zero
effect. I know because Y Combinator itself had near zero effect on Boston when
we were based there half the year. The people we funded came from all over the
country (indeed, the world) and afterward they went wherever they could get
more funding—which generally meant Silicon Valley.  
  
The seed funding business is not a regional business, because at that stage
startups are mobile. They're just a couple founders with laptops.   
  
If you want to encourage startups in a particular city, you have to fund
startups that won't leave. There are two ways to do that: have rules
preventing them from leaving, or fund them at the point in their life when
they naturally take root. The first approach is a mistake, because it becomes
a filter for selecting bad startups. If your terms force startups to do things
they don't want to, only the desperate ones will take your money.  
  
Good startups will move to another city as a condition of funding. What they
won't do is agree not to move the next time they need funding. So the only way
to get them to stay is to give them enough that they never need to leave.  
  
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How much would that take? If you want to keep startups from leaving your town,
you have to give them enough that they're not tempted by an offer from Silicon
Valley VCs that requires them to move. A startup would be able to refuse such
an offer if they had grown to the point where they were (a) rooted in your
town and/or (b) so successful that VCs would fund them even if they didn't
move.  
  
How much would it cost to grow a startup to that point? A minimum of several
hundred thousand dollars. Wufoo seem to have rooted themselves in Tampa on
$118k, but they're an extreme case. On average it would take at least half a
million.  
  
So if it seems too good to be true to think you could grow a local silicon
valley by giving startups $15-20k each like Y Combinator, that's because it
is. To make them stick around you'd have to give them at least 20 times that
much.  
  
However, even that is an interesting prospect. Suppose to be on the safe side
it would cost a million dollars per startup. If you could get startups to
stick to your town for a million apiece, then for a billion dollars you could
bring in a thousand startups. That probably wouldn't push you past Silicon
Valley itself, but it might get you second place.  
  
For the price of a football stadium, any town that was decent to live in could
make itself one of the biggest startup hubs in the world.  
  
What's more, it wouldn't take very long. You could probably do it in five
years. During the term of one mayor. And it would get easier over time,
because the more startups you had in town, the less it would take to get new
ones to move there. By the time you had a thousand startups in town, the VCs
wouldn't be trying so hard to get them to move to Silicon Valley; instead
they'd be opening local offices. Then you'd really be in good shape. You'd
have started a self-sustaining chain reaction like the one that drives the
Valley.  
  
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But now comes the hard part. You have to pick the startups. How do you do
that? Picking startups is a rare and valuable skill, and the handful of people
who have it are not readily hireable. And this skill is so hard to measure
that if a government did try to hire people with it, they'd almost certainly
get the wrong ones.  
  
For example, a city could give money to a VC fund to establish a local branch,
and let them make the choices. But only a bad VC fund would take that deal.
They wouldn't _seem_ bad to the city officials. They'd seem very impressive.
But they'd be bad at picking startups. That's the characteristic failure mode
of VCs. All VCs look impressive to limited partners. The difference between
the good ones and the bad ones only becomes visible in the other half of their
jobs: choosing and advising startups.   
  
What you really want is a pool of local angel investors—people investing money
they made from their own startups. But unfortunately you run into a chicken
and egg problem here. If your city isn't already a startup hub, there won't be
people there who got rich from startups. And there is no way I can think of
that a city could attract angels from outside. By definition they're rich.
There's no incentive that would make them move.   
  
However, a city could select startups by piggybacking on the expertise of
investors who weren't local. It would be pretty straightforward to make a list
of the most eminent Silicon Valley angels and from that to generate a list of
all the startups they'd invested in. If a city offered these companies a
million dollars each to move, a lot of the earlier stage ones would probably
take it.  
  
Preposterous as this plan sounds, it's probably the most efficient way a city
could select good startups.  
  
It would hurt the startups somewhat to be separated from their original
investors. On the other hand, the extra million dollars would give them a lot
more runway.  
  
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Would the transplanted startups survive? Quite possibly. The only way to find
out would be to try it. It would be a pretty cheap experiment, as civil
expenditures go. Pick 30 startups that eminent angels have recently invested
in, give them each a million dollars if they'll relocate to your city, and see
what happens after a year. If they seem to be thriving, you can try importing
startups on a larger scale.  
  
Don't be too legalistic about the conditions under which they're allowed to
leave. Just have a gentlemen's agreement.  
  
Don't try to do it on the cheap and pick only 10 for the initial experiment.
If you do this on too small a scale you'll just guarantee failure. Startups
need to be around other startups. 30 would be enough to feel like a community.  
  
Don't try to make them all work in some renovated warehouse you've made into
an "incubator." Real startups prefer to work in their own spaces.  
  
In fact, don't impose any restrictions on the startups at all. Startup
founders are mostly hackers, and hackers are much more constrained by
gentlemen's agreements than regulations. If they shake your hand on a promise,
they'll keep it. But show them a lock and their first thought is how to pick
it.  
  
Interestingly, the 30-startup experiment could be done by any sufficiently
rich private citizen. And what pressure it would put on the city if it worked.
  
  
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Should the city take stock in return for the money? In principle they're
entitled to, but how would they choose valuations for the startups? You
couldn't just give them all the same valuation: that would be too low for some
(who'd turn you down) and too high for others (because it might make their
next round a "down round"). And since we're assuming we're doing this without
being able to pick startups, we also have to assume we can't value them, since
that's practically the same thing.  
  
Another reason not to take stock in the startups is that startups are often
involved in disreputable things. So are established companies, but they don't
get blamed for it. If someone gets murdered by someone they met on Facebook,
the press will treat the story as if it were about Facebook. If someone gets
murdered by someone they met at a supermarket, the press will just treat it as
a story about a murder. So understand that if you invest in startups, they
might build things that get used for pornography, or file-sharing, or the
expression of unfashionable opinions. You should probably sponsor this project
jointly with your political opponents, so they can't use whatever the startups
do as a club to beat you with.  
  
It would be too much of a political liability just to give the startups the
money, though. So the best plan would be to make it convertible debt, but
which didn't convert except in a really big round, like $20 million.  
  
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How well this scheme worked would depend on the city. There are some towns,
like Portland, that would be easy to turn into startup hubs, and others, like
Detroit, where it would really be an uphill battle. So be honest with yourself
about the sort of town you have before you try this.  
  
It will be easier in proportion to how much your town resembles San Francisco.
Do you have good weather? Do people live downtown, or have they abandoned the
center for the suburbs? Would the city be described as "hip" and "tolerant,"
or as reflecting "traditional values?" Are there good universities nearby? Are
there walkable neighborhoods? Would nerds feel at home? If you answered yes to
all these questions, you might be able not only to pull off this scheme, but
to do it for less than a million per startup.  
  
I realize the chance of any city having the political will to carry out this
plan is microscopically small. I just wanted to explore what it would take if
one did. How hard would it be to jumpstart a silicon valley? It's fascinating
to think this prize might be within the reach of so many cities. So even
though they'll all still spend the money on the stadium, at least now someone
can ask them: why did you choose to do that instead of becoming a serious
rival to Silicon Valley?  
  
  
  
  
  
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