Silicon Valley’s derivative venture opportunity
Silicon Valley is the world’s largest innovation hub, and it doesn’t look likely to implode or shrink anytime soon. We have gathered in one place all the essential ingredients to make fertile soil: failure-tolerant investors + great universities + attractive climate and location = mecca conditions attracting brilliant minds and crazy dreamers.
Let’s not break it. Actually, like any great natural ecosystem, it’s always partly broken and it’s always breaking down in places and repairing itself organically. The tech giants have tilted the landscape, causing more serious problems than just a temporary unpopularity of billionaires and social media addiction. They’ve built a concentration of power that is unhealthy for innovation and competition. Venture capital becomes hesitant to fund projects that threaten the royal palaces. Historically we’re healthier when we do exactly that.
Another place that we’re broken is diversity. When you first move here you may feel we’ve done a great job hiring a diverse workforce. Then you realize that beyond the Indian people and the Chinese people, it’s all white people and a dusting of Europeans. No Latinos. No black people. No older people. No re-careering people from the corn belt. It’s a big blob of cultural uniformity. I recently walked into a wall of age discrimination in my last 5 months of job search, and came up empty-handed. I’m going to go back to Plan-A: my Salesforce consulting business is in financial trouble, but is salvageable. Once I save it, I can’t be marginalized by a snotty recruiter or hiring manager who believes only a thirty-something can perform brilliantly in this job.
There’s so much capital available in the US right now. VCs and banks have boatloads of cash. Startup founders who fit the valley’s unofficial profile (young, academically brilliant, STEM educated, geeky and possessing bold imagination) are being flooded with funding offers. Successful businesses are being offered loans at favorable rates.
Now let’s look at the underserved markets and their potential. What segments or groups are we leaving behind that could be nurtured to become financially healthy and rewarding? One obvious group is non-Silicon-Valley startups. Some VCs are already meeting with founders elsewhere and discussing funding for ventures that will never move to the 415 or 650 or 408 area codes. We also have new service businesses that are not creating product but with new and imaginative offerings in financing, legal, marketing, education and training, and managed services, they represent interesting derivatives markets. Most of these will have to bootstrap, or fail, as there’s limited appetite for funding services businesses. The investment returns are lower and less sexy, but the failure rates should also be lower, therefore some subset of the fin-serv industry ought to be interested in financing growth for early stage services companies, and act as mentors instead of just banks. VC partners offer a wealth of wisdom and coaching to their founder entrepreneurs, helping them make smart decisions and not despair when things are complicated. The services businesses need the same kind of innovator think tank to help them see around corners.
What about moms and dads and farmers and builders and schoolteachers who have startup ideas? None of these are able to even get a meeting with an early stage investor because they don’t fit the profile — we don’t believe they’re capable of taking an idea from concept to successful exit. Perhaps the VCs and angels are right. Even if they have the staying power and the smarts, maybe the profile misfits will think like shopkeepers and not like disruptors, and maybe this is why they’re not the future of entrepreneurship. Wouldn’t it be great if a few funds were launched to hear ideas from people who don’t fit the Silicon Valley mold but have innovations they want to pursue. They might need a different kind of coaching and mentorship, and they might have to learn about valuation being more important than profit margins (shopkeeper thinking sees cash as king; entrepreneur thinking tends to see future value as more important than cash in hand).
Silicon Valley still has a diversity problem and a tech giants problem. Both will be difficult challenges but must be addressed, because there are many places around the world that would love to take #1 position.