For decades governments and business leaders are trying to understand the venturing ecosystem in Silicon Valley. With over 30,000 start-ups, a world leading venture capital industry and continuously emerging high growth technology companies, the Bay Area is the most admirable and innovative ecosystem in the world. Not surprisingly, the Silicon Valley is seen as a best practice for business regions around the world. Many attempts have been made to copy the Silicon Valley model into other places. Yet, despite these efforts, the Bay Area ecosystem remains the single unique place for talent and ideas to unfold. Notably, the valley has several times transformed its ecosystem entirely in the past 40 years. From silicon in the seventies, software in the eighties, internet in the nineties and social in the zeros, the Silicon Valley managed to quickly develop the winners in emerging industries. And again, the Bay Area is in the midst of a transformation refocusing on the maker industry, a movement that is expected to disrupt entire traditional product industries.
In this blog I will share my view on the main differences between the Silicon Valley ecosystem and those we see in the rest of the world. What is required for corporations to become successful in venturing? How to embed (corporate) venturing in the traditional, control based organizations? And how to engage ecosystems in a successful venturing strategy? Before addressing these questions, I will first shortly discuss a key distinguishing factor in the success of the Bay Area. This seldom-discussed factor is the operating model of most Bay Area companies.
The Silicon Valley operating model – designed for growth
In a previous blog on the Future of Business Incubation and Venture Funding, I provided an overview of innovative venture platforms and methodologies that are being developed at the tail of the venture industry. More than ever, starting a start-up is accessible to everyone with a vision, team and drive. New ventures build upon a new breed of venture innovations such as the lean start-up model, cloud services, collaboration platforms, accelerators, crowd funding and micro venture capital. Yet, even though the scale of the venturing industry in the valley is a league of its own, this is not what sets the Silicon Valley apart. In my view – and in addition to the scale of the venturing industry – the secret of the success is to be found in the operating model of the leading tech companies in the Bay Area.
Traditional ecosystems are primarily ‘value chain’ driven where suppliers and knowledge institutions collaborate in the field of production and product development. These collaborations are driven from the ‘core’ of the business. In more advanced ecosystems, players apply an open innovation approach to collaborate on research & development. The value chain collaboration model exists in the Bay Area too, though the main technology players such as Google, Facebook, Twitter, Airbnb, Cisco and Apple follow a different operating model which is critical to the success of the valley. Rather than efficiency driven value chain optimization, the Bay Area operating model is designed to enable growth for both the leading tech players as well as the start-ups. A ‘what is good for you is good for us’ philosophy.
The Silicon Valley operating model consists op three building blocks:
- The first component in the operating model is ‘employee mobility’.
- The second building block is what I call ‘scaling the core through ‘moon shot’ thinking and living the brand’.
- The third component is the continuous focus in the valley on developing platforms and interfaces’.
I Employee mobility
The number of start-ups in the Bay Area is overwhelming. According to Wired Magazine, 51 new tech companies are launched every month in the San Francisco Bay area. The majority of these start-ups are struggling to survive and find it hard to raise capital or worse to find clients. While most start-ups fail or will be ‘team hired’ by a larger player, only a smallish percentage of start-ups manage to raise venture capital required to build a company at scale.
In traditional economies such a high failure rate could have serious social and economical side effects, but not so in the Valley. Due to a high employee turnover – in the Bay Area it is very common to change jobs every 2 years – and consequently high employee mobility between established companies and start-ups, the cost of failure is no more than the loss of income in a given time. Entrepreneurial attempts – success or failure – are very positively perceived during job interviews. It speaks for itself that a positive side effect of high employee mobility is the sharing of best practices and learning.
II Scaling the core through ‘moon shot’ thinking and living the brand
Most tech companies in the valley set audacious goals and a global ambition with a mission to make the world better. At Google this is called ‘ moonshot thinking’. Stretching your ambition ‘10x’ requires you to reconsider your underlying business assumptions. As a result new approaches and unexpected solutions may come along your path. Working on a good cause is naturally connected with moonshot thinking. It demands for a system approach rather than a product-only focus. Most tech companies apply design thinking to connect the higher purpose with product development.
On a day-to-day basis, all Silicon Valley companies follow an agile development approach. This in contrast to the ‘waterfall’ development method – in use by most traditional companies – requiring detailed business planning and tight control mechanisms. In this blog I will not describe in detail the agile development approach. The point I want to make is that agile companies have a different view on leadership, organization and empowerment. Traditional management skills and controls are not equipped to deal with instant decision making let alone a culture of experimentation through MVP’s (Minimum Viable Products) and A/B testing. How do Silicon Valley companies manage to align vision and growth with an agile development approach? How do employees and developers know what to do and how to handle issues as they arise? One of my observations during visits to the valley is that all tech companies, both start-up and established, pay a lot of attention to the ‘living of the brand’ in every detail and aspect of the business.
By ‘living the brand’, tech companies in the Bay Area set implicitly the direction for further development. Airbnb has dedicated almost an entire floor in its new office building in San Franco to showcase the brand evolution and the look and feel of rebuild lodges from most visited places across the world. ‘End-user focus’ and ‘details matter’ are the two most heard key messages that are amplified throughout the entire organization, best illustrated by the health food programs in place at all leading players.
‘Living the brand’ is a leadership philosophy that provides teams in high growth companies with guidance to do what they should do. It may seem a contradiction, but the more scalable the platform, the more soft leadership elements you will find in the Bay Area tech companies.
III Platforms and interfaces
The third component of the Silicon Valley operating model is the ongoing focus of Bay Area tech companies on developing platforms and designing multi layer interfaces into their business model. Examples of platform companies are facebook, twitter, indiegogo, udemy and Android (Google). Examples of interfaces are API’s (Application Programming Interfaces) and App stores. Through developing platforms and API’s, big tech companies enable other companies – often new start-ups – to build new innovative services and product extensions on top the platform. This ‘plug & play’ approach makes it easier for other companies to collaborate. Often standardized governance and revenue share models are readily applicable. The objective of the platform & interface approach is without exception to increase customer value. Please note that this is a very different starting point to collaborate than the value chain oriented players focused on creating efficiencies through outsourcing and off shoring non-core activities.
Ecosystem strategies require corporations to change the operating model
In this blog, I shared a number of observations that I believe are fundamental to the success of the Silicon Valley ecosystem. Much effort has been put into establishing similar ecosystems elsewhere. Mostly, these attempts were focused on stimulating venture capital and entrepreneurship through incubators and entrepreneurship programs. However, with the emerging seed- and crowd funding and platforms – such as Angellist, Indiegogo, Y-combinator and 500 start-ups – seed capital is widely available. Furthermore, the lean start-up methodology advocated by Eric Ries provides a blue print for start-ups to develop an idea into a product, solution or company based on the same end-user orientation as common in Silicon Valley. The lean start-up approach can be applied anyplace and anywhere – not only by start-ups. The missing link in the development of venturing ecosystems is that leading aspirational ecosystem players need to change their operating model too.
Once leading ecosystem players accept employee mobility to be a driver for change, adopt a platform approach and start embedding third party interfaces into their business model, we will start to see flourishing Bay Area alike ecosystems. Further, a strong purpose and a ‘living the brand’ approach will create an environment where full empowerment becomes the norm, replacing top-down management and controls.
As a result, the Silicon Valley operating model enables low barrier collaboration between the leading players and emerging start-ups. Aspirational ecosystem players that adopt this model will increasingly see more growth opportunities through collaboration, investments or acquisitions. A side effect is that entrepreneurs will become less concerned about failure as they now have a fall back scenario to give their start-up learnings a second chance.
Corporate venturing: developing the edge and changing the core
Developing the edge of your business is the most heard goal of corporate venturing. To cope with the need for innovation and new business opportunities, corporate venturing and partnership creation are high priority areas at corporations. Corporate venturing drives connectedness between the corporation and the ecosystem. However, successful ecosystem strategies require the core-operating model of your company to adapt to the three building blocks as described in this blog. Only then corporate venturing will enable the development of new business on the edges of the core activities of today. In other words, aspirational ecosystem players should not only use corporate venturing to develop the edges of the business, it demands the core business to adapt to the needs of an ecosystem as well.