I’ve had the good fortune over the last few months to meet with the Scottish government, Lt. Governor Diane Dinesh of New Mexico, and U.S. Ambassador to Italy Honorable Ronald P. Spogli. The question they asked was all the same: “how can we bring the venture capital model, so successful in Silicon Valley, to our geography?”
My answer was “don’t”.
The fundamental reason for my advice was that Venture Capital in Silicon Valley has evolved over the last 35 years. It is now nothing at all like it was when it helped start the economic miracle of the bay area. It’s not what’s needed, at least in its current form.
Sure, VC gets an abnormally large amount of press and attention for it’s relatively few 3,000 individuals. But it’s the equivalent of the golf maxim “Drive for show, put for dough”. (I’m at least told this is a golf maxim. VCs spend an abnormally little amount of time driving electric carts through manicured lawns carrying lightning rods.)
VC gets the press for their long drives, and last year invested over $20B in start-up companies. But the small strokes, the putting for dough, is done by angels. Angels in the U.S. also invested over $20B last year. Big business, and not just the “friends, families, and fools” that they are represented to be. They are groups like the Band of Angels, Angels Forum, and Keiretsu Forum.
So my first advice to those asking me how to get venture capitalists to their geographies was “encourage angels”. As a VC, I say “no” to about 300 companies for every one that I invest in. As VCs have gotten larger, they aren’t able to get money to the earliest of opportunities. VCs today don’t invest in the same sized companies as when they were helping build silicon valley. Now, it’s angels that invest in those companies.
My second bit of advice was to focus on “friction”. Specifically, “negative friction” and “positive friction”.
I was amazed at the amount of negative friction present in these geographies. In Scotland, the minimum lease duration is 10 years and the deposits are substantial. To open a corporate bank account, the bank visited the CEO’s home, inspected his personal accounts and those of his wife. In Italy as in much of the EC, it is difficult to fire employees. This is anthema for a startup company with a need to quickly change direction as needed. This friction reduces the velocity of startup companies and the interest among talented would be entrepreneurs.
So to the policymakers with whom I spoke, I suggested reducing this friction. In Italy, for example, encouraging outsourced staffing companies which can lease workers or consultants to start-up companies could reduce hiring friction.
Encouraging positive friction is a bit harder. Positive friction in this context is generated by the rubbing together of people from two different cultures. Cultural change is necessary in these geographies: an increase in risk taking, a tolerance of failure. When I first moved to Silicon Valley, I recall eating at Amici’s Pizzeria. At the table to each side of me were young entrepreneurs starting companies over pepperoni and sausage pizza. It’s the entrepreneurial equivalent of every waiter being an actor in Hollywood.
If students want to learn English literature, they should go to Oxford. If a corporation wants to learn how to manufacture low defect cars, they visit Toyota in Japan. And if you want to replicate Silicon Valley in your geography, generate some positive friction: send entrepreneurs to silicon valley to learn.
It’s working for China. Chinese entrepreneurs are returning to China now. They are bringing skills learned in Silicon Valley and adapting them for the exciting possibilities in their home countries. And this leads to the final bit of advice. “Create poster children”.
In an environment with low negative friction, entrepreneurs have an opportunity to build businesses. One final push would help. Poster children are the examples of what can happen if someone risks, if someone works those long hours. Bill Gates has made the world safer for high school geeks. Baidu.com has convinced millions that billions can be made in China. Scotland, New Mexico, and Italy need similar success stories.
So, it’s “angels”, “friction”, and “poster children”. Obvious, isn’t it?
Sean Foote's Blog 