Why Silicon Valley is no longer the global model

Clusters of innovation.
Clusters of innovation.
Image: Reuters/Robert Galbraith
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As coronavirus pushes the world toward a global recession and governments contend with a pandemic that is battering economies and livelihoods with no end in sight, one Silicon Valley voice thinks it’s time to change how we think about businesses and innovation.

“The world of innovation needs a refresh,” says Alex Lazarow, a Bay Area-based venture capitalist, academic, and author. That refresh is already “well underway” at what he terms “the frontier”—centers outside Silicon Valley and its counterparts, located largely in emerging markets, that operate with far fewer resources and networks. The entrepreneurs in these places are out-innovating their Silicon Valley counterparts, argues Lazarow in his new book Out-Innovate: How Global Entrepreneurs—from Delhi to Detroit—Are Rewriting the Rules of Silicon Valley.

In this time of coronavirus-fueled uncertainty, startups should strive not to be like Silicon Valley unicorns, but rather like “camels” of the frontier: ventures that capitalize on opportunity, but also focus on sustainability and long-term growth, i.e. surviving droughts and pandemics from the get-go.

Silicon Valley startups, Lazarow says, succeed in a very particular context of an abundance of human capital and resources. Meanwhile, for ventures in emerging markets, the context is entirely different.

An illuminating example: Brazil, one of the larger startup ecosystems in emerging markets, received $575 million in venture investment capital in 2017.  That’s compared to $8.5 billion in Silicon Valley, notes Lazarow.

Despite this disparity, the potential in emerging markets is staggering. In 2018, a Brazilian fintech firm called PagSeguro was the New York Stock Exchange’s biggest IPO since Snapchat’s IPO in 2016, raising almost $2.3 billion. And last year, SoftBank launched a $5 billion SoftBank Innovation Fund—what it described as “the largest-ever technology fund focused exclusively on the fast-growing Latin American market.”

While global capital dynamics shift away from Silicon Valley, “just imagine what will happen as funding becomes more democratized and accessible” to the rest of the world, notes Lazarow.

What went wrong with Silicon Valley?

In 2017, the world largely turned against Silicon Valley. Attention focused on the area’s cost of living, ethical issues at startups like Uber, the impact on neighbourhoods of platforms like Airbnb, discrimination, sexism, and harassment, and growing frustration with social media platforms and their controversial roles in the 2016 US elections, among other problems.

In addition, recent innovation there has been incremental rather than world-changing, Lazarow argues. He writes that Silicon Valley is accused of “catering to ‘tech bros’ who are building products and services to match their own lifestyles, often providing basic services they are unaccustomed or unequipped to provide for themselves. On-demand laundry, food, or home cleaning, anyone?”

Lazarow likens Silicon Valley’s unicorn-hunting strategy to mortgaging your home to buy three new homes: If things go well and the market moves in the right direction, the rewards are massive. (Case in point: Facebook.)

But this approach also increases the risk of losing everything.

The burn rate at startups in Silicon Valley is the highest it has been since 1999. And more people are working for money-losing companies now than in the past 15 years, according to his data.

Attitudes are changing now. As best practices go global, innovation leadership is also becoming increasingly distributed.

“For Silicon Valley to keep its place, it needs to evolve, learn, and revisit a lot of its deeply held beliefs to be able to stay relevant,” he told Quartz.

Perks of the frontier

Numbers Lazarow cites suggest that the incidence of entrepreneurship in emerging ecosystems is double that of the developed world. According to a report by the Global Entrepreneurship Network, as of 2019, there were almost 50 regions contributing at least $4 billion each in ecosystem value, whereas two decades ago, only four regions had that much value.

Startup ecosystems are springing up all over the world—from Detroit to Bengaluru to Puerto Rico to Nairobi—to support the roughly 1.3 million tech startups globally, says Lazarow.

The numbers he presents are compelling: There are 480 startup hubs worldwide. About 10% of all unicorns are located outside Silicon Valley, and outside major locations in Europe and Asia. And global entrepreneurs are quickly eclipsing their Silicon Valley counterparts. Lazarow writes: “Uber has 75 million users worldwide, and China’s DiDi has 550 million users, but emerging market leaders like Grab, Gojek, 99, and Cabify are not far behind across Latin America and Southeast Asia, with 36, 25, 14, and 13 million users, respectively. Similarly, PayPal, founded in 1998, has 267 million users, while Paytm, founded over ten years later in India, boasts 300 million users.”

Drawing on examples from Africa’s M-Pesa to Romania’s Ui-Path to India’s Bharat Matrimony, Lazarow thinks that the best entrepreneurs around the world have more in common with the best entrepreneurs in São Paulo than they do with Silicon Valley. “And yet, no one is telling their stories,” he says.

Also, he argues, frontier innovators bring greater ethnic, cultural, and occasionally gender diversity to the world of tech innovation.

In US venture capital, 90% of decision-makers (primarily partner-level) are male. Fewer than 20% of tech startups have even one female founder, he writes.

But there are fascinating trends in the founder landscape of the Middle East, he adds. As MIT Technology Review reports, more than 25% of Middle Eastern startups are founded or led by women. This is due to a variety of factors, including the lack of a male-dominated legacy in a particular field and fewer career paths being open to women. And because the unemployment rate is often high, tech startups, sometimes run from one’s own homes, are an attractive opportunity for women.

Still, he argues, imaginations about startups are stagnant, centered in a specific time and place and a particular type of company: the Silicon Valley software business, his experience shows.

“Now, more than ever, the Valley has an opportunity to learn from what it takes to scale outside the Valley,” he said.

Be a camel, not a unicorn

At the crux of it, there are three key differences between Silicon Valley and frontier models, according to Lazarow.

First, the conventional wisdom is obsessed with disruption as opposed to creation. At the frontier, innovators build entirely new sectors. The obsession with asset-light, highly focused startups isn’t practical when the inherent infrastructure doesn’t exist—which is why frontier innovators often need to build the “full-stack,” he says, including enabling infrastructure.

Second, where Silicon Valley strives to breed unicorns, the frontier raises camels. “In the Valley, a unicorn is not just a numerical value of a billion-dollar business, it’s also a philosophy,” he told Quartz. But “around the world, the best entrepreneurs are taking the opposite approach. They’re saying, ‘I want to have sustainable economics from the get-go, manage costs, and still scale, but scale responsibly. From a risk-adjusted outcomes perspective, you get there more successfully, more often.”

Third, frontier innovators build A-teams, rather than just hiring A-players. “With Silicon Valley’s rich talent pool, entrepreneurs have the luxury of recruiting A-players as needed, and high turnover is tolerated because employees can be easily replaced.” Instead, frontier innovators have a growth mindset toward their teams. They interweave profit and impact-based goals into the core fabric of their business models.

Startups, he argues, should stop trying to be like unicorns, and be like camels instead.

The new order

Coronavirus has underpinned this shift, while also presenting new challenges and opportunities.

Four out of every 10 startups will die in the next three months if they do not raise additional capital and their revenue and expenses remain unchanged, an April 2020 study by the Global Entrepreneurship Network suggested.

But over half of Fortune 500 companies started during a crisis, and over 50 unicorns were created in the Great Recession alone, data show.

Now, more than ever, the world is looking for a model on how to build a sustainable startup that makes an impact, and succeed in situations of constraint. That makes it more important to allow the acceleration toward certain trends, such as the push to digital.

You can now use technology to revolutionize the way you offer your product or service to solve unmet needs and create solutions to mass-market challenges. “That’s the big opportunity here,” Lazarow says.

“As we reflect on this crisis, what we’re learning is not new,” he adds. Soaring unemployment, inadequate healthcare systems, and economic inequality have long posed challenges. “What the crisis is doing is laying bare these problems. It’s a call-to-arms to solve them. And some of these big, hairy, intractable Covid-19 problems are also the biggest opportunities.”

His advice, then, to startups: Be a creator, not a disruptor. Think global, leveraging diverse experiences, with a distributed workforce. Think long-term. Find the opportunities that exist within big crises. And mostly, “Ask yourself, what do you care about? Focus on something that’s really meaningful to you. And if it works—it’ll change the world.”