Magazine | July 9, 2018, Issue

Go Midwest, Young Techie

The Google logo is shown reflected on an adjacent office building in Irvine, Calif., August 7. (Mike Blake/Reuters)
Silicon Valley should disperse itself geographically

‘The spirit of the start-up phase! My God!” declared Tom Wolfe in Esquire. “Who could forget the exhilarations of the past few years! To be young and free out here on the silicon frontier!”

The 1960s were heady days for Silicon Valley, when the tinkerings of midwestern engineers birthed a digital revolution and the future was paved in stock options. Silicon Valley actually made incredible thinking machines with silicon, until Japan ate its lunch in the ’80s. But then! They delivered the personal computer. The Internet’s strange bleeps and bloops. And supercomputers fitted to the palms of our hands.

Every life has its cycle, and so it is with Silicon Valley. There is an unsettled feeling out west, now that they may be facing a gilded retirement. All the signs are there, if you are looking. A young engineer from anywhere in the world can still decamp to the Valley or (now) San Francisco and make six figures. But all the ping-pong tables and start-up theater can’t hide the growing battles with cities back east, or the fact that the social circles, while ethnically diverse, are an intellectual and ideological monoculture.

That is why Silicon Valley should break itself up, but not through antitrust provisions or with private-equity dollars. The financial backers and major corporations of Silicon Valley should move a sizeable share of their social and financial capital to other burgeoning technology hubs across America. (When I refer to the Valley, I mean the Bay Area as well as its high-tech community.) Already some of the tech sector’s leading lights are eyeing the exits. When they move, they will be hedging a bet against our mad politics and tapping into a wellspring of ideas in places where they can once again be “young and free.”

Many of the challenges facing the Valley, such as pricey housing, are familiar. But at some point in the past few years, these problems came home to roost. Nearly half of Bay Area residents are considering moving away, according to a new poll from the Bay Area Council. Or consider the case of Y Combinator, the Valley’s most venerable start-up incubator, whose poster children from 2012 — Airbnb, Dropbox, and Stripe — are the same ones they tout today, even after investing in twice as many start-ups in the past six years as they did in their first six. Rates of small-business formation are down since 1980, including rates for high-tech start-ups, and have fallen dramatically in the decade since the Great Recession.

Now the Valley is assuming a starring role as the bad guy. As Om Malik, a legendary tech journalist, predicted last year, Silicon Valley is becoming “an even bigger villain in the popular imagination, much like its East Coast counterpart, Wall Street.” It is not just the picture of Mark Zuckerberg, head bowed and repentance painted on his face before congressional inquisitors, that comes to mind. Google is bracing for another multi-billion-dollar fine from the European Union. Even start-ups, the vaunted little guys, operate under the shadow of their peers that, like Theranos and Zenefits, played fast and loose to make a venture-capital (VC) buck.

Silicon Valley as a concept is still very much tied to Silicon Valley as a place. Nearly every major technology financier lives within spitting distance of Sand Hill Road, the Main Street of venture capital. It is not a coincidence that the Bay Area soaks up nearly 45 percent of all venture-capital investment in America. Even as other start-up hubs have popped up around the country, California’s share of VC dollars has grown throughout the 1990s and 2000s. It is also not a coincidence that start-ups and large tech firms want to be near this cash that is so tightly bound up in social relationships and dependent on physical proximity. Of the “unicorn” start-ups (privately held start-ups valued at more than a billion dollars), more than 60 percent are in California — and nearly all of those set up shop in the Bay Area.

But the Valley’s biggest challenges are only just beginning. As its tech firms hit the road in autonomous vehicles, devise artificial-intelligence applications intended to improve modern medicine and health care, and begin to sway elections, they are coming face-to-face with the Valley’s nemesis and antithesis: Washington, D.C. If Silicon Valley is defined by its risk-takers, Washington is known for its risk mitigators. The contest between coders and lawyers is increasingly played by the rules set by lawmakers and regulators, and we can guess which side has the upper hand. This wasn’t always so. As Tyler Cowen recently pointed out, “to date, these two new cultural and intellectual centers have proceeded on largely separate tracks, each with its own strengths and weaknesses, ignoring each other as much as possible.” But that dynamic has shifted, to Washington’s benefit.

Silicon Valley’s response to Washington’s threat has been to set up shop in Washington, D.C. What were once small tech-lobbying outposts have morphed into enormous government-affairs offices. America’s five largest tech firms have outspent Wall Street in lobbying dollars by two-to-one over the past decade. But this spending could backfire. Tech firms have benefited for decades from a hands-off approach by Washington, reinforced by distance and legislators’ lack of knowledge. But as tech lobbyists have swarmed Capitol Hill, policymakers haven’t always liked what they have seen. Tech firms seem to be losing political capital as quickly as they gained it.

By investing so much in Washington, D.C., Silicon Valley risks doubling down on its main problem: working in a gilded bubble that is increasingly distinct from the rest of the world it claims to reach. Lived experience shapes the life and death of great ideas, yet coastal elites come from increasingly small circles of education, employment, and economic status. There is a limit to the number of tech-enabled services one can build on the same business model: providing to prosperous young knowledge workers what Mom once did for them, whether it is Rinse for laundry, Seamless for lunch, or Uber for a ride. If start-up formation is down, maybe it’s because Silicon Valley has simply run out of new ideas.

So why not move? By locating in emerging tech hubs outside Silicon Valley, leading venture capitalists could gain a measure of protection against changing politics. In an earlier era, the military and its industrial complex mitigated political risk by opening bases and plants in congressional districts across the country. Moving could also serve as a form of patriotic economic development if it meant investing in “comeback cities” of the Heartland such as Detroit, St. Louis, or Youngstown.

Breaking up Silicon Valley would put smart people in new places where they would be exposed to new ideas. Just ask Google, which claims that “having talented people from different places, bringing diverse perspectives and backgrounds to work, is essential to the development of our products.” This is easy to recognize in Silicon Valley’s own history. “Most of the major figures, like [Intel’s Robert] Noyce,” said Tom Wolfe, “had grown up and gone to college in small towns in the Middle West and the West.” Today as well, most of the high-skilled workers come from outside the Valley.

Moving out of the Valley may seem like a risky bet. Many deals are still struck face to face, after all. But innovators are nothing if not opportunistic, and there is opportunity aplenty outside Silicon Valley.

When Mark Kvamme took a leave of absence from Sequoia Capital — one of Silicon Valley’s leading venture-capital firms, where he was a top partner — for a six-month tour of the Midwest, he didn’t expect much to come of it. But then, he told Forbes, “I kind of fell in love with the place.” He was so enthused, in fact, that he poached a fellow VC at Sequoia, Chris Olsen, to join him in starting Drive Capital, a firm based in Columbus, Ohio, that is devoted to investing in midwestern companies. “The opportunity that I saw in Ohio and the rest of the Midwest . . . I really felt like there was something happening here.” Kvamme believes that “90 percent of the future technology-market capitalization will be created outside of Silicon Valley.”

Breaking up Silicon Valley would tap into the potential of technology hubs around the country. Venture capitalists and major technology firms can lead by investing financially and socially outside the Valley — putting in the money but also the time to show up, shake hands, and get to know people. There is no single path forward, but there are some clear steps they can take. VCs can learn from Mark Kvamme by spending time outside Northern California and getting to know investor networks in places such as Salt Lake City or Columbus or Raleigh. They should relocate an essential portion of their partnership and portfolio companies wherever they find opportunity.

Major tech firms should take a page from Amazon and also move significant headquarters functions outside Silicon Valley. Or learn from Google, which is still headquartered in the Valley but this year is opening new or expanded offices and data centers in 14 states. For many technology firms, back-office jobs are the first to be relocated to cheaper locales such as Bend, Ore. But these investments should be thought of as long-term strategic plays to align with the strengths of local communities (akin to automobiles in Detroit or agriculture in Omaha) and even to spawn new ventures.

Rise of the Rest, a $150 million midwestern start-up fund led by AOL co-founder Steve Case and his partner J. D. Vance, has already blazed a trail for other investors and companies to follow. In May, Case and Vance visited Birmingham, Chattanooga, Dallas, Louisville, and Memphis. Success in these places won’t happen overnight, and local officials shouldn’t pitch them simply as cheap Silicon Valley knockoffs. Rather, they are cities full of talent and opportunity grounded in unique assets, institutions, and histories, and they could develop over decades into tech hubs in their own right.

Breaking up Silicon Valley would take us once again to the silicon frontier, where anything is possible and the spirit of the start-up lives on.

Michael Hendrix is the director of state and local policy at the Manhattan Institute.

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