It’s a great time… Critical StrengthsProof of SuccessBoom, Bust and Beyond
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Innovation |
Silicon Valley
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There is no better place to start or grow a technology-based business than Silicon Valley. Our many decades of experience have taught us how to create a “habitat” for innovation – a unique setting where entrepreneurs find easy access to scientific research, rapid prototyping services, intellectual property attorneys, workforce training programs, venture funding, and local governments that understand the relationship between time and money. Since the year 2000, despite the dot com bust, over 23,000 net new firms have been created in Silicon Valley.
Three factors explain a lot about why companies tend to succeed in Silicon Valley: industry clusters, personal networks, and an exceptional workforce. Industry clusters are geographic concentrations of companies that share technologies, workers, and markets. When competing companies locate in the same region their access to specialized resources and a mobile workforce gives them special advantages as they compete in global markets.
Personal networks are a second competitive advantage. In Silicon Valley work networks interconnect with school networks, social networks, church networks and soccer networks. Deals are made in coffee shops, on the playing field, over the Internet, and at the numerous technical talks sponsored by Stanford, MIT, Harvard, Cal Tech, UC Berkeley, Carnegie Mellon and all of the technical societies. Our large population of foreign-born workers extends our networks to Asia, India, Europe and the Middle East.
Silicon Valley’s workforce is well educated, highly productive, and very creative. As manufacturing has moved out of the Valley the workforce has shifted to occupations involved with the design and engineering of products and processing. As employment decreased in the early 2000's wage rates in our cluster industries increased.
Silicon Valley’s “habitat of innovation” helps workers be 2.5 times more productive than the national average. It helps us generate 10% of all patents issued in the United States each year. And it helps us attract almost 35% of all venture financing invested in the U.S.
It’s a great time to be in Silicon Valley.
Critical Strengths: Industry Clusters, Networks, and Creativity
Silicon Valley has seven industry clusters:
- Software
- Semiconductors and Semiconductor Equipment
- Computer and Communications Hardware
- Innovation Services
- Biomedical
- Electronic Components
- Creative Services
Five of the seven clusters are significantly more concentrated in Silicon Valley than in other regions in the nation.
Employment concentration compares the percentage of employment in a regional cluster to the percentage of employment in its national counterpart. An employment concentration greater than one signifies that industry cluster employment is over-represented in the region, suggesting it is a “traded industry” – reliant upon markets outside of the local economy to sustain its competitive advantage. “Traded industries account in the U.S., on average, for about a third of regional employment, but record significantly higher wages, productivity levels, and innovation rates than the average of the economy.” (Ketels, 2003).
A 1998 Brookings Institution study of 13 U.S. “high tech”
centers around the country, including Austin, Boston, Raleigh-Durham and Washington D.C., found that Silicon Valley
“seems to have an unusually broad range of technological competencies”… while…
“the bulk of high technology employment in most areas is in firms that specialize in just a few
technologies.” Cortright and Maier (1998), High Tech Specialization: A Comparison of High Technology Centers.
Brookings Institution.
The Valley also has the largest concentration of Nano-Bio-Info convergence activity of any other U.S. region (Small Times magazine).
The Big Advantage: A Network of Innovation
Silicon Valley is a special habitat for innovation and entrepreneurship. It consists of dense, flexible networks and relationships among entrepreneurs, venture capitalists, university researchers, lawyers, consultants, highly skilled employees, and others who know how to translate ideas into new commercial products and services fast enough to stay on the leading edge of the innovation curve.
The density of industry activity creates a “network effect”.
“What matters in this network system are relationships.
The rich social, technical and productive relationships in the region foster entrepreneurship, experimentation
and collective learning. As a result the region’s social, technical and productive infrastructure is as
critical to the success of local firms as their own individual activities.” Annalee Saxanien
Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Harvard University Press, 1994
The scale of Silicon Valley’s network creates ample opportunity
for the exchange and convergence of ideas across industry sectors.
Large numbers of talented workers make up the region’s workforce
| Silicon Valley Industry Cluster | Employment | Share of total employment |
|---|---|---|
| Software | 93,650 | 8.2% |
| Semiconductors and semiconductor equipment | 59,240 | 5.2% |
| Computer and communications hardware | 54,490 | 4.8% |
| Innovation services | 48,340 | 4.2% |
| Biomedical | 33,660 | 2.9% |
| Electronic components | 23,410 | 2.0% |
| Creative services | 10,700 | 1.0% |
| Cluster Employment | 344,630 | 28.2% |
| All regional employment | 1,146,430 | 100% |
Source: California Employment Development Department
Creative people are key to our current and future comparative advantage in the global economy
Economic researchers have found a strong correlation between where creative people like to live and the economic success of communities. (See The Rise of the Creative Class by Richard Florida.) Silicon Valley has a long history of welcoming people with new ideas. People regarded as “geeks” in other communities are seen as heroes who can repair balky home computers and design life-saving medical devices.
“It is no surprise that most of the interesting consumer electronics products– iPod, TiVo, Treo-are coming out of Silicon Valley. It has to do with being close to leading edge technology.” David. B. Yoffie, Harvard Business School, Wall Street Journal, March 10, 2005
Proof of Success - Productivity, Patents, Venture Financing, Firm Creation
Silicon Valley is More Productive
Silicon Valley has the highest productivity of any region in the United States thanks to the concentration of industry clusters and innovation-related occupations. This means bottom line benefits to firms that operate in the region. Access to this innovation habitat helps entrepreneurs turn ideas into products and get to market quickly.Silicon Valley delivers more value and at a faster rate than anyplace else
Value-added per employee, a measure of productivity, is two and one half times higher in
Silicon Valley than it is nationally. In 2004, value-added per employee averaged $224,200
compared to $85,800 nationally.
Regional value-added per employee grew 5.6% annually in Silicon Valley during the past ten years.
This far outstrips national value added which grew about 2% annually during the same period.
Clusters drive value in Silicon Valley. In 2004, the seven major clusters employed 28% of all
workers but accounted for 48% of all the dollars spent on payroll. The high wages in the clusters
reflect, in part, the wealth-generating impact of outward-oriented industries (industries that
sell products and services to customers outside the region). High pay also reflects demand for
skilled workers in these industries.
Silicon Valley specializes in creating and applying new knowledge
Patents are one indicator of a region’s capacity to innovate. The ability to generate and protect new ideas, products and processes is an important source of Silicon Valley’s regional comparative advantage. The number of patents issued in a year is a leading indicator for the number of new products that will reach the market in five to ten years.
Silicon Valley is home to many law firms that specialize in intellectual property protection, ranging from patents, to copyrights, trade secrets, and digital rights management. With strong legal advice a new firm can be confident that its product does not violate any existing patents and that the firm’s intellectual property has been safeguarded.
In the last ten years, the number of patents per capita
awarded to Silicon Valley-based inventors has more than tripled, from 103 patents per 100,000 residents
in 1993 to more than 371 in 2003.
In 2003, the U.S. Patent and Trademark Office awarded
Silicon Valley inventors 8,809 patents.
Silicon Valley’s share of U.S. patents
grew from 4% in 1993 to 10% in 2003.
Access to Venture Capital in Silicon Valley has never been better.
Silicon Valley’s venture capitalists are former entrepreneurs themselves. They have personally experienced the challenges of starting at least one company. They have developed a network of people with exceptional managerial, technical, financial, and operations talent. When a new company needs help, they know where to get it. They become active members of boards of directors and participate in sales calls to add credibility to the presentation.
Silicon Valley firms continue to capture a rising share of all U.S. venture capital. Between 1995 and 2004 the Valley’s share of venture capital rose from 13.8% to 34.7%.
Net new firm creation is on the rise
The Silicon Valley region generated about 23,000 net new firms between 2000 and 2002.
On average, these firms employed about seven people.
Forty-six percent of all firms in Silicon Valley were started in the five years spanning
1998 to 2002. Those firms contain about 30% of the region’s jobs.
Boom, Bust and Beyond: Silicon Valley’s waves of innovation
Silicon Valley has retained its fundamental strength as a center of innovation despite boom and bust business cycles. Silicon Valley's history is characterized by waves of technology innovation. In fact, an economic downturn in the Valley sets the stage for substantial growth in innovation and new business formation.
“My sense is that there is more innovation going on right now than ever before” John Seely Brown, former Director of Xerox’s Palo Alto Research Center San Jose Mercury-News (March 8, 2005)
The Dot Com Boom and Bust. As exemplified by venture capital investment in the chart below, Silicon Valley experienced a boom period followed by a bust between 1998 and 2003. After growing exponentially, venture capital investment peaked in 2000 at $34.5 billion, then declined 80% to $6.7 billion in 2003. Employment followed a similar trend. Growth averaged 4.6% between 1994 and 2000, then Silicon Valley lost 16% of its jobs between 2001 and 2004. The bust was inevitable as entrepreneurs and investors swarmed to take advantage of new Internet opportunities, proliferating new companies and driving down profit potential. This phenomenon, known as a “hype curve,” often accompanies the introduction of a fundamentally new technology.
This is not the first time Silicon Valley has experienced a boom/bust cycle. The Valley experienced significant job growth, followed by job losses, in the 1970’s, 1980’s, and early 1990’s. Each time a new industry cluster emerged. Economic adversity helped stimulate the Silicon Valley habitat to major innovations, including the commercialization of the integrated circuit (1970’s), the development of the microprocessor and personal computer (1980’s), and the application of the Internet (1990’s).
It is during the down cycles that Silicon Valley has proved itself to be a true center of innovation and entrepreneurship. During the 1970 defense recession, Valley firms shifted to commercial applications of military technologies. In particular, the integrated circuit made the transition from defense to commercial use. During the 1985 semiconductor recession, semiconductor firms shifted from commodity chips to microprocessors. During the 1990 defense and aerospace recession, Valley entrepreneurs turned the defense-sponsored ARPANET into a platform for thousands of network-based applications.
Booms and busts are inevitable in high-tech regions. As Paul Saffo, a technology forecaster at the Institute for the Future in Menlo Park, explains, “Failure is an essential part of our ecosystem. It’s like a forest fire burning space for new growth.”
With each forest fire we lose some businesses, but a new industry takes root and matures in Silicon Valley creating permanent jobs and helping to diversify the economy. The search for the “next big thing” will never stop.