Silicon Valley: Risk is the Reward

“The biggest risk is not taking any risk… In a world that is changing quickly, the only strategy that is guaranteed to fail is not taking risks. -Mark Zuckerberg, Facebook founder

Silicon Valley is a physically beautiful place surrounded by mountains, forests, and the ocean. It’s also a hub for Open Innovation and risk-taking driven by ambitious individuals and startup companies.

Today, some of the hottest business models under the microscope in the Valley are multi-sided platforms (MSPs) which include crowdfunding, crowdsourcing, and Open Innovation startups. The success of MSPs like AirBNB, Uber, eBay, and oDesk has attracted a vast number of hybrid platforms all seeking to grow their respective communities with or despite one another. This surplus of platform-based entrepreneurship in the Valley has been called a ‘platform bubble‘ by academics.

In order to gain perspective on the state of the Valley, I flew out to Palo Alto for a week in early January 2014 for a networking trek. This trip included site visits, interviews, and open discussions with a dozen companies from various industries and of different sizes.

Open Innovation framework developed by Henry Chesbrough, UC Berkeley

Open Innovation framework developed by Henry Chesbrough, UC Berkeley

The goal was to understand specifically how Open Innovation or more generally open business models and mindsets may or may not be disrupting things in the Valley; this includes the use of crowdsourcing of which I’m particularly interested in. I hoped understand if crowdsourcing had still become critically useful for large companies – Thus far, I’d only seen a few examples where the “crowd” really helped a company to make strategic progress.

Once I arrived in Palo Alto I quickly realized that openness, of architectures, of data, and of mindsets, was more than just a trend but in fact a fundamental reality of Silicon Valley. It’s part of the culture here; the place is literally teeming with risk-taking entrepreneurs that are totally comfortable with sharing their ideas and discussing nerdy topics in public with complete strangers. The same is true of the companies they represent. Openness and defining your company’s boundaries, including the costs and benefits associated with those decisions, was a foundational part of nearly every experiment I came across during my time in the Valley. Be they firms focused on wearable devices, Internet of Things (IoT), Personal Cloud, or Augmented Reality, they all had a perspective on open data, open platforms, crowdsourcing, and Open Innovation in general. Some are very open and pride themselves on sharing.

In terms of risk tolerance, I also found it common for Silicon Valley companies, even large established corporations, to act riskier than expected by running multiple innovation experiments at any given time. For example, AT&T’s Foundry office in Palo Alto, which I visited, can run dozens of product and network driven experiments simultaneously by tapping into their “crowd” of collaborators spread around the Valley. Their feedback loop on flaws and new ideas is incredibly short, where they can develop a new functionality, test it rapidly, then improve upon it all within days where it normally takes months or years. What seemed incredibly risky to me at first (running simultaneous experiments) was actually quite commonplace in hindsight. Realizing this reality, that “risk” in the Valley means something quite different than everywhere else on the planet, helped me to begin to understand how Palo Alto itself breeds a culture of risk-taking.  

These insights led me to ponder deeper, maybe unanswerable questions such as WHY is Silicon Valley is so accepting of risk? Moreover, can the experimentation culture of the Valley be replicated in other places?

Silicon Valley

Map overview of startups and established firms in the Valley

One answer became totally clear early on: NO, the Valley culture cannot be readily replicated elsewhere. Steve Blank, serial entrepreneur, points to the Valley’s military-based history as a crucial reason why innovation capabilities and an experimental culture are so strong here.

In the 1950 and 60s, driven by national security concerns, the US government invested extensively in research facilities in the Palo Alto area. Their goal was to aggressively facilitate R&D for the military in order to stay ahead of competing nations, which meant a culture tolerant of risk-taking experimentation. This brought an influx of talented and motivated scientists and technologists to the Valley who, once peacetime came around again, went to work for startups and corporations in the area. The community that grew around these folks became quite unique and collaborative over time.

Co-location played an important role. Employees from firm A would interact with employees from firm B employees at night in the surrounding town. Bars and restaurants became landscapes for pitching ideas and hashing out go-to-market strategies among social groups. The result was cross-pollination and acceleration of ideas throughout the Valley and a sharing culture that relys on networking to get ahead.

Today, the density and collaboration between technology firms in Palo Alto feels similar to the clustering of advertising agencies on Madison Avenue or Italian automakers in the Motor Valley. Considering the cultural and industrial history of the Valley and the strong cross-side network effects in play, little can be done to recreate this place elsewhere.

Another cultural factor I realized that makes Silicon Valley unique is the R&D mindset – failure is a badge of honor. The social and emotional costs of losing your shirt are substantially lower for Valley entrepreneurs as compared to other founders in different cities. Certainly success is helpful, but in many cases you’re taken more seriously out here once you’ve tried and failed at something. As Ambika Gadre of Bracket Computing, a cloud services provider, explains, being resilient and a mental athlete of sorts is a key attribute for success in the Valley.

Given the R&D focus and failure tolerance here, the area is overflowing with half-cracked ideas developed by highly capable people totally willing to put their reputations on the line, which is quite an exciting and frightening combination. Spencer Tall of the VC firm Allegis Capital describes “betting on the jockey, not the horse” as a key factor when making choices as to which startups to back and which to avoid. Such risk-based incentives in turn attract large corporations from around the world who are looking to ‘spice things up’ by learning from the boots on the ground.

As more talented coders continue to flood into the region, more firms will continue to set up shop here – it’s a virtuous cycle. Even the most conservative firms can establish satellite offices the Valley to attract new talent, tap into the entrepreneurial energy, and escape their status-quo governance hierarchies to accelerate the pace of innovation. Microsoft and their Studio 415, staffed with ex-entrepreneurs, is a clear example of this strategy.

Certainly, success in Silicon Valley is contingent on having the right attitude. But what does that really mean?

IPOs from Silicon Valley

IPOs from Silicon Valley

Regis McKenna, a well known marketer, describes the modern-day Valley as a “state of mind” where honing ideas, forging connections, and balancing arrogance with confidence help the market to choose the winners and losers. What you know is seemingly less important than who you know, and how you leverage those things impact your chances for blockbuster success in the Valley. The cocky Valley culture is so pervasive as to be highlighted regularly by national news agencies (see herehere, and here).

Despite the criticisms, a strong FOMO (fear of missing out) effect is at play in Palo Alto .

Venture Capital Investment in Silicon Valley

Venture Capital Investment in Silicon Valley

Many companies believe they MUST have an outpost in the Valley lest be outdone by competitors, especially related to new technology product development.

Investment data reinforces the importance of the Valley. The region is a hub for Venture Capital funding, $6 billion in 2012 (and growing), as well as a high number of Initial Public Offerings (IPOs). 25% of all American IPOs in 2012 came from California, 13% from Silicon Valley alone. Fear of missing out should be expected with such a high concentration of investment activity in one area. But being out here is only half the battle.

There are certain best practices I saw shared among the most successful firms in the Valley. While the following list isn’t collectively exhaustive or mutually exclusive, I’m certain these guidelines would be helpful for any firm considering becoming more open and collaborative. I’ve found that:

Firms Should:

  • Be physically near customers and partners – co-location matters in the Valley and elsewhere. If you can position near those you do business with, you can speed up the process
  • Talk to end-customers during the experimentation process to validate your ideas early on before spending a fortune on development for useless features (Lean Startup methodology is a good example)
  • Send connected entrepreneurs to run your Palo Alto office. Who you know is much more important than what you know in the Valley
  • Prepare to fail often – in fact, design for it. Incentivize experimentation as opposed to hoping for predictable outcomes. This should be your goal for being in the Valley
  • Prepare to collaborate, even with competitors. Design incentives for cross-pollination inter-firm since innovation can be sped up that way. ‘Going open’ must be designed for!
  • People will ask to visit your Silicon valley office – let them! Show them what you’re working on. Closed is not the way to get ahead in the Valley, and new ideas can come from anywhere.
  • Capture learnings from your outpost – don’t just send folks and ideas over the fence and expect meaningful results. Make sure your initiatives align with the rest of your firm as part of an overall organizational push for systematic innovation and experimentation. Otherwise, if you fail to listen, you’ll likely see your people leaving to re-join the startup world

Firms Shouldn’t:

  • Lock the doors – being too closed is a classic failure of established firms new to the Valley
  • Send internal people to lead the Palo Alto office – they’re brainwashed into the existing ways of your firm. If you want to innovate, hire innovators.
  • Expect instant success – the goal is to be there and experiment, not to solve a single problem and then leave.
  • Overstate expectations – it’s not a ‘doing’ mission, it’s a ‘learning’ mission. Come to Palo Alto to learn about yourself, the market, and your customers and not to execute new business plans. If it happens, all the better

The valley is a safe place to take risks and that’s exactly startups should and will continue to do. Be forewarned, however, that there are always losers and failure may be the only thing you have to show for your efforts. Everyone else has the same idea as you. Showing up is only the first step.

Chris Kluesener, Open Innovation Central

2 comments

  1. UW Professor Jan Heide concurs that Silicon Valley is one of the best locations for innovative businesses! His research here: http://bus.wisc.edu/knowledge-expertise/faculty-research/forward-thinking-blog/2015/02/05/want-an-innovative%20business-location-matters

  2. Thank you for the comment and link! Please excuse the delayed response. Couldn’t agree with this quote: “densely connected clusters (of tech firms) support the development and commercialization of truly novel products.” -Professor Heide

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