Sustaining an Environment of Innovation

Sept. 27, 2017

BY TARA MATAMOROS CARTER & CHRISTIE LI

Summary

In 2014, our founder, Antonio Altamirano, wrote a perspective blog about Ecuador's attempt to recreate Silicon Valley. In the past three years, his predictions came to fruition. Reportedly, Ecuador's 'Silicon Valley of Latin America' faces a reality check from economic and political pressures. In this blog post, we revisit past conversations and identify key characteristics that sustain innovation in Silicon Valley. In addition, we discuss how emerging markets can learn from Ecuador's attempt to clone Silicon Valley and how to avoid or at least reduce the impact of those mistakes.

Understanding Silicon Valley’s Innovation History

Silicon Valley was built upon a Gold Rush mentality and software innovation is the new gold. Everyone from all over the world wants a piece of it, as we can see with the radical increase of coding bootcamps, accelerators and VC firms. In an analysis performed by the Brooking Institute and Pitchbook, "in 2005, 34 percent of the venture capital funding directed towards firms in United States went to firms in the San Francisco and San Jose (Silicon Valley) metropolitan areas. By 2014, that figure jumped to 44 percent. Given the population of San Francisco and Silicon Valley, the region currently has $4,433 per capita in venture capital, outstripping the nation (at $206 per capita) by a ratio of 21-to-1." Foreign investors and entrepreneurs can break into Silicon Valley by signing up for one of the many training courses on investment. It seems easy to make a quick fortune in only a few years by selling a startup or going IPO, but there is more to being financially successful than meets the eye.

Not able to develop software in Silicon Valley? No worries, there is an alternative. Those who can't physically join the gold rush, are opting to compete instead. Unlike the original California Gold rush in 1849, anyone has a chance to develop software nowadays –– the riches are not limited to your geographical location. This opportunity ignites people's imagination from all over the world. Engineers don't have to move to Silicon Valley to make a fortune anymore. Chile, Brazil, Argentina, Colombia, Canada, Germany and a long list of countries are actively trying to clone Silicon Valley. The same is happening in cities throughout the United States, such as Los Angeles, New York, Miami, Chicago and many others.

Permission to Innovate

Many past articles take a stance on creating and replicating Silicon Valley. You have Marc Andreessen's What It Will Take to Create the Next Great Silicon Valley (Plural), Paul Graham's essay about buying your way into Silicon Valley, as well as Vivek Wadhwa on How Silicon Valley Can't Be Replicated.

This topic continues to fascinate entrepreneurs and governments from around the world; however, it remains difficult for many regions to create a similar environment to Silicon Valley. Furthermore, initial attempts at replicating Silicon Valley have focused on surface issues rather than foundation infrastructural changes that need to happen in order to support innovation.

 To paraphrase Steve Jobs, what matters is not how it looks ––which unfortunately is the focus of first-gen efforts seen in Yachay, Ecuador. What matters is how it works.

Considering that innovation is a mindset, it's important to understand that building an environment that supports innovation extends beyond university learnings. Marc Andreesen, the co-founder of Netscape and Andreesen-Horowitz argues the value of Silicon Valley depends mostly in its culture and how it supports innovation.

"…the freedom to create new technologies without having to ask the powers that be for their blessing. Entrepreneurs can take advantage of the difference between opportunities in different regions, where innovation in a particular domain of interest may be restricted in one region, allowed and encouraged in another, or completely legal in still another. For example, the laws and guidelines for using drones or taxing bitcoin already vary widely across the globe, just as they do for ride-sharing services across different cities in the U.S."

Liberal regulations in the United States reduce the hurdles of starting a company. As a result, Silicon Valley is enabled to spread its influences across the world. Thus, making its way to Ecuador as well.

The Unraveling of Ecuador's Yachay, City of Knowledge. 

Just how did replicating Silicon Valley fair in Yachay, Ecuador? The plan certainly looked promising on the surface. "In 2013, Ecuador's former president, Rafael Correa, launched the institution [a university] in part of a bid to transform the nation's economy from one reliant on exports of oil and other commodities to one that generates its own innovations." This is Ecuador's attempt to leapfrog into the next economic frontier. The government began erecting a sprawling campus in Yachay, coined the "City of Knowledge." At its launch, Correa boldly predicted that Yachay Tech University would become Latin America's Silicon Valley.”

Fast forward four years to today, we can see that economic and political pressures unraveled Correa's dream of a technological frontier. In other words, Ecuador's plans to replicate Silicon Valley did not have a sound foundation to work well. Their struggling economy and plummet of oil prices in the ongoing years led to a shift in national priorities. As of June this year, an austerity plan was initiated, cutting $2 million in expenses for the university. Similarly, surrounding public companies capped employment opportunities for the students. Leading scientists who were previously hired were quickly let go and/or poached by neighboring universities.

The missing gem impeding Ecuador's success is a culture akin to Silicon Valley.

Innovation engine fire sparks from Silicon Valley are largely due to the area's culture and governmental support that allows innovation to flourish. In order for this great cloning experiment to work in any location, there needs to be a complete cultural shift and government reformation to incentivize, not punish, new businesses. The potential opportunity for Ecuador is reliant on deregulation and specialization of resources that are available within the country.

Lessons for Emerging Markets

How can other emerging countries actually make the Silicon Valley vision a reality? Start by systematically considering and creating the area's regulatory competitive advantage. Here are some points that can help make this happen:

Get the infrastructure right

Hector Rodriguez, the current General Manager of Yachay Tech University, understands that a new city should include a robust university with comfortable amenities such as stores, health clinics, schools, child care centers, transportation and other basic infrastructure that will attract and foster a vibrant community. Though the vision is seemingly extremely lofty, it is actually sound and comparable to other pie-in-the sky ideas set forth by folks like Peter Thiel and the Island Nation project he supports.

Culture trumps location

Yachay is located two hours from Quito, the capital of Ecuador. The best parallel is Palo Alto, CA which is located in between two major US cities: San Jose and San Francisco. This small city, Palo Alto, CA, became the capital of the world for startups. So shouldn't Yachay fair just as well? Not in the slightest. Yachay's disadvantage is twofold. First, its culture became homogeneous rather quickly given immigration limitations. And second, support for disruptive technologies and business plans was blatantly absent. If you have a mix of people with diverse backgrounds and experiences, as in Palo Alto, CA, it helps to build a creative culture. According to Vivek Wadhwa in an article titled "Why Silicon Valley Can't Be Copied" he explains the success of Silicon Valley and attributes it to culture malleability.

"The reasons were, at their root, cultural. It was Silicon Valley's high rates of job-hopping and company formation, its professional networks and easy information exchange, that lent the advantage. Valley firms understood that collaborating and competing at the same time led to success—an idea even reflected in California's unusual rule barring non-compete agreements. The ecosystem supported experimentation, risk-taking, and sharing the lessons of success and failure. In other words, Silicon Valley was an open system—a giant, real-world social network that existed long before Facebook."

Liberal regulation Sustains Culture

Here's a side by side comparison of what works in Silicon Valley when starting a company and the current policies in Ecuador that clearly do not support a culture of innovation.

Silicon Valley Policy and Culture Current Ecuadorian Policy and Culture
Starting a company takes a few minutes and it can be done online for a minimal fee. Starting a company can take many weeks to months, after following many complicated steps. Many fees and taxes are required and you have to prove a dollar value of the company before it has even been formed. You must have money in the bank to show you can support the company.
Hiring people is easy. There's no red tape or any type of strict regulation. If you pay your taxes, you are in good standing and the government will not interfere. There are many governmental protections for workers, making it difficult to have a trial period for employees and making it difficult to fire employees. Firing employees can be cost prohibitive for a small company. Long-term contractors are prohibited and must become employees of the company.
Investors and companies understand that traction trumps profits in the short term. Highly valued companies such as Google, Facebook, Pinterest, Twitter reported losses and took many years to figure out how they would be profitable. (Some companies are still figuring it out.) Companies that report losses for more than 5 years are shut down by the government.
Business processes such as hiring, paying taxes, accounting and banking is highly efficient and can be automated to a large extent. Many transactions must happen in person instead of online. The entrepreneur is often concerned about obscure regulations that can shut down the business from one day to the next.
Credit is easily accessible Interest rates are high and it can be extremely difficult to obtain loans. There are even many obstacles in simply opening up a savings account.
Equipment is readily available and fixable and anyone can get computers and software quickly and efficiently. For example, if I am starting a software company I don't have to worry about my laptop failing and having to wait months to get a new one or having to pay a government-driven protectionist tax on foreign goods. If computer equipment fails, people often must wait months to get replacements, before which they must pay high tariffs, or government-driven protectionist taxes on foreign goods. The latest technology is not readily available.
Unless you are completely careless, the government will not shut down your business. The IRS wants the income from your business and does not want to shut you down. In South America, government officials are keen on “catching” noncompliant businesses and then shutting them down.
The entrepreneurial culture of the Valley gives entrepreneurs a ready-to-go support network where people help each other while at the same time competing against each other. Entrepreneurism is lonely and isolating and there is no vibrant community of support. Corruption rules the culture.

Unfortunate for Ecuador, although the the plan to replicate Silicon Valley looked like a potential win for the country, it did not work well due to both a missing culture of innovation and an unsupportive government.

To answer my question from earlier, How can other emerging markets, such as Chile, Brazil, Argentina, Colombia, Canada, and Germany, and cities across the United States actually make the Silicon Valley vision a reality? The formula may be slightly different in each environment, but one key ingredient rings true in all cases: cultivating a culture of innovation.

BY TARA MATAMOROS CARTER & CHRISTIE LI
SILICON VALLEY, SUSTAINABLE WORK ENVIRONMENT, INNOVATION