On Generational Shifts and Urban Cores

I read three interesting articles this weekend around new tech communities.

The first one was a very well written article in The New York Times Magazine by Yiren Lu, a Silicon Valley-raised, East Coast (Harvard and Columbia) educated Computer Scientist, titled “Silicon Valley’s Youth Problem,” in which she tackles the differences between “older” generation engineers and the current crop of “restless” engineers and computer scientists who want to change the world and build the next great technology company. The two don’t seem to mix.

She attributes this fact to cultural aspects of older generation companies (Cisco, HP) vs. newer ones (Dropbox, AirBnB): an older engineer would probably not fit well in a Gen-Y-founded company mostly because of lifestyle reasons and partially because some have failed to keep their programming skills up to date (her arguments are more refined than my exposition and I recommend you read the article). I partially agree with her logic, but I think it boils down to the “cool” factor (which she also mentions): some companies have been able to stay cool and are attractive for both generations of engineers (i.e. Apple, Google) and some have lost it and are trying to regain the cool factor (Cisco, Microsoft), and are not very attractive to the younger generation, at least right now.

But she also talks about another point, which I fully agree with: starting new companies today is dramatically different from 15-20 years ago, and skills that were needed then are not needed now. When I used to invest in Silicon Valley companies in the 1990s (typically early growth companies, “Series B” rounds and beyond) I would visit an outfit in the midst of Silicon Valley, with 30+ employees in a relatively large office space that could host a computer/data room with the technicians and admins to maintain that and other facilities like the internal data network and infrastructure; a hardware prototyping lab (if the company was involved in hardware); a large programming team with experts in many aspects of system software development, because you had to build everything from scratch; a storage and “manufacturing” room (for software companies as well) where you would package your CD-ROMs, insert your manuals, shrink-wrap the box, ship (many of these companies required a loading dock). In addition, if the company was involved in developing sophisticated hardware products you had to pick your locations well. Did you have to be close to a prototyping lab or a fab? Did you have your own factory?

Today, this way of doing business has largely disappeared. It has been a while, of course, that we have moved away from the need to write software onto CD-ROM, package it and ship it: the Internet has optimized that process and now we download software every time there is an update, which is incredibly more efficient compared to the past. We don’t need the large computer rooms, the internal network infrastructure and personnel to go with it, because you are likely to use outsourced services like Amazon Web Services (AWS) as your server cluster, and all you need to think about is making sure that your office is well served by broadband service providers and wifi. By the same token, you don’t need large development teams anymore: you just need the domain experts that are important to what you are building. The rest (the database administrators, the developers of all the standard functionality in your system) are gone: AWS gives you a set of services for your use, open-source software is available for free, and there are enough APIs (Application Programming Interfaces) out there that you can connect to, in order to “mash in” the functionality required, from login scripts to credit card protocols, to integration of “nice to have” functionality like search, maps, weather etc.

Even if you are in the hardware business you can get so much more done and get to the prototype level much faster than in the past: off the shelf motherboards (Arduino, Rasperry Pi), a variety of inexpensive sensors, 3D printing, prototyping labs that you can access inexpensively (TechShop). You can do all of this inexpensively while creating final designs that conform easily to volume manufacturing facilities elsewhere in the world. Standardization creates important economies in hardware and software.

The bottom line is that in order to start a company today you don’t need the large office space and large development teams anymore: a small team with laptops in a shared space can accomplish all of this. You have to develop your core technology and mash in, plug in, borrow and rent the rest. It takes less than 5% of the investment that was required in the 1990s to develop a comparable software product. And to loop back to Lu’s article, if you are starting a company with a bunch of Gen-Ys and no one else, it is likely that the culture of the company will be very much modeled around that generation. Hence the difficulty to insert older generation engineers until the company is more mature.

All of this brings me, in somewhat lengthy fashion, to the other subject of this post: the new urbanization. In fact, the technology shift is also having an effect on where people are starting companies. If I don’t need to look for large office space and resources, which would typically be in large suburban office parks, I might as well focus on working in a location that I enjoy. Young people like to live in cities, where they can find social life and culture, as we discussed in our book, Tech and the City. Hence there is no reason not to live in cities: all I need is a desk, laptops and my team.

Fred Wilson touches on that in his blog post of today: Revitalizing Urban Cores, a must read like most of Fred’s posts. In it he makes the point, which I fully agree with, that to build new ecosystems you need to start with “lifestyle,” not tax incentives or government driven programs. Ecosystems start with entrepreneurs, as Brad Feld often states, and then the rest follows. You can accelerate the development of an ecosystem by offering incentives, but you still have to build a place young entrepreneurs are willing to move to and settle. Fred also discusses the development of the Downtown Project in Las Vegas by Tony Hsieh, founder of Zappo.

The third article I recommend is about Silicon Beach, the area around Santa Monica and Venice Beach where most of the LA tech community seems to have moved to. Titled “Network? Let’s party! Santa Monica as the new Silicon Valley,” it appears, perhaps aptly, in the Fashion and Style insert of today’s New York Times. And it is indeed a stylish article that mostly discusses the social life of LA’s entrepreneurs, not giving enough credit, in my opinion, to the technical chops of the community. LA too is growing as a tech hub and they deserve to be recognized. The article is nevertheless a good read about the culture of this community as compared to Silicon Valley or Silicon Alley.

The decrease in the cost of starting a company has another important effect: how companies are being funded. Seed/angel investments (and eventually crowd-funding) are replacing the early stage VCs: not much capital is needed to get to major milestones, and you can get there with seed funding. There is still a difference between building a product and building a company, and in today’s competitive environment you still need to spend a lot of money on marketing and sales, so large capital is still needed. It’s just that it is needed a little later and it is spent differently than in the past.

The entrepreneurial and VC landscape is changing and I think we can expect change to continue for the next few years. Which will give us a lot more to discuss.



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