Dan Morrell: Hi, this is Dan Morrell, host of Skydeck.

It’s trendy to say that Silicon Valley is over—that this place and the philosophy that it became is past its apex, and all signs point to its impending collapse. That prophecy has become even more popular as the COVID-19 pandemic has made both the Valley’s products and its real estate prices seem ever more impractical.

But if those dire predictions come true, it might not be because of inflated valuations. It could be because Silicon Valley has lost its monopoly on its superpower: Innovation.

Alex Lazarow (MBA 2010)
Photo by
Lindsay Upson

Alex Lazarow (MBA 2010)
Photo by Lindsay Upson

In this episode of Skydeck, we’re kicking off a three-part series called “Out of the Valley.” It will focus on the work of Alex Lazarow (MBA 2010), a venture capitalist and author of the book, Out-Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley. Over these next few episodes, we’ll explore the ideas at the heart of Alex’s book, detailing how entrepreneurs and ecosystems across the globe are challenging the Silicon Valley model—and explaining what these global startups can teach their peers in the Valley.

In this first episode, we’re going to examine why Silicon Valley is at risk of losing its startup crown and what that could mean for the future of innovation.

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If you were asked to name some of the greatest entrepreneurial failures in history, you might think of some companies like Pets.com or Webvan, startups which raised hundreds of millions of dollars in venture capital only to get wiped out in the dotcom bust.

But entrepreneurs and venture capitalists were making expensive bets well before Silicon Valley existed, says Alex Lazarow.

Alex Lazarow: Hey, my name is Alex Lazarow. I'm a global venture capitalist by day. I teach entrepreneurship with the Middlebury Institute for International Studies.

I often ask my students where they think the root of venture capital is. They'll often tell me they think it's Silicon Valley. The reality is it's much older. It comes from another industry altogether, the whaling industry.

Morrell: In the early nineteenth century, it was the whaling ships of New England that offered the kinds of high-risk, high-reward stakes that attracted investors.

Lazarow: At the time, 70% of the whaling industry was dominated by one country, the United States, and 70% of that from one town, New Bedford. The reason actually has nothing to do with them having better ships or them having better anything. It's only because of their invention of a new financing mechanism, whereby merchants were able to take money from investors and support captains, kit them out with a boat and the captains then got a bunch of crew.

Morrell: Take the example of the Essex, the whaling boat whose story became the inspiration for Herman Melville’s Moby Dick. The principal owners of the Essex invested in some repairs in the aging ship before it launched.

That particular investment famously didn’t pay off. But generally, the New Bedford whaling industry of the 1800s thrived using this investment model, averaging over 14 percent annual returns, says Alex. Holding up the high end of that average was the firm Gideon Allen and Sons, which regularly made returns of 60% a year.

Lazarow: The merchants basically built a portfolio of these highly risky ventures. A lot of the boats didn't come back. Some of the boats didn't come back full or didn't pay off. And with that approach, were able to really build an industry. And that model of investing in individual ventures, building a total portfolio of these high-risk things, some of which work really, really well and some of which fail completely, inspired the way the venture capital model works today. It's worked extraordinarily well in Silicon Valley and in the context that we have.

Morrell: To understand how this financial model became an integral part of Silicon Valley culture, we first need to understand how Silicon Valley came to be.

Nancy Koehn
Photo by
Steven Richard

Nancy Koehn
Photo by Steven Richard

Nancy Koehn: My name is Nancy Koehn. I'm a historian at the Harvard Business School where I hold the James E. Robison Chair of Business Administration.

Morrell: Koehn notes that the San Francisco Bay area’s coastal location made Silicon Valley a natural hub for Naval and other government activity and funding. This helped foster several eras of technological development, beginning in the early 20th century with radio components and then later the vacuum tubes that would be used to power the predecessors to modern computers. The computing revolution naturally followed, in part fueled by government projects like ARPANet, the Defense Department initiative that would lay the foundation for the modern internet.

But powering all of this technological innovation also required a steady stream of smart people.

Koehn: As these forces gather steam by the early 1960s, you're now attracting all kinds of interesting people, right? From the names we recognize like Robert Noyce and Gordon Moore and William Fairchild. And before that, William Shockley, to hundreds and later thousands, and now cumulatively millions of largely men—but by no means completely men—with engineering talent and interest and ambition that say, where do I want to be?

Morrell: So Silicon Valley became a talent magnet. And historically, when these big industrial revolutions start pulling in all of the builders, scientists, and engineers, Koehn says, the legal and financial expertise quickly follows. Soon, Sand Hill Road, which cuts through Palo Alto and Menlo Park, was lined with eager VC firms.

Koehn: That's essential, because you can't make breakthroughs—you can't found firms, you can't gain traction—without the oxygen of cash or the oxygen of investment, and that was there in Silicon Valley. I mean, we talk about it coming with Sand Hill Road in the 1960s, but it was there in a different guise from very, very early on, from the early 20th century with the tradition, almost a habit of all kinds of different leaders and investors taking positions in high-risk, untested, brand-new high-tech firms.

Morrell: That appetite for risk has remained a dominant characteristic of modern Silicon Valley, which has also developed a seeming lack of concern for profitability, a loving embrace of failure, and an unquenchable appetite for growth and capital. You might remember this scene from 2010’s The Social Network: Movie clip

That was a fictionalized telling of Facebook’s rise, but those numbers are real. Silicon Valley produced 32 unicorns in 2018, and 30 in 2019. Crunchbase reports that Valley startups attracted about $46 billion in funding in 2019.

But perhaps tellingly, that $46 billion was down from 2018’s $64 billion. And the Silicon Valley model for building startups has begun to show cracks. For one thing, there is only so much failure that investors can tolerate. Both WeWork and Uber—poster children for modern American startup success—lost $10 billion between January and October of 2020.

There’s also been huge social and political pushback against some of the tech giants, who are under fire for exacerbating issues of inequity in the Bay area, aiding in the spread of global disinformation, and facing congressional charges of monopolistic practices and calls for their break up.

And beyond that, says Alex, Silicon Valley is starting to lose its global monopoly on innovation.

Lazarow: In 2013, you would have been right to say, "Hey, look, most of the action is in the Valley."

Four ecosystems around the world had created all [the] billion dollar businesses. Today, over 84 startup ecosystems have created one billion-dollar business. It isn't that the startup movement is globalizing alone, it's that the biggest and best companies are also being built internationally. The biggest RPA company in the world—robotic process automation—came out of a village in Romania, UiPath. The biggest education technology company in the world came from India. The biggest neo-bank with a credit-led model came out of Brazil, Nubank, and the biggest super app in the world came from China and it's the WeChat ecosystem. The biggest and best and most inspiring tech companies are not just from Silicon Valley, they're coming from everywhere and they're being inspired by local problems that are getting solved and local solutions that are really working.

Morrell: And those local solutions mean that the Valley isn’t just facing more competitors, but competitors with truly unique ideas that are shaped by their distinct circumstances and distinct opportunities. Alex refers to these nascent entrepreneurial ecosystems—both in the developed world and in emerging markets—as the frontier.

Lazarow: In many ways, it is a gross oversimplification to think of the world as Silicon Valley and not Silicon Valley. If I was going to think about two variables, as an example, you might say how developed the country is versus developing, and how developed versus developing the startup ecosystem. If you painted a two by two matrix, you might put Silicon Valley on the top right. Incredibly developed startup ecosystem and one of the most developed markets in the world, the US, and there's a couple other ecosystems you might put up there, right? Tel Aviv or something like that. At the bottom left in the book, I take you to places as far as Pyongyang, which you might say very developing country, and very little if any startup ecosystem. But also countries like Zambia, and Lusaka, its capital, as well. There's places like Bangalore, which have very developed startup ecosystems but operate in emerging markets, and there's some interesting nuances that we can pull apart.

In reality, these markets are very heterogeneous but I believe they share more in common with each other than they do with the Valley and there's so much that they can learn from each other.

Morrell: One of those similarities these frontier innovators share? Lack of resources.

Lazarow: There's a lot less capital, there's a lot less depth of trained startup human capital, the been-there-done-that crowd that have already scaled with businesses. There's less corporate ecosystem, for instance—if something doesn't work out, someone that can buy the company. There's less proven exit markets.

Second, in more emerging market contexts, there are more macroeconomic shocks and the volatility that comes with that. Then third is this culture of entrepreneurship that has to be built over time. In many markets it is not considered a great career to be an entrepreneur. It's something you do out of necessity if you haven't gotten a job in the other sectors. And that needs to change as a way to continue attracting the best talent, the best entrepreneurs that want to do this as a vocation.

Morrell: And outside of Silicon Valley, there’s just less appetite and acceptance for failure.

Lazarow: In many emerging ecosystems, failure is real. Failure is a black mark on your career. It isn't something that you can get a soft landing and sell your company for an acqui-hire to another company. It's firing all your employees. It's really declaring failure. That actually prevents a lot of startups from even starting and is a really big barrier to entrepreneurship.

Morrell: And all of these challenges and constraints fundamentally change the way that entrepreneurs build their businesses on the frontier. In many emerging markets, for instance, ecommerce companies have had to develop systems that allow buyers to pay cash on delivery so they can address trust issues and serve unbanked populations. But more generally, it also means that startups are being built for a long journey, rather than a short path to exit. It’s part of what Alex calls the “camel approach”—a sort of counter to the Silicon Valley unicorn model.

Lazarow: It is this notion of building sustainability and resilience into the business model from day one. Of course, they still want this world-shaking ambitious growth, but they do it from a position of sustainability and resilience where unit economics from the get-go are strong, where burn is managed from the get-go, where there's a long-term approach to doing it.

Morrell: Alex offers the example of the food delivery service Grubhub, whose cofounder Mike Evans told him that the Chicago-based company used every single fundraising round for a very specific purpose.

Lazarow: It was to expand to another city or it was to do a small acquisition or something like that. That they really took this long-term approach. I asked Mike, I said, "It took you guys 10 years to IPO, why did you not just raise a little bit more venture and speed it up?" He said, "I could’ve raised more money and IPOed in two less years, but I would've done so at tremendously more risk."

That's really what I'm talking about with this camel approach is, in the face of adversity, how can you build businesses that have better risk-adjusted outcomes?

Morrell: Look, it’s easy to understand why the Valley model is viewed as the ideal. Facebook is worth some $720 billion. Amazon is worth $1.6 trillion. Those are gaudy, attractive destinations for any startup.

Lazarow: I think one of the pitfalls of looking at some of the really growth-at-all-cost models in the Valley, and then saying how did they get to the position they are today at X valuation, is we look at the method and we say, "Well, it's because of that method that we got the outcome." I think the risk is that if you replayed that story 100 times, what we don't know is how many of the times using the same methods we would have got into the outcome. I posit it that many of the times we wouldn't have, it would not have worked out, and it's not because of the method, it is despite the method that we got to the outcome.

That's really what I'm arguing with the camel strategy—is really having better risk-adjusted outcomes more often. Obviously venture and building startups are risky all of the time. But I think the camel approach, which in many ways it's not new news. It's like this idea of building thoughtful, sustainable businesses that obviously just want to grow but do so from a position of strength. That isn't new. But I think that it is a “what's old is new” and what the rest of the world can teach us in the Valley and for startups everywhere.

Morrell: So what do these sustainable startups really look like? How do they get built?

In the next episode of this special Skydeck miniseries, we’ll introduce you to Aldi Haryopratomo [HAR-E-uh-Pruh-Ta-mo], who built a thriving startup in the villages of his native Indonesia. Aldi’s story will offer you an inside look at how an entrepreneur faces the challenges of the frontier, how and why they succeed—and what their experiences can teach Silicon Valley.

This episode of Skydeck was co-produced with contributor April White, with additional production by PRX Productions. It was edited by Craig McDonald. It is available at iTunes or wherever you get your favorite podcasts. For more information or to find archived episodes, visit alumni.hbs.edu/skydeck.

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