The a16z Show - a16z Podcast: How Innovation Ecosystems Grow Around the Globe

Episode Date: August 1, 2015

Why do so many-government led efforts to build the next "Silicon Valley" in one geography or another fail? Is it misguided to even try? But then what does make such innovation clusters work? In this segment of the pod a trio of expert guests -- AnnaLee Saxenian, Dean of the UC Berkeley School of Information and a longtime researcher/observer of regional competitive advantage; VC Brad Feld and writer on startup communities; and entrepreneur and investor Christopher Schroeder, who covers startups rising in the Middle East and most recently wrote about the tech phenomenon in Iran -- tackle the question of how innovation ecosystems grow. The discussion delves into how innovation is being spurred differently (or stifled) in places like China and Iran; whether there are cultural differences in attitudes for failure or about entrepreneurship; and if regulatory arbitrage is one way for regions to get ahead. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi everyone, welcome to the A6NC Podcast. Today we're talking about startup and innovation ecosystems. I know those are a pretty loaded set of buzzwords. In this case, though, it actually really is an ecosystem because we're talking about cities, communities of entrepreneurs, governments, universities, companies, and others. And we want to talk about what makes these innovation ecosystems around the world work or not, especially since the question we hear often, for better or worse, is how to create the next Silicon Valley. So Cali is completely the wrong question for lots of reasons. So that's why we have three special guests on the pod today who are experts in different aspects of this topic. Annalise Saxinian, who's the dean of the UC Berkeley School of Information, and a longtime researcher who has studied competitive advantage around the world. Brad Feld, VC at Foundry Group in Colorado and the author of the book Startup Communities, and who has written a lot about the power of networks over hierarchies. and Chris Schroeder, who's a serial entrepreneur and investor,

and who also once served in the staff of former Secretaries of State. He wrote the book Startup Rising last year, which was one of the first books to document the phenomenon of startups in the Middle East, and more recently he's written about the impact of software-eating the world and how that's been playing out in Iran. So let's start by having you guys talk about what makes a successful innovation cluster like Silicon Valley. I'm not even sure if that's the right assumption for us to begin from,

given the question and given how many of those government-led experiments have failed. But since the three of you have different perspectives on this topic, I think it would be great for us to begin there. It's largely because they focus on situations and isolation with important dynamics is the opening of boundaries between firms, between firms and finance, between industries and government allowing, we talk a lot about how information has opened up global access and that allowed new parts of the globe to compete. But opening up flows of information locally, I mean, at the local level between people, you know, really from the bottom-up dynamic,

because ideas move much more quickly than they do within. And people can act. They can use central capital. They can invest. They can reform. They can recruit teams much more quickly when information flows openly between them. So a lot of the things that we look at, whether it's a university or those work, especially if... I think that people are learning across boundaries much more quickly exactly than.

I think there's something that's very different from any time before as these ecosystems have risen, and that is a very auto-di-dive people with mobile devices to learn not only from each other and to share and innovate and collaborate on things that might be relevant within their markets, but they are instantly seeing the best practices and the best writings of people like Anna and people like Brad and people like Penn Harowitz, and they have an ability to access and engage and improvise on what are best practices elsewhere in ways that they're in ways that we simply couldn't have talked about, I think, even five years ago. I had a conversation the other day with a bunch of young people,

evaluations about different kinds of ways social networks are functioning in the United States and making their own analogies of what are relevant in Iraq, which, of course, was completely unprecedented. And when I was in Iran a month ago, our devices, it was allowed to see each other as well to see other academy. Other people are doing, and building something bottom up, which is not a replacement for some of the challenges that are still essential, in a traditional Silicon Valley story in parallel. But, again, we could not have...

I think the profound and collide nicely, this notion of opening up boundaries, making them more porous, which Anna talks about, and it has very articulately for a long time, and a lot of the writing I've done about networks and what Chris just said about, the technology enablement, which we've been talking about for 20 or 30 years,

but it's actually now reality, in terms of how information flows across geographic boundaries. What I think it results in is that the notion of trying to create the next Silicon Valley is completely the wrong question. And it's a wrong question for lots of reasons. But most importantly, each different geographic region, any city in the world, has different natural resources. And when I say natural resources,

it's structural dynamics about how the city works, about what in that geography or region is powerful or unique. And then you have this layer of now, and over a period of time, not short period of time, 20 years, 30 years, 40 years, you can have really amazing things happen in different startup communities if you take that very long arc with this notion of the permeability of this information across all kinds of boundaries, not just geographically, but within whatever that region is. Great. What are some of those assets when you, Brad, when you talk about, you know, these are assets that aren't just necessarily natural assets. I mean, we're now talking about information economy. So the assets can be in the form of human capital. What are your thoughts about how that varies across regions

and what it takes to sort of make those communities thrive? It's important to level set and create a city somewhere for some reason. And it might have been, you know, information flows, a bunch of people that collect and grow independent of institutions, the business institutions that could build in those geographies. And all of that is then wrapped around by how people interact with other people in that geography. So the thing that comes from that that's so powerful is if you have founders or entrepreneurs who are leading the efforts of their geography, again, over a long period of time,

learning and taking from other places, you get this self-referential phenomenon. And if you look at Silicon Valley, it's a great example of it. It's not a phenomenon that happened in the last 10 years, the last 20 years. I have a book on my desk that, you know, that's a self-referential phenomenon. that's called 100 years of Silicon Valley, and it was written in 1994. It's just a very, very long-term arc, and I think that, you know, what happens with a lot of people

who want to create, you know, the next Silicon Valley in my geography is they're taking a very narrow short-term view versus saying, what is it about the city we're in that's so special and why people are here, and what can we do over a long period of time

to build on that? I think I agree with everything that's been said. I think that we often have two short-term view, and also, region is distinctive and need to believe that as well as their institutions. So the first thing is to really think about what is technology that has been funded for decades, low-end programming into larger. It really is entrepreneurs to identify capabilities within a region and then build on them more valuable, not only locally, but to...

How does history and timing play a role here? In the case, the case of Iran is actually particularly interesting, given the recent news about sanctions and the existing groundswell of entrepreneurial and tech activity that's already there. Because time is something that people really do wrestle, and the idea that you can build these things overnight is, as they point out, a mistake. I think interestingly, though, in a lot of these emerging markets, time isn't also their friends. And what I mean by that is you've got a lot of countries in Iran is a perfect example of this, where 30 to 40 percent of the population is under 30. And so people are kind of looking at each other and saying,

can technology help us delete to light, maybe some of our natural events within our markets or within our regions, but possibly and more controversially. To Iran, of course, it's been so locked down because of the sanctions. There's been a two-edged sword to it for them at one edge. Even with the crackdown on access to the Internet, everyone I've met there of all ages have access to VPN. Every mobile phone I looked at had access to all the same things that we have access to. They know a lot about what's been going on, so they've always been able to end up.

at what companies not being there, through the new generation, to build a lot of interesting technology to effectively replace things. So, for example, I saw a startup, Google, you used to be able to get almost any app from the app stores from Google, and if you run it a little bit from iPhone, but it became very hard, and obviously you couldn't get anything that you would have to pay for because of the sanctions. So what happened, a bunch of startups came up to fill that gap and create apps so people could use them for a period of time. And so there was this interesting both creativity and fire to make something happen,

but at the same time it was out of necessity because the options were, leaders are now very talented, very capable of the market I've seen in early days. At the other hand, they're about to enter now a very, very competitive place, and I think it's going to be interesting to see how that plays out. We highly educated population. Of course, it has been cut off in all sorts of ways, and there's also a huge, very successful Iranian diaspora, which I suspect will, I know in Silicon Valley they've been dying to contribute back.

So Iran is very nicely positioned in some important structure to continue and entrepreneurial. Anna, what does a research show about when, because I agree completely with Brad, that starting with the question of trying to emulate Silicon Valley is exactly the wrong question. Yet whether people are emulating Silicon Valley or not, there is a tendency to sometimes start innovation by imitating. and as Christopher calls it improvising. What is your research show about that? Learn by improvising, by trying things, by first imitating and then improvising, because often you can't, you know, you think you're building advantage of local capabilities that don't exist elsewhere.

So I think we need to be really aware that innovation builds on and imitation. We have a sort of a sense often that, you know, it's dealing intellectual property, imitation and improvisation. I had the man who was the founder, effectively of the Yahoo, the Middle East, was a company called Maqtube, which Yahoo, in fact, bought for $160, or $70 million about five years ago. And he said to me, you know, Chris, he just don't understand how these things staged. There's a lot of risk in startups under the best practices, but we're dealing with culture experience in this. You know, there's plenty of money in places like the Middle East.

There are plenty of money in a lot of emerging growth markets, but people are used to deploy at 80, 60, you would have any of these instances. So if all of a sudden, as he said, some kid five years ago would come home and tell his parents in Egypt that I'm dropping out of college because I've got the million people are going to be on it and I'm going to make billions of dollars, his friends would have laughed at him, his teachers would have laughed at him, his parents might have kicked him out of the house. But if all of a sudden you come home and say, you see this thing called Yahoo? Or are there a lot of people speak Arabic? Yes. Are there people who would like to have email? Yes. Are there a lot of people, in fact, might even want to sell things?

yes and all of a sudden you say well that work there maybe a smaller version that can become a bigger then you get the flywheel starting for companies one of which is suk.com which is the largest e-commerce player in the Middle East which just got valued over a billion dollars and I can assure you out of that will come out and kick out money and so I just think that this improvisations that people will build upon can this all really happen at a bottom-up level though is there a role for top-down government and creating these innovation clusters especially when it comes to things like rule of law.

I challenge the assumption that you need top-down. I think that a lot of people approach the top-down as top-down in the absence of bottom-up entrepreneur-led phenomena, grassroots, whatever phrase you want to use, nothing really happens. You get this stagnation. If you have a sudden the startup community starts to develop and grow because you've got entrepreneurs, and to Christopher's last point, as they're successful, they reinvest back in the community, often and especially, you know, in different pop-down focus.

And you have government start to try to community or you have academia or university and the city, try to become the central point of what's going on. And that is not going to be a successful path. What is a successful path is when those institutions figure out how to attach to the chaotic network that's being built and participate in the network rather than try to control it. And that's where the conversation about top-down starts to get complicated, because it's not that those organizations and institutions don't have a role or shouldn't be involved or can't be involved.

Quite the opposite. They're very beneficial. However, when they start trying to organize and control the activity or legislate the activity, it tends to get recycling. and in some cases the growth and development of what's going on in terms of the startup. I couldn't agree more with that. I think, you know, we have this model of government leading, and that just can't be the model.

This has to be, you could have a public sector. At a minimum, they should be permissive. I mean, I think we have a lot of places where you'll go are not even permissive that control flows of information or control capital markets in a ways that don't work. Because they get in the way, doesn't mean that they can also leave. to be in conversation with entrepreneurs, with innovators. What are the, you know, I think that the ideal role for a public sector or even for a university or other institution in a region that's trying to say, what are the obstacles and what can we

do to help support you? You know, do you need more skill? Is there something that we can do to help generate more skill? Are there certain kinds of policy change? They can't be tough sense that they will either plan in the traditional. That makes a lot of sense, actually, but I do think that I don't want to assume. that we're being naive about it, but I do think that there is a certain purity to how we view government sometimes, because when I think about travels in third world countries, I mean,

it's probably not the appropriate phase. It's certain developing world countries. I think of corruption, bribery, you know, the fact that some governments can just seize your assets without notice. And these are not things that are familiar to us because we, for any complaints that we have about different governments, we are still used to living in a society that's actually very well-run and organized. And I want to hear your guys' thoughts on how to deal with that when it comes to an entrepreneurial ecosystem. I actually don't. I think part of the reason it's so resilient is that it's not. And the difference is we have a framework of rules, which, by the way, have a very, very hard time keeping up with innovation. And that framework of rules has then a way they're in

When you go into a country where there either isn't a framework of rules or just a late, then you have lots of erratic phenomena where, you know, the thing you're trying to do can be, you know, stolen out from under you. I mean, I've been on the receiving end, for example, of, you know, deals that I did in the late 90s, you know, I'm thinking of one in particular with the Chinese company, where, you know, the merger agreement came back entirely in Chinese. we really had no choice but to sign it. And, you know, when it was translated, the document basically said,

you're giving us your company and we are giving you nothing, and you will be happy. And at least they sent us the document. Right? So, you know, I just sort of start with that. I don't think it's structured correctly, that there is a framework that has some consistency. And the warning there, and we see it all the time,

We see it with, you know, the phenomena of innovator versus incumbent. Of course, Uber is the one that everybody points at, but there's many, many companies that are struggling with this in lots of places in the U.S. right now because the laws don't keep up with innovation. So let's talk a little bit more about that as applied to some of the cultural aspects beyond the institutions that have been sort of tacit implied, you know, for example, attitudes towards failure. You know, Christopher, you've talked about how on one of the podcasts with some of the

students in Iran who were building startups that, you know, the thought of doing a startup would be so taboo before. And now it's still not something that their families understand. And Brad, you talk a lot about the psychology of entrepreneurs in everything from depression to the mindset of how to deal with failure and the reality, the hard slog of building a company. How do those attitudes play out internationally? And Anno, does any of your research show how that plays out? I'm curious here from all three of you about this. You know, I joke that I wrote a book that glorifies entrepreneurs. And, you know, being an entrepreneur is really hard.

I mean, it's easy to glorify it in it. But the ups and downs, you know, the unanticipated changes. Nobody would, in their right mind, would do it. And yes, you know, we have just growing numbers. And people are doing it all the time. I think there's a on this, which is many years cultural norm in having pizza So midnight with 20 founders of different companies. And they start off sentences by saying things like,

in the Midwest, we're more conservative. And I remember that when you just get over it? Like, it's not about being conservative. Like, you're all here doing this crazy thing where you're starting companies. You're not being conservative. And oh, by the way, you know, three or four generations earlier, you're, you know, five generations earlier, whoever settled in Des Moines, those people,

were not conservative. Like they drove in wagons across the United States and, you know, had to deal with, you know, starvation and disease and where they're going. That's not conservative. So, you know, let go of those things. And it's interesting because that construct then collides with something that Christopher said at the very beginning, which is so... The information about this is ubiquitous. You can get information about the notion and philosophy of how to be successful, how to think about failure, not to revel in it, but to understand that it's part of the process. Some of my own writings and others' writings on depression in the context of entrepreneurship

have started to desigmatize the fact that leaders actually have emotions. And, you know, as human beings, you know, we're just big back to chemicals. And it's not just that sometimes we have a lousy day, but sometimes we're in a place where, you know, in terms of how we relate to what's going on around us, we might be functional, but it's really, really hard. That, then, is not geographically constrained because of lack of information flow. They're reading that stuff,

and they might be able to relate to it directly. They might not, but it's at least permeating and influencing the way they think about in the context of the next business they carefully, through some of the work that I've done. It's amazing from everywhere. Rio at the Startup Weekend Global Summit a couple of years ago, and, you know, a kid that looked like any other kid in his 20s

looked like anybody else in their 20s, came up to me, handed me a startup terrain, and gave me a giant. Thank you so much for teaching us how to think about when things don't work. My son, Jack, who's a teenager, just came back from seven weeks in Taiwan, working for a start. He's worked for startups in New York and others. How is it different? he would come up with a couple of quick things.

And at one point, he just sort of looked off in the distance. And he turned to me, he said, Dad, I've got to tell you, women's the same way, they're undaunted in the same way, a new idea in the same way, they support each other in the same way, they think about culture in very similar ways. It really is a lingua franca now, I think, of this era that also... That's great. So one thing we haven't talked about is what happens when these local innovation clusters

are exposed to global competition. For example, in the case of Iran, as sanctions lift, what happens when... when the local eBay like competitor is exposed to the actual eBay, or in India, when Amazon competes more directly with the like of Flipkart and other competitors, is it really, I mean, is local really an advantage when they're exposed to these companies that have this unprecedented scale and operational efficiency? One of the things we're seeing is that, well, Amazon may be able to go anywhere.

It's fair to people. Often what you see, and you see this in China and other places, is that the local imitator, who get a first start, actually innovate in directions that are more appropriate for the local constituency. Absolutely. So it was a knockoff of Google, but it figured out what Chinese people want much more quickly. So I think, again, you really, the local has an advantage. They understand their community and what the needs are. And markets really are not completely homogeneous globally at the moment.

So I'm curious what you guys think about the distinction between what makes for that local advantage versus engineer wins, which obviously at least for the time being put some emphasis on to Silicon Valley. So take a place like India. I mean, the LinkedIn of India is legally faced in. The Twitter, Facebook of India is fundamentally LinkedIn. This is not true in e-commerce. In the Middle East, I can tell you that the –

so there is something about understanding the market, understanding unique payment issues. So, for example, the Middle East credit cards is not a usual thing, so you have to navigate COD in very different ways. logistic companies have gotten incredibly sophisticated and that kind of thing. And I'm wondering if you guys just think about certain kind of general criteria by which you say there are things that, and maybe they'll come from Silicon Valley, they tend to be easily dominant versus these enterprises or in each local need and execution and assets. It said to me something very interesting.

These are folks who've never known landlines. Always you've got to ask yourself telling me that a Silicon Valley entrepreneur is going to take global fast at time that allowed it to become the largest. payment mechanism in texting specifically in Kenya as wrestle the idea of what makes, perhaps even Silicon Valley, will continue to have a great advantage and what output gives that kind of advantage for these immersion markets. I think about it, which is, it's really value dissected across, you know, I'm not being precise in my language when I say manufacture and I'm saying value chain, but I think you could

pull advantage to this stage. Defenseability against the global commerce is such a good one. There's, you know, getting the product, like your example earlier, of the best way to ship something for somebody. through New York, okay, like, that's not going to work for, you know, the model that Amazon's executing on. The last one was in Dubai, and I met with Fadion Fasel, Father's son, and they were describing soup to me.

They had a relationship to in their company, and they were describing the logistics, the logistics dynamics of companies that were physical logistics companies. They had such a lot of the region. that really nobody that was outside the region was going to have a chance of getting that implemented anytime soon. And so in some ways it almost wasn't worth it to somebody else to try to do that.

I don't think that that's, you know, limited to e-commerce. I think it's limited to anything that has a lot of complexity in that value change. The only thing I would add to that is that the example you gave was India and software and the language difference is social media transport change

being a key variable. Okay, well, given the topic that we're on about local and regional advantage, I am curious about what you guys think about an argument that Mark makes and that he actually made in an op-ed in Politico last year about entrepreneurs and regions being able to use a sort of regulatory arbitrage to their advantage to help attract innovation and become leaders in like a particular technical area. So, for example, like with the UK embracing Bitcoin and being more thoughtful about fintech. Is it, you know, as a way for them to be more likely to get an early advantage there? Or Canada moving faster on drones regulation and so on. Not only do I have the most mobile generation in history. And when I say mobile in this case,

I don't mean phones or smart devices. I mean they will move to what brings us back to the conversation of whether Silicon Valley or whatever. I think one of the things that we didn't quite touch on about Silicon Valley here and it's odd focus about it, which is just simply the network effect of talent that's there. So what I'm finding, for example, and this is going to be very interesting to watch in the Middle East, is that if you go to Dubai now, as compared to three years ago, everywhere, I see Jordanians everywhere, other parts of the country, and because, in fact, the environment has opened up, the rule has opened up, people are saying this is a place where I want to be. And so not only will they be attracted by the opportunity to do things

like Bitcoin or cryptocurrencies, blockchain things, but they'll also want to go to a place which they can succeed physically as entrepreneurs. And I think that's a very interesting thesis to look at it as an arbitraising. It's staggering. Mike, I have a 22-year-old who has lived both in China and India. I mean, I grew up in a time when, you know, I lived in Hong Kong for two years, and I never called home because it was so expensive. So we are mobile, not just not just mobile devices, but we move everywhere.

Everything can move now. Okay, well, that's all we have time for. I wish we could keep the conversation going. but thank you very much, Anno, Brad, and Christopher. I really appreciate your time, and thanks for joining the A6NZ podcast.