Op-ed: Silicon Valley startup and investment strategies to avoid

While there are some patterns that are well worth copying and mimicking, blindly following what goes on in Silicon Valley in the hope it will work for you is a costly mistake that can be avoided
SV

There’s a general assumption that Silicon Valley is the centre of innovation in the world. It’s more complex than that.

In many places I travel, I often hear influential people tell me they want to build up their tech communities. They want to grow their economy, help young people create their own jobs, and tap into the unlimited potential that a truly innovative society can achieve. And they want to do so by being the next Silicon Valley.

Copying everything that’s done in SV is not going to lead to this success that the government, aspiring entrepreneurs and industry magnates dream of.

While there are some patterns that are well worth copying and mimicking, blindly following what goes on in Silicon Valley in the hope it will work for you is a costly mistake that can be avoided.

Financing

Venture capital is a market like any other. There are places where you raise money and places where you deploy money. It’s clear that the largest amount of venture capital for technology is in the Bay Area.

This abundance of capital makes for a very unique set of behaviours in the market. These patterns and behaviours are known worldwide: seeping into the culture of startups globally, revered on the Internet, and even referred to in pop culture.

Some of it is obviously very beneficial to tech investing and the startup world, but by blindly trying to reproduce these behaviours is where a lot of people – both companies and investors – make mistakes. The patterns of behaviour you’re following and looking up to don’t work outside of the Bay Area.

Let’s say I was an investor outside of the Bay Area that wanted to invest the way a Valley VC does. I would be offering high valuations and deploying a huge amount of money for a few early stage companies, I would exhaust my available funds very quickly.

A Valley VC can pass that high value up an established chain of well-funded later stage investors who can make a company successful by virtue of buying the emerging market. The community of investors around me couldn’t sustain the investments. We would run out of money before the companies could succeed. Instead of fostering a few good companies that can grow and contribute to the community, we would be out of cash with little to show for it.

Funds here in Canada, internationally, and the rest of the U.S. that are trying to foster technological success in their local market and have to look more carefully and be more discriminatory about what they choose to copy and what they should absolutely not copy.

Ideas worth spreading

Being a longtime investor with Wesley Clover, which has a history of successful investments, has shown me two specific approaches that people across all borders should take from the Silicon Valley: the perspectives on failure and pushing boundaries.

The way in which we approach failure at Wesley Clover is that failure exists only in the absence of trying. In other words, you’ve only failed if you’ve given up. To us, trying something that doesn’t work is all just a part of learning. Your idea didn’t work. Maybe you were too early or too late. Doesn’t matter. You dust yourself off and try a new investment or startup.

To be in the business of innovation inherently implies that you support risk taking behaviour, and you’re not taking risk if you’re not bumping your nose occasionally.

If you’re culturally aggressive by punishing failure, you’re dramatically stifling innovation. Without a doubt, this a good cultural view to take from the Silicon Valley.

Another view that is championed in the Silicon Valley and should be championed globally is the culture of pushing boundaries in innovation and seeing bigger. There is a huge advantage in having the confidence that your product, service or investment will change the world and has a chance to succeed on the global markets.

It’s OK to challenge established views, and there’s no reason why your idea – if it’s really good and creating real opportunity – can’t take on those established views and change the world. No matter where you’re located.

As an investor I enjoy working with recent graduates who are naturally inclined to look at problems with a very different set of eyes. Their fresh view makes them able to see what they can challenge and what boundaries they can push on.

This is definitely a critical component of Silicon Valley culture that should be borrowed and instilled around the word. Investment strategies and company models for anywhere else in the world, however, should not be taken from the Silicon Valley.

Domination through acquisition

Investors in the Silicon Valley write large cheques and go after problems very aggressively by putting a huge amount of capital behind a company. The reason they can do this is that they have funds that are larger than most communities. These funds have the financial depth to not only chase a market opportunity, but buy the whole market category as it develops. A Silicon Valley fund can invest in an individual company in an emerging market. Even if it’s not doing well, they can use their depth of capital to buy the competitors and dominate the market.

They also have financial support of like-minded people around them so that they can syndicate deals and spread the burden of this heavy investing. It’s not uncommon for failing U.S. companies to “buy wins” by taking over Canadian competitors that are doing well. The truth is most communities outside the Silicon Valley don’t have that kind of capital. Investors in those communities also don’t have partners that can deploy tens of millions into your opportunity to fall back on if things get tough. It’s not feasible to copy this style of investment strategy.

The amount of capital that gets deployed in San Francisco compared to any other global region is simply massive, and you need to account for that difference when deciding on your investment and company strategies.

Investors in places outside of San Francisco are better off dripping their investment to see how companies do with early growth traction and user acquisition before they deploy all of their investment. They should also be aware that it takes longer to get deals closed and that you can’t punish the company for that.

Companies in the Silicon Valley are surrounded by well-funded acquirers, which makes their exits much easier. They share board seats with venture funds that back the growing companies. Companies know who it is that’s buying and are found within the community of buying technology companies. The companies there don’t necessarily have to be profitable. They have to be building up an engineering skillset or solving a series of complicated problems for a potential market. That’s enough to drive acquisition opportunities within the local community of many multibillion-dollar value companies. Companies outside of this unique ecosystem should follow a lean startup model.

Following a lean startup model that is strongly profit-focused and has tested its product-market fit early thoroughly should be employed anywhere where risk is higher due to lack of deep funds. Companies need to show revenue to make sure they can keep going when the investors aren’t there anymore.

Capitalize on differences

Pointing to Silicon Valley as the epicentre of technological innovation that you want to copy and follow is a mistake that happens too often. Companies and investors have to be aware that there are simply some things that work in the Silicon Valley that simply will not work anywhere else. People look at the success coming out of the Bay Area and think “we want to act like them” when it comes to their investment methodologies, but that doesn’t cut it.

Be careful about the amount of money being burned in any individual investment. If too much money is being burnt, the ability to follow on in investment might not be available in your area. Be realistic. Focus on getting revenue and traction quickly, while being as bold as you can when addressing the global market. Understand your differences and try to capitalize on them rather than wasting time following others.

A further point of discussion should be around how the efficiency of capital deployment in the Silicon Valley compares to the rest of the world. It’s possible that it may not be as strong and successful as the rest of the world is led to believe. Maybe a topic for next time.

Owen Matthews is a general partner at Wesley Clover International, chairman of the Alacrity Foundation as well as the founder and CEO of NewHeights Software (which was acquired by CounterPath). He blogs at owen.tech, where this article originally appeared.