Xtech 2006: Paul Graham – How American are Startups?

Sitting in the Grand Ballroom of the Hotel Grand Krapolinsky Krasnapolsky in central Amsterdam, at yet another conference. This is the third in three weeks, and I’ll be glad when next week comes and I don’t have to think about writing a presentation. Well, for a few weeks at least.

First up:

Paul Graham – How American are Startups?

‘m here to talk about start-ups. Well, if I was giving a talk about start-ups in the US, there’d be a lot more people here, so maybe that says something, or maybe I’m reading too much into it.

Could you recreate Silicon Valley elsewhere? With the right 10,000 people, yes. It used to be that geography was important, but now it’s having the right people. You need two kinds of people to create a start-up: rich people and nerds. Towns become start-up hubs when there are rich people and nerds. NYC could not be a start-up hub because there are lots of rich people but no nerds. Result: no start-ups. Pittsburgh has the opposite problem – lots of nerds, no rich people. Uni of Washington yeilded a hi-tech community in Seattle, but Pittsburgh has a problem with the weather, and no beautiful old city, so rich people don’t want to live in Pittsburgh.

Do you need rich people? Would it be best if the gov’t invested? no. You need rich people, because they tend to have experience and connections, and the fact that it’s their money makes them really pay attention. The idea of gov’t beaurocrats making start-up decisions is comic, it’d be like mathmaticians running Vogue… or editors of Vogue running a maths journal. Start-ups funded by burocrats would be competing with start-ups run by rich people who have their own money on the line.

Start-ups are people, not the buildings. Creating business parks doesn’t help start-ups, because start-ups do not use that kind of space. Where a start-up starts it stays, so all you need your three guys sitting round a kitchen table. If you can get rich people and nerds together, you can recreate Silicon Valley.

Smart people like smart people and will go where they are, so universities are good. First rate compsci depts are important to this, preferably one of the top handful in the world, and has to stand up to MIT and Stanford. Professors consider one factor only – they are attracted by good colleagues. So if you can attract the best people then you will create a chain reaction which would be unstoppable. Just takes about half a billion, which is within the reach of any developed country.

But you need a place where investors want to live and students want to live when they graduation. It needs to be a major air travel hub so people can travel easy. Investors and nerds have similar taste because most investors used to be nerds. Taste can’t be too different, but also can’t be too mainstream.

Like the rest of the creative class, nerds want to live somewhere with personality, that’s not mass produced. To create a start-up hub, you need a town that doesn’t have mass development of large tracts of land [so, no Milton Keynes then?]. Most personality is found in older towns. Pre-war apartments are built better, and people like them more.

You can’t build a Silicon Valley, you let it grow.

Any town’s personality needs to have a good nerd personality. Nerds like towns where people walk around smiling, so not LA because people don’t walk around, or NYC where people don’t smile.

Nerds will pay a premium to live where there are smart people. They like quiet, sunlight, hiking. A nerd’s idea of paradise is Berkeley or Boulder. The start-up hubs in the US are very young-feeling, but not new towns. Want a place that tolerates oddness. Get an election map and avoid the red bits.

To attract the young, you need a city with a live centre. None of the start-up hubs have been turned inside out like some Americans have. Young people do not want to live in suburbs.

Within the US, Boulder and Portland have the most potential. They are both only a great university short of being a start-up hub.

The US has some significant advantages:

1. Allows immigration. Would be impossible to reproduce Silicon Valley in Japan, because most of the people there speak with accents and the Japanese don’t allow immigration. It has to be a Mecca, and you can’t have a Mecca if you don’t let people in.

2. Won’t work in a poor company. India might one day produce a Silicon Valley, because it has the right people but it’s still very poor. US has never been as poor as some countries are now, so we have no data to say how you get from poor to Silicon Valley. There may be a ‘speed limit’ to the evolution of an economy.

3. The US is not (yet) a police state. China might want to create a Silicon Valley, but their tradition of an autocratic central gov’t goes back a long way. Gets you efficiency but not imagination. Can build things, but not sure it can design things. Hard to have new ideas about tech without having new ideas about politics, and many new tech ideas do have political implications so if you squash dissent you squash new ideas. Singapore suffers a similar problem.

4. Need really good unis, and their US has those. Outside of the US, people think of Cambridge in the UK, then pause. The best professors seem to be all spread out, instead of concentrated, so that hinders them because they don’t have good colleagues, and their institutions don’t act as a Mecca.

Germany used to have the best universities, until the 30s. If you took all the Jews out of any university in the US, there’d be a huge hole, so as there are few Jews in Germany, perhaps that would be a lost cause.

5. You can fire people. One of the biggest obsticles are the rigid labour laws in Europe, which is bad for start-ups because they have the least ability to deal with the beurocracy. Start-ups need to be able to fire people because they need to be flexible. EU public opinion will tolerate people being fired in industries where they care about performance, but that seems limited to football.

6. Work is less identified by employment in the US. EU has the attitude that the employer should protect the employee. Employment has shed these paternalistic overtones, which makes it easier for start-ups to hire people, and easier to start start-ups. In the US, most people still think they need to get a job, but the less you identify work with employment the easier it is to start your own company. All you have to do is imagine it.

A year after the founding of Apple, long after they had sold their stuff, Steve Wozniak was still working for HP. When Jobs found someone to give them venture funding, on the condition that Woz quit, he initially refused.

7. America is not too fussy. If there are any laws regarding businesses, you can assume that start-ups will break them because they don’t know them and don’t care. They get run out of places that they shouldn’t be run out of, like garages or apartments. Try that in Switzerland and you’d likely get reported. To get start-ups you need the just right amount of regulation.

8. US has a huge domestic market. Start-ups usually begin by selling locally, which works because their is a huge domestic market. In Sweden, for example, the market is smaller. The EU was created to form an international market, but everyone still speaks different languages. But it seems as if everyone educated person in Europe now speaks English, if present trends continue, more will.

9. Funding. Start-up funding doesn’t only come from VCs, but also from business angels. Google might not have got where they were without angel funding of $100k. All you need to do to get that process started is to get a few start-ups going, but the cycle is slow. It takes five years for a successful start-up to produce a potential angel investors. You need angels as well as VCs.

10. America has a more relaxed attitude to careers. In the EU, the idea is that everyone has a specific occupation, but in the US things are more haphazard. That’s a good thing. A start-up founder is not the type of career a high-school kid will choose – they choose conservatively. Start-ups are not things you plan, so you are more likely to get them in a society that allows career changes on the fly.

Compsci was supposed to provide researchers, but in actual fact most students are there because they are curious.

Americas schools might be a benefit – they are so bad, that people wait til college before they make their decisions about what their career will be.

This list is not meant to suggest America is the best place for start-ups. It should be possible not to duplicate, but improve on Silicon Valley. what’s wrong with SV?

– It’s too far away from San Francisco. You either live in the Valley, or commute from SF. Would be better if the Valley was actually interesting, but it’s the worst sort of strip development.

– Bad public transportation. There’s a train, which is not so bad by American standards but by Eu standards, its’ awful. So design a town for trains, bikes and walking and cars last, but it’ll be a long time before the US does that.

– Have lower capital gains taxes. Low income tax isn’t so much of an issue, but capital gains is. Lowering the tax instantly increases returns on stocks, as opposed to real estate, so to encourage start-ups, have low cap gains. But decreases in cap gains disproportionately favour the rich. Belgium as cap gains of 0.

– Smarter immigration policy. People running Silicon Valley are aware of the shortcomings of the US immigration system, and since 2001 it has become very paranoid. What fraction of the smart people who want to come to the Valley want to actually do get in? Half? The US policy keeps out most smart people and puts the majority in crap jobs. A country which got immigration right coudl become a Mecca for smart people simply by letting them in.

So basic recipe for a start-up hub is a great university and a nice town. You could improve on Silicon Valley easily. Just let people in.

25 thoughts on “Xtech 2006: Paul Graham – How American are Startups?

  1. “Pre-war apartments”?! Has he ever _seen_ Palo Alto? Sounds like PG thinks that Cambridge is the world epicentre of start-up culture, instead of Silicon Valley. 😉

    He’s right about the “rich people” factor though — as far as I can see, EU startup culture (or Ireland’s at least) has a serious problem with a lack of angel investment.

  2. I don’t think Paul has thought through the importance of the way space and buildings can be repurposed in America. Relatively lax zoning, wood and steel construction instead of stone and brick plus a mobile population mean that the character of a city can be changed quite rapidly by economic forces and incentives.

    Europe by contrast is densely populated, and people just will not move out of the way to make room for something new (the only force which can really make Europeans get up and move out of a neighborhood is an influx of poor immigrants). This makes Paul’s suggestions about recreating a Silicon Valley look, to this observer familiar with the US and the EU, very impractical.

  3. I’m spanish and I was in the first Paul Grahams’ Startup School at Cambridge (USA).

    I can say that the city, people or ideas are very different in USA. In Spain the goverment is controlling entrepreneurship, creating

  4. I wish to add some points José María’s comment.

    He shows the current context of Spain if you want to create a startup. It’s real, even if someone can think it’s unbeliveable.

    Government feels the responsible of innovation and research at Spain (and Europe), and thinks that paying others to research is the best option.

    But, nowadays, there is people that’s trying to ignore the currently pre-stablished serie of steps to research: get a degree, and join a big company (or government). And they’re creating startups, more and more startups.

    The main problem is that startups are weak, and government funded researchs are not. So if some government team wants to destroy a startup, it’s very easy. Government enterprises don’t need to be profitable, if they want to compete with start-ups, they have only to lower the prize until they kill the startup. And this is a big problem.

    So, if you want to do something here. You have to pick a good idea, and develop the idea the best you can both technologically and financially. It’s hard, but it can be done.

    It’s hard, but it can be done 🙂

  5. Attending X-Tech… without physically being there

    So flying to Amsterdam, spending 3 days (or more) away from the office and forking $1200 prevented you to attend XTech? Cry no more, dear reader, as you can get most of it through your Web browser, just by visiting planetxtech.org. For example, you’ll…

  6. I attended the most recent Startup school in Palo Alto – so shout out to all ya’ll.

    What Graham fundamentally never discusses (because I don’t think he’s spent any “in the trenches” time here) is just how godawful BORING and DEBILITATING it is. In all of his posts about how great SV culture is for producing business, it saps the libido ( I mean in the Freudian, Eros sense).

    Here’s a few points.

    I. There is absolutely nothing to do

    The reason so much great stuff comes out here is because there is absolutely nothing to do. Seriously. As a related point, you *can* go to SF – which is an amazing town, full of life, noise, fun, good vibes: but there are no companies of size there because of the cost of doing business. So, enjoy your stay in Mountain View, sucker.

    II. There is no dating scene

    I can’t think of any other town where a visiting friend (from Houston) would look around in a sports bar, turn to me, and say: “Is this a gay bar?”.


    “Where are the women?”

    “uhm, well. Funny thing about that.”

    Nerds don’t like to mortgage their libido much more than anyone else and the lack of stimulating intersex relationships is one of the things that will tear the Valley asunder one day.

    Enjoy your match.com account, sucker.

    III. Cost of Housing

    No one points out that for a *crappy* 1BR in the valley you will pay over 1000 a month. If you want to have somewhere where you aren’t afraid your computers will get stolen make it 1200. That means you’re paying 14.4K/annum just to sleep, forget the idea of ever owning a home when median housing cost in the Valley is 700K.

    And then, with that 700K what do you get? You get to live close to the Fry’s electronics, or a grocery store, or….vast suburban sprawl.

    Enjoy your shoebox, sucker.

    I pray for the the Big One (OK, a hypothetical big one where no one gets hurt). I think it’s time that the valley fell apart and, like the body of Duke Leto II, was spawned into a thousand seeds that could bloom in any of a variety of university towns. Too much talent is too concentrated, too soulless.

    IV. There’s no art scene

    Art stimulates, it inspires. When exposed to art, programmers think differently ( Graham himself is a stellar example ). There’s no art in San Jose the “capital” of the technical toilet, er, Silicon Valley.

    Result: Enjoy your Tivo, sucker.

    I will say though, the weather’s great.

    Enjoy the sunshine, sucker.

    But Dante said: The sun shines in Ravenna as well as Florence.

  7. What Paul is saying is in short the main idea in a book by Prof. Reuven Brenner called “The Financial Century”. In that book he makes the point that what makes a country rich is not astute macroeconomic manipulations but rather some propicious preconditions for development. These are workforce mobility, low/flat income tax rate, good education, and easy access to financial markets. Some of the examples he gives were Hong Kong and 18th century Scotland. The book, of course is makes the point in a more elaborate and better way… anyways, highly recommended read if this is your kind of stuff.

  8. When was the last time Paul ever visited NY? There are plenty of extremely smart, extremely technical people here.

  9. I think one big advantage that other countries have is universal health insurance. In the US, if you don’t have health insurance you can go bankrupt if you get sick or have an accident. Europeans have less risk.

    I think universal health care would be a huge boon to entrepreneurs of all types in America.

  10. China — I’m not an expert on China, but I think it is a startup hotbed, both in actuality and in its future potential. Paul talks about a command economy being obviously bad for startups, but that is not what China is anymore. The Communist Party is not even communist anymore—it openly supports capitalism and entrepeneurship—and even more importantly, most of the growth recently has been thanks to private enterprise, although it has been facilitated by special economic zones and who knows what other assistance. It’s chaotic and largely unregulated, but the energy and hard work of the Chinese people seems to be unbounded. And now the government is focusing on higher education institutions and research facilities. I think Paul’s formula is appearing there: rich first-round entrepeneurs to act as angels; smart, educated people, many of whom have a broadened vision from living in the West (Europe, U.S.); and a growing local market to start off in. We may not expect creativity from China now, but don’t be surprised if it starts to appear more and more.

  11. @Steven –

    thanks for the insightful comments on Silicon Valley.

    I’ve been living in Phoenix for the last few years but am contemplating a move to the Bay Area in the next year or so.

    The #1 reason is to pursue connections in the technology and Venture Capital industries out there.

    It sounds like I need to live in San Fran. or Berkeley.

    Your take on Silicon Valley sounds like Phoenix (minus the hot chicks, but plus tons of really smart people, and of course the VCs if you can break into that circle).

  12. 1. Allows immigration. Would be impossible to reproduce Silicon Valley in Japan, because most of the people there speak with accents and the Japanese don’t allow immigration. It has to be a Mecca, and you can’t have a Mecca if you don’t let people in.

    What, eh? This must be a different country to that big one on the otherside of the pond… America does everything it can to make immigration hard and practically impossible for people.

    In fact I know it’s one of the biggest bug-bares of most of the big tech companies is how hard it is to get foreign people able to work for their US operations.

  13. Quote #1 [Justin]
    > “Pre-war apartments”?! Has he ever _seen_ Palo
    > Alto? Sounds like PG thinks that Cambridge is the
    > world epicentre of start-up culture, instead of
    > Silicon Valley.

    Yeah, he lived in Palo Alto during the winter this year.

  14. Quote #1 [Justin]
    > “Pre-war apartments”?! Has he ever _seen_ Palo
    > Alto? Sounds like PG thinks that Cambridge is the
    > world epicentre of start-up culture, instead of
    > Silicon Valley.

    Yeah, he lived in Palo Alto during the winter this year.

  15. I felt Paul missed out one significant reason why American startups have a better chance of success: the incredible, irrational, unjustifiable yet self-fulfilling belief that most Americans have in the superiority of their own country. Most of them hardly know there is a world outside their own borders: they certainly don’t imagine it’s capable of producing innovative software. That makes it very difficult for others to penetrate the US market. In fact, though, an increasing amount of successful software is being developed outside the US, in places like Eastern Europe – often by companies that succeed in presenting themselves to the US market as home-grown.

  16. Some companies have proven you don’t have to be in any one location to be successfull — look at 37 signals. They created a successful company and coding framework and did it across multiple countries and timezones. I wonder in 10 years if we will really be looking at the physical place as the most important. It seems as bandwith and the ability to truly work together across timezones increases, so does the ability for a startup to happen without the need for the angel investors that are just based in one place.

    I also agree to the comments that China is becoming more of a place for these sorts of startups to happen. Many of the young people are finding their way into money and I have friends (from top schools in the US) who are chinese-americans and who are going back over there and starting to bridge the gap. The world becoming more globalized and there are increasingly going to be more opportunities for those companies that can successfully bridge the worlds of different countries.

    Michael @ SEOG

  17. Yes, the big players in the Internet world, such as Google, Yahoo with eBay or Apple with iTunes have all grown in Calitfornia or in cities like Boston. Europe is good at financing software (SAP) or mobile phone infrastructure (Nokia, Ericsson, Siemens), but seems not to be able to catch up with the Internet era, and seems to be sleeping with the current Web 2.0 hype.

    The speech was an outstanding example of how Americans look at the rest of the world. The perspective is narrow, with the simple dish-washer business model in mind: making very few smart people rich when they are selling their idea after a three years development phase. Well, how many of them who try fail and remain dish-washer (plus a second McJob) forever?. The European society has other models for feeling rich: in wisdom, social responsibility or equal access to education.

    After this key-note, I am not so sure, if any European region or city really wants to have a copy of silicon valley. I believe, we have different concepts, creating wealth. And may key factors are fulfilled the mekka, less cars, hiring on a per contract basis, and an inspiring culture!

    Some more notes on the key note are available on my blog-entry when klicking on my name above.

  18. Government’s Are Poor at Funding Growth Companies

    Paul Graham is right about governments being poor at funding innovation growth. In his How American are Startups? speech, a candid analysis of how to create an innovation center like Silicon Valley, Paul damns government’s abilities to fund companies. …

  19. I agree and sympathize with Jose Maria

    A look around Europe shows Paul Graham is right about governments:

    Government is not a good replacement for rich people / angel investors as they’re slow, invest inappropriately and don’t have the contacts or experience to support the right activity

    The best evidence is comparing a commercially run Technology Parks and state funded parks. St John Science Park in Cambridge has one of the best company growth records in Europe. The Park director is an ex-banker, the funding is largely private, and the innovation support is entirely focused on sales.

    Governments play an essential role in creating the infrastructure in which these Creative Classes can thrive, but private investors are best at funding growth companies.

  20. Xtech 2006: Paul Graham – How American are Startups?. Strange Attractor: Picking out patterns from the chaos that is the blogosphere.

    Insighful coverage from Suw on a recent talk at xTech
    Xtech 2006: Paul Graham – How American are Startups?.
    I’m a fan of Paul Grahams – his book “hackers and painters” is a must read for anyone in the technology space.

  21. Someone sent me a link to Paul Graham’s brief, and Kamen Stefanov’s comment. The latter refers to a collection of my speeches (The Financial Century) but which is out of print. The US edition, still in print, is published under the title The Force of Finance. One point in the book is how the movement of “vital few” to a place brings prosperity, and how when these “vital few” abandon some shores, the place falls behind. Many so-called “miracles” (and disasters) have been consequences of such movements – and not because local farmers or fishermen suddenly became tech of financial geniuses.

  22. Why NYC IS a Start-Up Hub

    Paul Graham made a comment at a conference last week that “NYC could not be a start-up hub because there are lots of rich people but no nerds. Result: no start-ups.” This has been bothering me since I read the comments.
    Well first of all, I t…

  23. Chinese education rewards memorizing more than innovation. This must change before China has a shot at its own Silicon Valley. Right now the innovation in China is being driven by those who are returning from abroad.

  24. I would not agree with you that america has a more relaxed attitude to careers, EU is also flexible there….

  25. I would not agree that rigid labour laws in Europe are a necessarily a bad thing. People in the US should have a little more security about their jobs.

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