Often described as the modern-day equivalent of the 19th century California Gold Rush, there's no denying that Silicon Valley is the most innovative place in the world.
The place is in a league of its own, offering an entrepreneurial environment that encourages collaboration and risk-taking like no other.
For years, 'the Valley' has played a crucial role developing innovative technologies and facilitating new trends that have become central to the way we work and live.
It is home to the headquarters of the world's largest and most recognisable tech corporations, including Apple, Alphabet (Google), and Meta (formerly Facebook). It also hosts some of the most promising start-ups and accounts for one third of venture capital investment in America.
The Valley's record on innovation speaks for itself. More than one third of the 141 companies in America, Europe and Asia pacific that reached a valuation greater than $1 billion between 2010 and 2015 originated in the Bay area. It is therefore not surprising that more than 60% of companies with innovation centers have a presence there today. There's also something special about being surrounded by success stories that is likely to have attracted these companies to the location.
Of course, not every Silicon Valley start-up is a success story. Far from it. However, the few companies that do succeed are successful on such a grand scale that it makes up for all the failures.
What is it about the Bay area that has made it so successful?
Silicon Valley is a unique place that offers a distinctive combination of history, resources and people. More importantly, it has an ecosystem where everything comes together.
It is where academia, investors, immigrant students, the private sector and US government converge, bringing together the most innovative and talented minds. Whether it be the researchers at Stanford or Berkeley, prominent business leaders or unknown entrepreneurs with fresh ideas, there is no shortage of talent to be found.
The scale of personal and institutional wealth in the area is also a key ingredient for business growth. Entrepreneurs are therefore spoilt for choice when it comes to wealthy investors to pitch their ideas to.
The mindset is also unlike anywhere else on earth. Risk taking and failure are celebrated in Silicon Valley.
Another advantage of the Valley is its ecosystem-led approach to innovation. It has become increasingly clear that a collaborative approach is more effective in achieving sustained competitive advantage over traditional transactional approaches.
The rise of the platform business has been instrumental. Traditionally, the business world has focused on product development, associating the number of products manufactured and sold with revenue growth. Silicon Valley's focus on platform over product has changed this perspective, with a growing number of contemporary tech start-ups offering no physical product at all.
Today, approximately 80% of the top global brands operate from platform-based business models. With companies like Meta (formerly Facebook) placing their focus on improving their platforms to cater to user preferences, it seems likely this new-age mindset is here to stay.
The rise of the "sharing economy" has been particularly lucrative. Two of the most prominent sharing platforms are Uber and Airbnb, now rival the size and scale of some of the world's largest companies in hospitality, transportation and other prominent sectors. Other companies such as Zipcar, Justpark and Fiverr appear to be following suit, rapidly gaining market share in their respective industries by capitalising on the popularity of the sharing economy.
According to a survey of Silicon Valley-based CEOs, the main benefits of conducting business there are its entrepreneurial mindset (83%), access to skilled labor (81%) and proximity to competitors and customers (60%). On Silicon Valley's success story, Elizabeth Charnock of Bloomberg also points out that the community's unique approach to failure has been instrumental. "The Silicon Valley mantra is 'fail fast' and that of the rest of the world is 'don't fail'" she noted.
A league of its own
Over the years, many places have been coined "the next Silicon Valley". However, no location has come anywhere close to rightfully claiming this title.
Silicon Valley hosts 7,894 start-ups. That's more than the entire continent of Europe with a population of 750 million, or China with a population of 1.5 billion. Silicon Valley also has 5 times the number of scaleups of Israel, the place sometimes referred to as the "Start-up Nation".
As previously discussed, there is also no comparison when it comes to the availability of capital. In 2021, scaleups headquartered in The Bay Area raised $501.3 billion in capital, representing 2.6 times greater than their European counterparts and 1.1 times greater than China.
The future
Throughout history, crisis has been a catalyst for innovation. The COVID-19 pandemic accelerated the transition to the digital economy, which had been years in the making. Tech companies were a major beneficiary of this. The pandemic didn't stop innovation (as many predicted), it aided it. Companies like Zoom, which thrived during lockdowns and is also likely to play a crucial role in hybrid remote/office environments going forward, stepped up to fill a new gap in the market.
What happens in Silicon Valley sets the tone for the rest of the world. Many places have tried to match its success story, and some have done well in certain areas. For example, New York (for financial technology), Tel Aviv (for security) and Austin (for digital health).
However, Silicon Valley is almost impossible to replicate in its entirety and is therefore likely to remain the global epicenter of innovation and disruption for many years to come. For this reason, we remain confident that the tech industry can survive (or thrive) from any challenge thrown its way and will continue to invest accordingly.
The good news for Australian investors is that we too can now participate in the success of Silicon Valley. It's never been easy to buy shares in some of the world's greatest companies that are listed in the US.
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