The Evolution of Silicon Valley’s Innovation Ecosystem: From 2006 to 2016
In this research, we have analyzed the support that Silicon Valley start-ups receive from universities, government and industry throughout their Business Development Process and identified the incentives from public administrations; type and source of investments from the industry; and new programs from universities, established after 2006. We have focused our research on Silicon Valley — a highly competitive Innovative Ecosystem — to determine how and why strong entrepreneurial ecosystems evolve with time. We also aim to identify if specific actions or events trigger evolution.
The study was developed in two parts. The first part uses case-study methodology to compare the start-up development process in Silicon Valley now and 10 years ago. A total of sixteen interviews — six of them with entrepreneurs and ten with key experts — compose this part. The second part analyzes the role of Triple Helix Agents in Silicon Valley, compared with 10 years ago using a quantitative approach.
The Role of Triple Helix Agents Evolves Over Time
From the analysis of data collected during the interviews, we can conclude that the role of triple helix agents evolved over time. The main changes identified during the study are (1) the rise of accelerator programs as new players in the ecosystem; (2) early engagement of some corporations with start-ups; (3) geographical expansion of Silicon Valley, now including San Francisco; (4) increasing commitment of universities with capital funds; and (5) the rise of micro-multinationals due to talent shortage and fierce competition in the area. Other changes have helped to increase the efficiency of an already highly innovative ecosystem.
1. The Rise of Acceleration Programs
While in 2007 there were just 2 accelerator programs in the US, by 2014 the number reached 170, more than 20 in Silicon Valley. The leading accelerator programs include funding, which, combined with training and access to powerful networks, suggest a positive impact on the start-ups. Their overall impact still remains to be assessed. At present, the clear benefit of accelerator programs is a large increase in the number of seed deals sealed. In 2016, two accelerators were on the top 15 list of the most active US VC Firms by number of deals.
2. Big Companies Engage Sooner with Start-ups
Big tech companies that were start-ups 10-15 years ago are changing the “rules” by engaging sooner with start-ups. Corporate Venture Capital funds (CVCs), Corporate Accelerators and acquisitions are the most popular ways of engagement.
Despite the long-time existence of CVCs, the present amount of funds is extraordinary, including traditionally non-tech companies such as 7-Eleven or Walmart. In spite of the high performance of some of them: Intel or Google Ventures (GV); the immaturity of other CVCs is causing a high level of skepticism among some entrepreneurs and investors. Overall, we expect that CVCs will consolidate as a mature agent of the ecosystem in the near future.
Accelerator programs are another way corporates engage with start-ups. Since most organizations are still experimenting with different ways of setting up and managing their accelerator initiatives — either running the program in-house or outsourcing its administration to a partner such as Techstars, LMarks, or Nest — we will have to wait to see the real benefits of these initiatives.
Shifts within Investment Stages — fewer chances to become a Unicorn
Investors have also advanced. Business Angels are becoming more organized and syndicated which is helping to spread their work and professionalize their role. For their part, VC Firms are focusing on specific technologies while providing an array of other services to their companies.
As more accelerator programs appear, angel investors have become more organized and reachable, and corporates invest in early development technologies, sources of investment for seed and early stages have increased rapidly. But, while the number of seed and early stage deals is increasing, the investment funnel in later stages is shrinking, turning the growth stage into the most difficult for start-ups.
Now, VC Firms are “Playing too big to fail” (Lazansky, 2017). Now, we see fewer deals but a bigger share of the investment at expansion and later stages, therefore fewer companies are being funded with larger amounts of money
3. San Francisco & Silicon Valley Synergy
All these changes concurred with Millennials reaching adulthood and demanding to live in a walkable city. The City of San Francisco embraced this young population, and helped to create an environment to attract tech companies. The redevelopment of SOMA and Potrero Hills, and the widely criticized Payroll Tax Exclusion Program are some of the examples that have extended Silicon Valley (historically related to Santa Clara County) to San Francisco. Although the Payroll Tax Exclusion Program attracted new ventures into the city, and allowed them to maintain their teams there, the economic effects remain to be seen when the actual incentives finish by the end of 2018.
By now, this has caused the known bad-effects of gentrification (Atkinson, 2004), and the creation of a New Economy in the inner city (Hutton, 2000, 2004).
Some corporations, listening to their employees demands and usually against their corporate philosophy, are now opening small offices in San Francisco. Being in a “cool” neighborhood helps with recruitment and retention (O’Mara, 2015).
We are also seeing a shift in cities’ role from customers to facilitators. Cities like San Jose are becoming technology platforms, allowing emerging and consolidated companies to showcase their new technologies in a real environment.
All being said, San Francisco and Silicon Valley seem to have developed a synergy: single people and couples with no children tend to live in the city, and once their family grows, they move out of the city to quieter, more family-friendly areas. A similar phenomenon occurs in companies: start-ups begin their journey in the city, where companies take advantage of social agglomeration factors, and once their venture reaches a certain level (after early stages), they leave the city to grow in a cheaper and distraction-free environment.
4. Universities are getting closer to Industry
Universities are offering more and more ways for students to pursue an entrepreneurial path — Business/Lean Plan competitions and awards; cross-faculty programs; incubators and accelerators; commercialization of science — and at the same time getting closer to investors and VC Funds through the prolific rise of University-backed VC Funds. Investing in their own students’, researchers’ and professors’ ventures, universities are demanding their share in the seed and early round space.
This also means an increasing need to establish formal connections and relations with other investors to help their companies secure next rounds.
Through the i-corp Program — a Federal Program that promotes commercialization of science — Universities are increasing their relationship with companies and markets.
Offices of Technology License (OTL) are also becoming more ‘startup-friendly’ with the inclusion of spin-off companies and technology transfer to start-ups as key indicators. Other universities have developed specific programs to help their researchers or professors to pursue businesses based on OTL technologies.
5. The Rise of Micro-Multinationals
Talent, the main driver of Silicon Valley’s growth and success, is becoming a challenge, especially for new start-ups that struggle to recruit their first employees. The recent collapse of the H1B Visa Program — designed to attract international talent — and the exponential growth of the main tech companies’ workforce, have caused a shortage of engineers that have seen an increase in base salary over and above the average.
New start-ups are inclined to move their engineering teams partially abroad. Other entrepreneurs are following a different path, starting their companies elsewhere and moving to Silicon Valley to grow.
Both models seem to replicate the Israeli model, followed also by most international companies when entering Silicon Valley. These might lead to a change in the type of companies seen in Silicon Valley in the near future, where fewer engineers will be needed, and only the core of the company — founders, business development and design team — will be in Silicon Valley.
Conclusions of: Botey, M., Pique, J.M. and Miralles, F. (2018). ‘The Evolution of Silicon Valley’s Innovation Ecosystem: From 2006 to 2016’. In: XXXV IASP World Conference on Science and Technology Parks. Isfahan (Iran).