The author of books on Silicon Valley explained the phenomenon of the ecosystem and the reasons for the failure of its clones

    On September 14, with the support of the Yegor Gaidar Foundation, Ilya Strebulaev, professor of finance at Stanford University Graduate School of Business, held a regular lecture in Moscow. Ilya is the author of his own course and book on Silicon Valley.

    Russia is one of the five most active countries supplying startups to Silicon Valley. Among the valley projects, 5% of Russian origin. But more than 30% of projects are launched by immigrants from India.

    In an interview with the Slon correspondent, Mr. Strebulaev also shared his thoughts on the secret of Silicon Valley success and the reasons for the failure of its clones.

    "Megamind" gives the most interesting statements of the professor.

    Dosed State Support


    The US government provided new investment mechanisms by adopting the Prudent Man Investor Act in 1979, which allowed insurance and pension funds and other investors to invest in risky assets through venture capital funds. Thanks to the Prudent Man Investor Act, the total capital inflow to the technology sector increased 50–100 times.

    But it is equally important that quite quickly the state almost completely abandoned decisions on whom and for what to give money. This is precisely what many countries where they rely on state financing do not succeed: the state gives money “from and to”, without attracting private capital and without creating structures that would allow the state to step back at some point.

    The best example of "cloning" Silicon Valley


    Only Israel, which can be considered the best example of the reconstruction of the Valley, failed to make this mistake. In Israel, the state created funds for investments in technology, but together with American funds, which were later replaced by Israeli private investors. Officials in Israel did not indicate who would invest in what projects, and this is very correct. I don’t know a single career American official who is as good at financing innovation as a professional investor. When private foundations do not give money to Solyndra, the manufacturer of solar panels, and then the project is supported by the state, it doesn’t end with anything good: taxpayers lose hundreds of millions of dollars.

    Continuous financing of technological projects


    You can raise several tens of thousands of dollars when you have only an idea, and you can expect to attract billions of dollars when you go on an IPO. And since the path of innovative companies to profit takes a long time (on average, eight years pass from the first investment to an IPO), such an ongoing chain of capital inflows is a matter of life and death.

    Only 10% survive in Silicon Valley, and only 0.5–2% turn out to be truly successful, then guarantees and security are needed. They are provided by tools such as convertible preferred stock and convertible note. They suggest that if the investor does not return the invested funds, then he receives all rights to the company and all its exhaust. On the other hand, an entrepreneur whose company is gaining momentum can count on a large piece of the pie.

    Silicon Valley Funding Evolution


    In recent years, the “ladder” of continuous financing has changed. Firstly, there is a noticeable influx of investments in the early stages. Ten years ago, there couldn’t be such a boom of angels: to start a software project, an entrepreneur needed at least several million dollars (to buy Oracle systems, rent an office, hire developers), and such money could be given mainly by venture capital funds.

    Now $ 50-100 thousand is enough at the start, therefore there are much more private investors. Technology at a higher level needs investors with more expertise and more impressive amounts, so that neither angels nor crowdfunding will crowd out venture capital.

    So, although the investment climate is good in the Valley now, there is no doubt that there will be a decline. It is hard to say how soon it will begin. But this certainly cannot be considered a failure of Silicon Valley, this is a normal stage in the development of such ecosystems.

    Combining theory and practice


    Stanford University and other leading US universities remain the core of Silicon Valley. In Russia, Stanford is perceived as a top university that can be compared with Moscow State University. This is not true. In Russia, a university is an educational institution, and scientific research lives in the institutes of the Russian Academy of Sciences. In the USA, science and study are developing together; Stanford performs the functions of both the Russian Academy of Sciences and Moscow State University.

    In Russia, many scientists believe that they should not stoop to commerce, that respected researchers are aloof from money and introductions. This is the exact opposite of the American, a little hypocritical approach: the vast majority of Stanford scientists are “advisers” in venture funds and startups. It’s the other way round: if you have an idea and you can realize it, it will have a good effect on your reputation.

    Is it possible to repeat the synergy of science and education embodied at Stanford? Yes. I do not follow the development of Skolkovo, but if it is this idea that is laid down in the project of the innovation center, it is correct. The main thing is that officials understand that to repeat the success of Stanford, it is not enough just to pour in $ 2-3 billion, invite corporations and build beautiful buildings. There are many factors to consider.

    Reverse side of ups and downs


    There is a culture of risk taking in the Valley: people are not so worried that they won’t succeed. Of course, no one focuses on failures, but if this happens - this is not the end of a career, not a cross on the possibility of success. Therefore, many multi-billion dollar companies fired not with the first idea of ​​their creators, but after the pivot.

    In many countries of continental Europe, in Asia, the right of error is not recognized for a person. If, for example, you open a restaurant in a French village and get burned out, most likely you and your family will have to leave, because within 50-100 years you and your family will be known as those who failed the business. And according to the laws of France, you, as the former general director of the company that will be closed, will not be able to stand at the helm of the business again in the next 5-10 years.

    Accordingly, the pivots will not work in this regard: the first thought of an investor who discovers that not the idea for which he gave money is made with his money, but a new one - this is the idea of ​​withdrawing money. In Silicon Valley, all financiers understand that they are investing in an idea that could change.

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