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Business model innovation is making Silicon Valley less important as a startup center April 19, 2010

Posted by jeremyliew in growth.

Last week I noted some companies that have quickly grown revenues to over $1M/mth, including Zynga, Playdom, Playfish, Gilt, Hautelook, RueLaLa, Groupon, Living Social, Lifelock and Zoosk. Later I and others added Crowdstar, Cash4Gold, Shoedazzle, Second Life and TheLadders to this list.

It’s interesting to break this list down geographically, especially if you seperate the gaming/virtual world companies from the rest.

  • Gaming Companies in the Bay Area: Zynga, Playdom, Crowdstar, Second Life
  • Gaming Companies outside the Bay Area: Playfish (London)
  • Other Companies in the Bay Area: Zoosk
  • Other Companies outside the Bay Area: Gilt (NY), HauteLook (LA), RueLaLa (Boston), Groupon (Chicago), Living Social (DC), Lifelock (AZ), Cash4Gold (FL), Shoedazzle (LA), TheLadders (NY)

Given that the the Bay Area attracts the most VC funding (a proxy for startup activity), the fact that most of the gaming/virtual world companies are based here isn’t too surprising. But what is pretty surprising is that the vast majority of other fast growth companies are from outside the bay area.

One notable thing about many of these companies is that they innovated more on business model than on technology or product. While there is some core technology to each of these companies,  most of them have more people in functions like marketing,  sales, customer care, merchandizing etc than in technology. This is in marked contrast to the gaming and virtual world companies where the bulk of the headcount is in technology since the product is the game.

Many other “hot” companies in the bay area also show a bias towards product and technology in their employee mix; youtube, facebook, digg, etc.

When product and technology are core to the success of a company, Silicon Valley still dominates the startup scene, but when the innovation is in other functions, and technology is more an enabler than core to the product, other regions can be as competitive, if not more so.

What do readers think?


1. Lateef - April 19, 2010

The costs of starting up continue to decline in terms of hardware and software, which has been well documented. However, there are a lot of other factors that haven’t been explored as much. For example, the rise of social networking has helped level the playing field. On blogs and Twitter, I can network with Silicon Valley-based lawyers, VCs and other facilitators from anywhere (I’m in the middle of Nebraska). Social networks also make it easier to promote new businesses and market categories from anywhere. On the technology side, frameworks like LAMP have finally diffused to a majority of technologists. I can hire a PHP programmer easily in Nebraska and that wasn’t possible five years ago. Another key area that gets overlooked is design. During the boom and bust, start-ups were differentiated by the branding look and feel they could establish with venture-backed cutting edge design firms. Now you can get that same look and feel from a growing number of top notch design firms in Omaha (Oxide Design is world class: http://www.oxidedesign.com). Finally, blog technology is allowing all regions to create a entreprenurial community. Silicon Prairie News serves as a local TechCrunch and BIG Omaha serves as a local TechCrunch 2.0 for Nebraska, Iowa and Missouri. All of these factors are forming a tipping point for allowing technology companies to be started from anywhere.

Silicon Valley still has a certain magic. The mass of successful entrepreneurs who now serve as mentors and angels can’t be matched outside of the Valley. In addition, discussing cutting edge tech and marketing with the average person outside the Valley bubble is still met with blank stares and cautious support vs. immediately “getting it” and offering a list of valuable personal contacts. But the advantages of location are rapidly declining.

2. MoeJoe - April 19, 2010

The hottest unchecked company is called Immersion Labs, LLC. It’s not based in SF Bay area. What they are doing in gaming is unreal if it’s true. They say on their site that their new game will have 13 million zones for players to play in. They said the same thing on Twitter too…… but I think the Twitter guy is a bit nuts. I can’t imagine what their budget must be but from the looks of their site, every penny they have must be going into their game. ahHAhah

3. Chang - April 19, 2010

I’m not sure if classifying Zynga et al as “technology” companies. Yes many of their employees are engineers, but many social gaming and virtual goods startups in the Valley got their original inspiration from South Korea (and they’re pretty public about it). Also usually Zynga games are not such “high-tech” games like 3D MMORPG, but are more of casual, relatively easy-to-build games.

4. Aryan - April 19, 2010

I concur with Chang above — calling Zynga and other casual gaming outfits as *technology* companies is a bit of a stretch.

In general, Silicon Valley is definitely the best place for doing *technology-driven entrepreneurship* because
a) finding good engineering and product talent is easy
b) finding VCs who invest in early-stage tech startups is easy.
c) the local culture is not averse (in fact, it is somewhat encouraging) to doing startups

If you want to innovate on the business model (think LinkedIn, think Ladders, think Doostang), then one could be based anywhere as finding good enggr/product talent is not *critical* (but still good-to-have). However, points b and c still hold. c is somewhat less relevant though. W.r.t (b), this is not so easy outside of Silicon Valley or other major early-stage VC hubs (like NY, Boston etc).

India is a fantastic case in point: Most Silicon Valley VC firms focus and invest in early-stage tech/non-tech startups but their India offices have the mandate to be sector-agnostic and focus on growth stage opportunities, and not do any early-stage (tech/non-tech). This is kind of a bummer as even though India may not have the best tech talent (the cream of the crop is sitting in Silicon Valley), it is still full of smart people who are very capable of innovating on the business model,identify large local market opportunities etc. Think of companies like makemytrip, naukri, flipkart etc. Now, they are all VC-funded but more like growth-stage capital instead of early-stage. It’s extremely hard to get a company (tech/non-tech) off the ground in the India if the capital requirements are anything non-trivial and the break-even point is more than 6-12 months away. Once you get it off the ground, and get ‘traction’ (i love this word), scaling it with growth capital is fairly easy.

What do you think Jeremy ?

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[…] -That's what Lightspeed Venture Partners' Jeremy Liew says on his venture firm's blog and adds that the innovation these days is coming in the form of business models rather than technology or product – and then he lists a bunch of companies to prove his point. "While there is some core technology to each of these companies, most of them have more people in functions like marketing, sales, customer care, merchandizing etc than in technology," says Liew. Read it. […]

6. Ted Rheingold - April 20, 2010

Overall I very much agree. In fact, I’d hazard a guess that the cause is that the business mindset in the greater Bay Area is on technology and product, whereas elsewhere, the business mindset is still the more traditional focus on revenue and profitability.

7. steve chang - April 20, 2010

A lot of the companies you mentioned: Gilt, Groupon, HauteLook, RueLaLa, Living Social, LifeLock, TheLadders, ShoeDazzle, & Cash4Gold are all extremely active (and presumably very adept) performance-based marketers. Product/technology-centric Silicon Valley companies generally look down on paying for customer acquisition, and at the very least don’t have this in their DNA, so it makes sense that many of the companies on your fast-growing list are based elsewhere.

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11. Oleg - May 10, 2010


12. kempion - May 11, 2010

This coming for the $13m investors in SHOES.

I’m clearly not a VC butt-kisser (read that as most posters ARE).

The truth is the VC model is broken. For once, I actually think Congress will get one right when they raise the requirements for who can be a VC.

That said, the VC’s can only blame themselves for not monitoring their own. When you see a foul, say so. When you find a fraud, expose them. And, for the love of God, stop offering to buyout start-up companies who are asking for VC funding AFTER they generate revenues. If they are generating revenues, they don’t need a buyout and they don’t need YOU.

13. Top 4 treats of failing business models « Failures – exposed, reflected upon, considered - October 17, 2010

[…] stil lworks for many a business, many startups and small businesses grow exponentially by embracing innovative business models for such wide and overcrowded markets as online gaming or discount […]

14. Lightspeed invests in Shoedazzle | SGEye Eyes the World - December 20, 2010

[…] company is based outside of Silicon Valley (LA) and is definitely built on the back of business model innovation, as are many of the current crop of fast growth […]

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