Out-Innovated

August 07, 2020 / Steffen Bartschat

Is Silicon Valley still relevant as a model for innovation? I would say that as long as authors of books, articles, and press releases feel the need to compare their subjects to Silicon Valley, it is relevant. I came across a new book with a provocative title, Out-Innovate, by Alex Lazarow, a Silicon Valley venture capitalist. The title and byline, “How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley,” seems to imply that maybe the Silicon Valley model is no longer relevant as innovation practices are getting adapted at what Lazarow calls “the frontier.” Naturally, I was skeptical.

The first half of this book reinforced this skepticism. I would title this part of the book, “A VC comes of age.” Lazarow learns that not all great businesses use an asset-light strategy like Uber, accompanied by drunken-sailor like spending to expand faster than the competition, unit-profitability be damned. He also learns that not every great startup is founded by two white 20-something males that just graduated from Stanford. And he learns that there are plenty of great startups that are not headquartered in Silicon Valley, or if they are, many maintain a majority of operations elsewhere to attract engineering talent more easily.

All of the above has been obvious to most of the Silicon Valley community for the past 15 years – except for the VC lemming investors that thought the solution to all of the world’s problems would be… scooters. Ok now I am being unfair to Lazarow as I am associating him with the lemmings. His book proves he is not one of them!

Next, Lazarow tackles talent management. He provides a good overview of how “A-teams” get built in Silicon Valley, but then turns this strength into a supposed weakness: there exists a lack of loyalty and retention. But this begs the question, how did we become the best at what we do? Why do entrepreneurs from all over the world visit to size themselves up against the local ecosystem? It is precisely because of our wealth of experiences across multiple companies and our enthusiasm for working at high-risk startups. After all, if that growth opportunity or startup is a flop, who cares, I just park my car next door at another company. This highly competitive talent-driven model also ensures that more of the eventual rewards of scaling the company will flow back to the employees that made it happen – if founders and investors are not generous with stock options, the talent will have plenty of alternate choices!

Speaking of scale, Lazarow’s limited operational experience shows when he describes in glowing terms how a loyal employee in Ottawa, Canada started as an office manager for Shopify and eventually became its SVP of human capital. Is that really the best approach? In Silicon Valley, as your business begins to scale rapidly, you have ready access to a fleet of middle managers available to hire that have been there, done that. They know what’s likely to be around the next corner, instead of wasting time by making mistakes and learning on the fly. Around here good executives advertise, “I can take your engineering team from $10M to $100M (in revenue)”. At that point they know it’s time to leave, making room for the executive that can scale the team to $1B. Loyalty at a growing startup is a two-edged sword, often resulting in long-time employees in over their heads. There are exceptions of course, so maybe at Shopify they got very lucky with a brilliant employee that can scale their skillsets at the same pace as a rapidly growing company….

If the talent management section was my biggest disagreement with the book, the “Reinvent Finance” chapter was the biggest puzzler. Lazarow uses a series of complicated “power-law” and “normal-distribution” curves to illustrate a pretty basic concept: Silicon Valley VCs make big investments, looking for big returns on a few companies in their portfolio. But not all businesses are suitable for VC level investments – whether in Silicon Valley or anywhere else in the world – yet they can still earn good returns. Like I said, that’s basic information - no need for any “Frontier power-law” mumbo jumbo. Next, Lazarow gives a positive review of the SoftBank Vision Fund without acknowledging its track record for driving stratospheric valuations in the very “asset-light” Silicon Valley startups that he excoriates in an earlier chapter. Finally, he seems to recommend a new-fangled royalty-based investment structure for mid-tier businesses that don’t expect unicorn exits. Hmm, that strategy seems quite risky, especially if you need to raise future investment rounds. Angel investors may make a better alternative – we like great businesses with modest capital needs and, given the smaller investment amounts, don’t require a $10B exit valuation. Angel investing is huge in Silicon Valley and growing rapidly in every part of the world with an entrepreneurial scene. This is a far bigger trend than “revenue share investing”, but it gets no mention in this chapter.

The last part of the book describes how entrepreneurs at the “frontier” are creating local innovation ecosystems that look very different from Silicon Valley – they do this by necessity, since they don’t have the same advantages as we enjoy here such as easy access to capital, a large market, and most important, a vibrant community that helps and encourages each other. They are hardly “out-innovating” Silicon Valley, they are compensating as best they can for their local ecosystem’s weaknesses.

Lazarow provides many well-researched examples throughout the book of entrepreneurs that have managed to thrive in their part of the world. These stories are the best part of the book. Come to think of it, maybe my biggest issue on the book is with its title – Out-Innovate. Lazarow never proved his thesis that Silicon Valley has become irrelevant, in fact most of the book’s contents would support the claim that we will remain the leader in innovation for the next decade or longer. Global entrepreneurs and those trying to build innovation ecosystems will continue to find inspiration here, but as Lazarow rightly points out, the takeaways then need to be adapted to the nuances of the local ecosystem. Silicon Valley never claimed to have a lock on opportunity. It exists everywhere around the world. We do have a few good ideas though.