I get asked all the time how other areas can replicate whatever it is that makes Silicon Valley special. The short answer is "You can't", as is the longer answer. But the really long answer is that one of Silicon Valley's less understood secrets -- from an investing standpoint -- is how much of it is tied to a simple idea.
What is that idea? Stanford? Smart engineers? Fairchild and National Semiconductor? The weather? Sure, all of the above, but I'm talking about how it is that there is such a liquid exit market for companies founded in the Valley. Part of it is the quality of the companies, and part is definitely the proximity to like-minded companies with better balance sheets. But a big part of it is the simple and semi-incestous idea of "friends selling to friends":
So much of what happens in the Valley goes like this: Someone starts something, and it gets some investment. It works, or semi-works, and then the investors and founders go looking for a buyer, which they often find at a company where they sold a previous company, perhaps even to the founders of that company, now ensconced at that other company. Hey, you should see this portfolio company, they say, you guys might be interested. And it get even more entrenched than this, with a VC holding at a board seat at a larger company, especially a public one, and using that to vend in portfolio companies, sometimes in surprisingly large numbers.
It's friends selling to friends, and a) it works, and b) adds liquidity to an illiquid market -- even if it isn't always clear that it is in shareholders' best interests at the acquiring company. Nevertheless, It makes a big difference in an investing business where too often the outcomes are binary. Most areas and regions don't have the "friends selling to friends" exit avenue available, and it helps explain why, in turn, they aren't able to achieve Valley levels of investing "success".
Comments