Born AgainBorn Again

Businesses need the innovation engineered by startups such as Voltage, GroundWork, and Force10 Networks, which is backed by Morgenthaler Ventures and others, and produces gigabit and 10-Gbit routers. Phil Gaskell, global manager of network technologies at Veritas DGC Inc., which analyzes geophysical data for energy companies, bought 90-port routers from Force10 to connect data centers in the United States, Canada, Singapore, and the United Kingdom. "When we go to Cisco and ask them for [oversized, high-speed routers], we don't fit into their business model. Small startups tend to be a lot more flexible," Gaskell says.

And Silicon Valley startups have the advantage of drawing from some of the best brains from around the world to help drive their innovations. The Stanford University Graduate School of Business says that from its graduating classes of 2003 and 2004, 38% stayed in the San Francisco Bay Area; the engineering school reports that 53% of its graduates stayed. The University of California at Berkeley's alumni office says 50% of engineering grads stayed in the Bay Area between 1999 and 2004, as did 57% of business grads. Eight percent of Harvard Business School's MBA graduates and 9% of MIT's School of Engineering grads head west each year to Silicon Valley, too.

The same goes for some businesses that want to be in the mix. MySQL AB used to have its headquarters in Stockholm, Sweden. But in 2003, it moved its headquarters to Cupertino, Calif. "It's an enormous boost for us to be here," because of the mix of talent, networking opportunities, and potential partnerships, says Marten Mickos, CEO of the maker of the popular open-source database. MySQL has partnerships with Embarcadero Technologies, Hewlett-Packard, Silicon Graphics, SugarCRM, Veritas, and Zend--all in the greater Bay Area. "We know the Silicon Valley is the premier trading place for software, the premium place for software talent," he says.

A good percentage of Silicon Valley talent in recent years has come from foreign nationals. According to AnnaLee Saxenian, dean of the Berkeley School of Information Management and Systems, Chinese and Indian professional organizations such as the Indus Group and the Chinese Software Professionals Association have functioned as social networks, cutting across companies and keeping talent moving around. But more than 200,000 jobs disappeared in Santa Clara County between 2000 and 2004, and many Indian and Chinese engineers and business execs affected by these cuts took their skills and went home to booming economies, says Junfu Zhang, a researcher at the Public Policy Institute of California, a private San Francisco think tank.

Yet even with that brain drain, the concentration of talent in Silicon Valley is hard to duplicate. In Austin, Texas, a technology startup "might have a choice among 12 candidates for CEO," says Foundation Capital's Holland. "Here, there's a hundred choices."

Meanwhile, the highest concentration of jobs in Silicon Valley is in technology design and software development, says Doug Henton, president of Collaborative Economics, a Palo Alto economics research and consulting firm. About 27% of venture capital in Silicon Valley went into software in 2004, up from 23% the previous year, Henton says. "We think it's a positive sign," he says, because those jobs are usually involved with developing software for new products. Software is now a strength of U.S. companies in worldwide markets, says David Yoffie, a Harvard Business School professor. Not only are U.S. software developers maintaining a competitive edge in the IT infrastructure, they're pushing back Japanese dominance in consumer goods, he says.

China and India aren't a threat on this front, yet. "They work the lower end of the software stack, not the innovative, creative end," says Yoffie, though he adds that this will change over time. There's no shortage of brainpower or entrepreneurial spirit in either country, making them potential innovation powerhouses, but it takes time to build up the fluid capital mechanisms that characterize the movement of money stateside, and practice to develop a risk-embracing culture that tolerates frequent failures in hopes of hitting the big one.

For now, Silicon Valley is the place business-technology managers are watching. That includes Jeffrey O'Halloran, manager of Internet services at Millipore Corp., a maker of fine filters and membranes for pharmaceutical and food-processing companies. O'Halloran found he could speed up delivery of application results from his Billerica, Mass., data center to any spot in the world through TCP/IP-acceleration technology that's the brainchild of startup Netli Inc. of Palo Alto. That saved the $820 million-a-year company the cost of building duplicate data centers near customers.

"You never know where the next big thing is going to come from," O'Halloran says. But by all accounts, it's a good bet that in the foreseeable future it will come from Silicon Valley.

Continue to the sidebars:
Success Story: Voltage Emerges From Class Research,
and Big Names Keep An Eye On Small Startups