Look­ing be­yond Sil­i­con Val­ley

Financial Mirror (Cyprus) - - FRONT PAGE -

Once again, Cal­i­for­nia’s Sil­i­con Val­ley is con­firm­ing its sta­tus as a mecca of high-tech en­trepreneur­ship and wealth cre­ation. But it is not a model for job cre­ation and in­clu­sive growth that pol­i­cy­mak­ers and en­trepreneurs else­where can em­u­late – at least not with­out mak­ing some fun­da­men­tal ad­just­ments.

To be sure, what is hap­pen­ing in Sil­i­con Val­ley to­day is noth­ing short of daz­zling. Ven­ture cap­i­tal (VC) in­vest­ment has reached near-record highs. Overnight mil­lion­aires – even bil­lion­aires – are pro­lif­er­at­ing. Twenty-some­thing soft­ware coders are com­mand­ing six-fig­ure salaries.

The boom has driven Cal­i­for­nia’s eco­nomic re­cov­ery. And, along with coura­geous po­lit­i­cal lead­er­ship, it has en­abled the state to es­cape from a seem­ingly hope­less fis­cal cri­sis.

But the Sil­i­con Val­ley su­per­star tech com­pa­nies and their VC cham­pi­ons pop­u­late an iso­lated is­land of pros­per­ity. In­deed, just 100 miles in­land, in Cal­i­for­nia’s Cen­tral Val­ley, un­em­ploy­ment rates re­main in the dou­ble dig­its (11.2% in Fresno and 10.4% in Modesto), with av­er­age fam­ily in­come amount­ing to less than half of that in Palo Alto, the heart of Sil­i­con Val­ley. If the ven­ture cap­i­tal­ist Tim Draper had suc­ceeded in his mis­guided ini­tia­tive to divide Cal­i­for­nia into six states, Sil­i­con Val­ley would have be­come the rich­est state in the US, and the Cen­tral Val­ley the poor­est.

The key ques­tion, then, is how to har­ness Sil­i­con Val­ley’s en­tre­pre­neur­ial and in­no­va­tive prow­ess to the goal of in­clu­sive eco­nomic growth in Amer­ica’s heart­land. To some ex­tent, this is al­ready hap­pen­ing, with vi­sion­ary en­trepreneurs in cities like Nashville, Cincin­nati, New Or­leans, Wi­chita, and Salt Lake City adapt­ing Sil­i­con Val­ley’s recipe for suc­cess to lo­cal con­di­tions and op­por­tu­ni­ties – and cre­at­ing much-needed mid­dle-class jobs in the process. But more can and should be done to sup­port this trend.

The Uni­ver­sity of Vir­ginia’s Miller Cen­ter re­cently cre­ated a com­mis­sion (of which one of us, Lenny, was a mem­ber) to iden­tify strate­gies to sup­port the cre­ation of mid­dle-class jobs through en­trepreneur­ship. The ideas pro­posed in the com­mis­sion’s re­port in­clude pro­vid­ing train­ing and men­tors for prospec­tive en­trepreneurs and star­tups, cre­at­ing “ecosys­tems” of sup­port­ing in­fra­struc­ture, and re­duc­ing reg­u­la­tory bar­ri­ers.

The re­port also high­lights the im­por­tance of un­lock­ing cap­i­tal for “Main Street” en­trepreneurs, who strug­gle to find the fund­ing they need to launch, sus­tain, or scale up their op­er­a­tions, par­tic­u­larly as the re­cent re­ces­sion drove out many of the com­mu­nity banks on which they had tra­di­tion­ally re­lied for credit. Sil­i­con Val­ley star­tups, by con­trast, en­joy the gen­er­ous sup­port of VC funds, hav­ing re­ceived 30-35% of all ven­ture in­vest­ment de­ployed in the US since the 1980s.

Not only is VC in­vest­ment con­cen­trated in a small part of the coun­try; it has re­cently tended to sup­port the ex­pan­sion of later-stage in­vest­ments, rather than the launch of star­tups. In other words, VC funds are not well suited to sup­port new busi­nesses that may gen­er­ate a large num­ber of jobs and boost pros­per­ity lo­cally, but that are not close to launch­ing a bil­lion-dollar IPO.

Main Street en­trepreneurs do, how­ever, have two ma­jor – and un­der­used – fi­nanc­ing op­tions. The first lies in the public sec­tor. In the US, the Com­mu­nity Rein­vest­ment Act (CRA) – cre­ated to en­sure that banks that gather de­posits in low- or mid­dle-in­come com­mu­ni­ties rein­vest some of their earn­ings in those com­mu­ni­ties – sup­ports more than $60 bln in com­mu­nity fi­nance, com­pared to the $48 bln of VC fund­ing that was de­ployed last year.

A sec­ond key source of cap­i­tal lies with pri­vate and com­mu­nity phil­an­thropic foun­da­tions, which are re­quired by US law to do­nate at least 5% of their as­sets to char­i­ta­ble causes an­nu­ally. In 2012, such foun­da­tions dis­trib­uted about $52 bln to sup­port their phil­an­thropic mis­sions. They chan­neled most of the rest of their $715 bln in as­sets into tra­di­tional in­vest­ments, in or­der to gen­er­ate re­turns that would ex­pand their cap­i­tal base.

But a grow­ing num­ber of foun­da­tions – such as the Bill & Melinda Gates Foun­da­tion, the Rock­e­feller Foun­da­tion, and the Kresge Foun­da­tion – are in­creas­ing the share of as­sets they di­rect to­ward in­vest­ments that fur­ther their phi­lan­thropy. Such in­vest­ments can help to ac­cel­er­ate im­pact in­vest­ing, which aims to yield both a so­cial and a fi­nan­cial re­turn. Un­for­tu­nately, pro­gramme-re­lated spend­ing still rep­re­sents only 1% of cap­i­tal de­ployed by foun­da­tions, with just 0.05% of that go­ing to­ward eq­uity in­vest­ments.

Public and phil­an­thropic in­vest­ments in lo­cal startup busi­nesses are al­ready pay­ing off, both in terms of cre­at­ing jobs and gen­er­at­ing fi­nan­cial re­turns. An early leader, the Bay Area Eq­uity Fund, raised $75 mln from banks, in­sur­ance com­pa­nies, pen­sion funds, and in­di­vid­u­als; cre­ated about 15,000 jobs, 2,218 of which were in low- and mod­er­atein­come neigh­bour­hoods; and gen­er­ated a 24.4% an­nual re­turn for its in­vestors. The gov­ern­ment can do much to pro­mote such in­vest­ment. For starters, it should re­fine the rules gov­ern­ing which in­vest­ments meet CRA re­quire­ments. Like­wise, as the US task­force on im­pact in­vest­ing rec­om­mended, the au­thor­i­ties should clar­ify the per­mis­si­ble in­vest­ment ac­tiv­ity of tax-ex­empt foun­da­tions.

Just as Sil­i­con Val­ley’s dy­namism should not be di­min­ished, the rest of the coun­try’s en­tre­pre­neur­ial po­ten­tial should not be un­der­es­ti­mated. With the right in­cen­tives and fund­ing from phil­an­thropic sources, jobcre­at­ing en­trepreneurs could serve as en­gines of more in­clu­sive growth in com­mu­ni­ties across the US.

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