Sil­i­con Val­ley Is the New Detroit

Don­ald Trump’s poli­cies could turn Sil­i­con Val­ley into another Detroit.

Newsweek - - FRONT PAGE - by Kevin Maney

By 1908, when Henry Ford started build­ing the Model T in a fac­tory there, the au­to­mo­bile was the most im­por­tant new tech­nol­ogy in the world. The in­dus­try co­a­lesced in and around that city as in­ven­tors and in­vestors rushed to the re­gion. Out of a tor­rent of star­tups—cadil­lac Au­to­mo­bile Co., Dodge Broth­ers, Du­rant Mo­tors, Mer­cury Cy­cle­car Co.—a few global mono­liths emerged and con­sol­i­dated. For the next four decades, Ford, Gen­eral Mo­tors, Chrysler and the city’s car­mak­ing ecosys­tem dom­i­nated ev­ery as­pect of the global auto in­dus­try—and, for that mat­ter, the U.S. econ­omy. Charles Wil­son, who was the pres­i­dent of GM be­fore be­com­ing Pres­i­dent Dwight D. Eisen­hower’s sec­re­tary of de­fense, coined the phrase “What’s good for Gen­eral Mo­tors is good for the coun­try.”

The 1960s were Detroit’s apex. In the early 1970s, du­bi­ous U.S. eco­nomic and for­eign pol­icy led to dis­as­ter when the OPEC na­tions ini­ti­ated an oil em­bargo. Gas be­came scarce and ex­pen­sive, and Detroit was caught fo­cus­ing on the wrong prod­ucts—os­ten­ta­tious gas-guz­zlers—at the wrong time, giv­ing Ja­panese mak­ers of small cars an open­ing in the U.S. mar­ket. Pulitzer Prize–win­ning auto his­to­rian Joseph White wrote about two fate­ful mis­takes that made things worse. First, “Detroit un­der­es­ti­mated the com­pe­ti­tion,” he said. The likes of Toy­ota and Honda had be­come much more adept than in­dus­try ex­ec­u­tives re­al­ized. Sec­ond, the U.S. com­pa­nies “han­dled fail­ure bet­ter than suc­cess.” Detroit’s decades of tri­umph set up the hubris, waste and bad prac­tices that came to haunt it.

From there, it was a short trip to loss of mar­ket lead­er­ship, lay­offs, plant clos­ings and a city that fell into a des­per­ate de­cline.

Think that could never hap­pen to Sil­i­con Val­ley? Like 1970s Detroit, Sil­i­con Val­ley seems to be han­dling suc­cess rather badly. Look at the twisted mess at Uber and the cul­ture wars tear­ing at Google’s guts. In­sanely high val­u­a­tions of pri­vate com­pa­nies are start­ing to look like a per­ilous pyra­mid scheme Bernie Mad­off might ad­mire. High costs and ev­er­wors­en­ing con­ges­tion are mak­ing the San Fran­cisco Bay Area nearly un­liv­able for all but the su­per­rich. At the same time, much of U.S. tech is un­der­es­ti­mat­ing the com­pe­ti­tion, par­tic­u­larly from China and the Euro­pean Union.

Mak­ing it all worse, the Trump ad­min­is­tra­tion seems to be do­ing every­thing it can to help shove Sil­i­con Val­ley off its pedestal. Trump’s poli­cies on trade, im­mi­gra­tion and in­vest­ment are giv­ing com­pet­ing na­tions open­ings to steal im­por­tant chunks of Sil­i­con Val­ley’s global lead­er­ship, lure away ta­lent and di­vert cap­i­tal to other ris­ing tech cen­ters—even France. (You know, the coun­try Pres­i­dent Ge­orge W. Bush once


said doesn’t even “have a word for en­tre­pre­neur.”)

The Sil­i­con Val­ley tech in­dus­try isn’t go­ing to sud­denly crum­ble and van­ish. Detroit’s auto in­dus­try didn’t dis­ap­pear ei­ther. But there’s a clear de­mar­ca­tion point in the early 1970s, when Detroit’s world­wide hege­mony ended. The CEOS, founders and wiz­ards of Sil­i­con Val­ley would be mis­guided to think they’re im­mune from any sim­i­lar stum­ble off their pedestal.


I FIRST MET Stepan Pachikov in Moscow in 1991. He had founded Para­graph, one of the first pri­vate soft­ware com­pa­nies in the col­laps­ing Soviet Union. Para­graph had de­vel­oped a way for com­put­ers to rec­og­nize hand­writ­ing—not easy in those days. Ap­ple ended up li­cens­ing the soft­ware for its ill-fated New­ton, a hand­held PDA. Be­fore 1991, a cit­i­zen of the USSR could barely dream of work­ing in Sil­i­con Val­ley. “The ma­jor ob­sta­cle be­tween me and the world was the Soviet Union,” Pachikov once told me. When the Sovi­ets could no longer keep their peo­ple from leav­ing, Pachikov bolted for the most dy­namic tech­nol­ogy cen­ter on the planet, mov­ing his com­pany and his fam­ily to the Bay Area. In 1997, he sold Para­graph to Sil­i­con Graph­ics for $50 mil­lion.

A few years af­ter, Pachikov built on his knowl­edge of char­ac­ter-recog­ni­tion soft­ware and founded a com­pany you’ve prob­a­bly heard of: Ever­note. Based in Red­wood City, Cal­i­for­nia, in the heart of Sil­i­con Val­ley, Ever­note makes a pro­duc­tiv­ity app and has around 400 em­ploy­ees. It has raised 10 rounds of fund­ing from 15 in­vestors, in­clud­ing top-tier ven­ture com­pany Se­quoia Cap­i­tal. The story is Sil­i­con Val­ley at its best: lure great in­no­va­tors; make cap­i­tal avail­able; let the startup draw from a lo­cal mi­lieu of the best en­gi­neers, coders and MBAS; and watch as the en­ter­prise moves the world ahead a few steps.

Fast-for­ward a cou­ple of decades. In­cluded in the fam­ily that Pachikov moved to the U.S. was a son, Alex, now 37. Alex Pachikov re­cently started Sun­flower Labs, a com­pany that mar­ries ar­ti­fi­cial in­tel­li­gence and drones to cre­ate a new kind of home se­cu­rity sys­tem. But to him, the tech scene looks dif­fer­ent from the one his fa­ther em­braced—it’s now spread across the globe. “My R&D of­fice is in Zürich,” he says. “My in­dus­trial de­sign, graphic de­sign and PR are in San Fran­cisco. One of my in­vestors-ad­vis­ers is in Tokyo. Our man­u­fac­tur­ing will be in China and Tai­wan. Get­ting all the time zones right is a chal­lenge.”


The arc of the Pachikovs sug­gests that Sil­i­con Val­ley, once cen­ter of the tech uni­verse, is now just a star in a constellation. Alex Pachikov’s com­pany-cre­ation story is be­com­ing more com­mon. Tech in­vestor An­dres Bar­reto said he has six com­pa­nies in­cu­bat­ing in­side Y Com­bi­na­tor in Sil­i­con Val­ley, “but their engi­neer­ing teams are all in Latin Amer­ica or they are start­ing to build teams in Latin Amer­ica.” The tran­si­tion is re­flected in tech job list­ings in Sil­i­con Val­ley, down 5.9 per­cent the first half of the year, ac­cord­ing to jobs site In­deed. The trend shows up in the num­ber and kinds of com­pa­nies started. The re­gion’s seed and an­gel in­vestors com­pleted about 900 deals in the sec­ond quar­ter of 2017, down from 1,100 the same quar­ter a year be­fore, ac­cord­ing to a Pitch­book re­port, while com­pany cre­ation is climb­ing glob­ally.

Famed tech an­a­lyst Mary Meeker noted that 60 per­cent of the most highly val­ued U.S. tech com­pa­nies were founded by firstor sec­ond-gen­er­a­tion Amer­i­cans. Those com­pa­nies em­ploy 1.5 mil­lion peo­ple and in­clude Ap­ple, Al­pha­bet, Ama­zon and Face­book—four of the most valu­able com­pa­nies in Amer­ica. Imag­ine the long-term im­pact if more would-be im­mi­grants to the U.S. launch their star­tups from wher­ever they are now—if the likes of Stepan Pachikov don’t make the jour­ney. The im­pli­ca­tions are enor­mous for the U.S. econ­omy, and it could af­fect Amer­ica’s po­si­tion in the world. The U.S. projects its cul­ture and val­ues through its tech ex­ports. Bil­lions of peo­ple glob­ally are on Face­book, use iphones and rely on Google—all made in Amer­ica. The next gen­er­a­tion of tech­nol­ogy, com­ing from na­tions other than Amer­ica, might look and feel dif­fer­ent.


IF SIL­I­CON VAL­LEY’S dom­i­nance wanes, it will be in part be­cause of what it’s do­ing to it­self, and what is be­ing done to it by Don­ald Trump.

Re­mem­ber all the fuss last year about the ex­plo­sion of tech “uni­corns”—those pri­vately held bil­lion-dol­lar com­pa­nies? The fi­nan­cial trap be­hind that trend is threat­en­ing Sil­i­con Val­ley’s com­pany-build­ing model.

Be­cause of U.S. reg­u­la­tions and shift­ing at­ti­tudes in the tech in­dus­try, suc­cess­ful star­tups are stay­ing pri­vate. Ini­tial pub­lic of­fer­ings used to be a com­mon way for emerg­ing com­pa­nies to fi­nance growth, but in 2016, ac­cord­ing to a new pa­per by in­vest­ment startup Ur­gent In­ter­na­tional, just 18 U.S. com­pa­nies com­pleted IPOS that raised less than $50 mil­lion, com­pared with 557 com­pa­nies in 1996. In other words, within 20 years, an im­por­tant path to ex­pan­sion for small, fast-grow­ing Sil­i­con Val­ley star­tups has been blocked. In­stead, com­pa­nies rely on rounds of pri­vate fi­nanc­ing, which in­flate or mud­dle val­u­a­tions, lead­ing to uni­corns that shouldn’t be uni­corns. Ur­gent has a plan to ex­ploit Sil­i­con Val­ley’s IPO prob­lem: It is propos­ing a way to take U.S. com­pa­nies pub­lic on other stock ex­changes around the world. “It’s a huge op­por­tu­nity for us as a fund amid a trav­esty for U.S. tech com­pa­nies,” Ur­gent’s Jeff Stewart tells me.

The fi­nan­cial mess in Sil­i­con Val­ley is writ large in the tur­moil at Uber. Founder Travis Kalan­ick, who was ousted as CEO but re­mains Uber’s chair­man, re­fused to con­sider tak­ing Uber pub­lic. He also raised huge round af­ter huge round of pri­vate fi­nanc­ing, so Uber is now val­ued at $70 bil­lion—

more than Ford or GM. Yet, at some point, the com­pany will run out of “greater fool” in­vestors who will put up fund­ing at even higher val­u­a­tions, lim­it­ing Uber’s abil­ity to raise money. New CEO Dara Khos­row­shahi says Uber may go pub­lic around 2020, but pub­lic mar­kets might value Uber lower than the pri­vate val­u­a­tions, which would mean big losses for Uber’s pri­vate in­vestors.

This ten­sion over an IPO was at the heart of why one of Uber’s main in­vestors, ven­ture com­pany Bench­mark Cap­i­tal, sued Kalan­ick in a strug­gle to con­trol the com­pany, mak­ing for a mind-jar­ring sce­nario: one of the most suc­cess­ful tech VCS su­ing one of the most suc­cess­ful com­pany founders—an epic Sil­i­con Val­ley equiv­a­lent of Bru­tus turn­ing on Cae­sar. In fact, Uber in­vestor and Kalan­ick sup­porter Shervin Pi­she­var un­leashed in Au­gust a Shake­spearean tirade aimed at Bench­mark: “Let our just cause give pause to those who would ever dream of ever em­u­lat­ing the shame­ful shenani­gans of th­ese sanc­ti­mo­nious hyp­ocrites,” he fumed. You don’t of­ten see that in busi­ness cir­cles.

At the same time, is­sues of sex­ism and dis­crim­i­na­tion are sul­ly­ing Sil­i­con Val­ley’s self-im­age as a land of op­por­tu­nity for all. At Google, low-level en­gi­neer James Damore wrote an an­tidi­ver­sity man­i­festo that went vi­ral and chal­lenged the lead­er­ship of CEO Sun­dar Pichai. A book by Ellen Pao, who fa­mously sued ven­ture cap­i­tal gi­ant Kleiner Perkins for sex­ual dis­crim­i­na­tion, just came out, squirt­ing more lighter fluid on that is­sue’s hot coals.

In another ring of the Sil­i­con Val­ley circus, Tesla CEO Elon Musk has been slam­ming Face­book CEO Mark Zucker­berg, mock­ing his knowl­edge of AI as “lim­ited” af­ter Zucker­berg ac­cused Musk of mak­ing “ir­re­spon­si­ble” com­ments about AI be­ing dan­ger­ous to hu­man­ity. This would be as en­ter­tain­ing as watch­ing Bugs Bunny de­bate duck sea­son vs. rab­bit sea­son with Daffy Duck, ex­cept it re­flects a grow­ing and some­times hos­tile di­vide in tech over whether AI needs to be tamed or let loose.

Most dam­ag­ing of all may be the poli­cies of the Trump ad­min­is­tra­tion, which has been im­ple­ment­ing or propos­ing one pol­icy af­ter another that puts the in­dus­try at a com­pet­i­tive dis­ad­van­tage. Ear­lier this year, the pres­i­dent ini­ti­ated a re­view of H-1B visas for for­eign work­ers, which tech com­pa­nies rely on to bring in ta­lent. More re­cently, the Trump ad­min­is­tra­tion de­layed—and may kill—the In­ter­na­tional En­tre­pre­neur Rule, which would make it eas­ier for for­eign com­pany founders to bring their star­tups to the U.S. “At a time when coun­tries around the world are do­ing all they can to at­tract and re­tain tal­ented in­di­vid­u­als to come to their shores to build and grow in­no­va­tive com­pa­nies, the Trump ad­min­is­tra­tion is sig­nal­ing its in­tent to do the ex­act op­po­site,” said Bobby Franklin, pres­i­dent and CEO of the Na­tional Ven­ture Cap­i­tal As­so­ci­a­tion.

And in early Septem­ber, Trump said he will end the De­ferred Ac­tion for Child­hood Ar­rivals pro­gram, which has al­lowed un­doc­u­mented im­mi­grants who were brought to the U.S. as chil­dren to stay. Now, they may be de­ported. Some are valu­able em­ploy­ees of tech com­pa­nies. Mi­crosoft pledged to pay the le­gal ex­penses of any em­ploy­ees who face de­por­ta­tion as DACA ends. Mi­crosoft Pres­i­dent Brad Smith called Trump’s de­ci­sion “a big step back for our en­tire coun­try,” and the in­dus­try wor­ries that it will fur­ther


dis­cour­age tal­ented for­eign­ers from com­ing to the U.S.

Other coun­tries have be­gun pur­su­ing in­ter­na­tional ta­lent like sharks cir­cling surfers at dusk. “I my­self hope that many of th­ese en­gi­neers will come to China to work for us,” said Robin Li, CEO of Chi­nese tech gi­ant Baidu. Canada’s min­is­ter of in­no­va­tion, Navdeep Bains, launched a re­cruit­ment pro­gram, say­ing, “We want to be open to peo­ple.” French Pres­i­dent Em­manuel Macron an­nounced tech ta­lent can “find in France a sec­ond home­land.”

Even more detri­men­tal to U.S. tech are two other Trump de­ci­sions: pulling out of the Paris cli­mate ac­cord and dump­ing the Trans-pa­cific Part­ner­ship (TPP) agree­ment on trade with Asia.

Clean en­ergy tech­nol­ogy and in­no­va­tions that solve cli­mate change will be among the great­est busi­ness op­por­tu­ni­ties of the next two decades. Trump sig­naled that the U.S. won’t wel­come new en­ergy in­no­va­tions, which, again, clears the way for over­seas com­peti­tors and makes it less likely Amer­i­can com­pa­nies will de­velop en­ergy so­lu­tions for their home mar­ket. A Trump Amer­ica will just keep min­ing coal no­body else wants.

As po­lit­i­cal pun­dits point out, aban­don­ing the TPP de­creases the lever­age for U.S. com­pa­nies in the ex­plod­ing tech mar­kets in Asia and in­stead hands those op­por­tu­ni­ties to China’s ever more pow­er­ful tech in­dus­try. The U.S. has nur­tured mono­liths like Ap­ple, Google, Face­book and Net­flix. But China’s big three tech com­pa­nies—baidu, Alibaba and Ten­cent—are chas­ing down Sil­i­con Val­ley much the way Toy­ota, Honda and Nis­san reached out from Ja­pan in the 1970s and sucker-punched Detroit. Alibaba and Ten­cent are more than twice as valu­able as In­tel or IBM.


FOR DECADES, the home mar­ket has been one of the great ad­van­tages to start­ing a tech com­pany in the U.S. Nowhere else on earth could you find a sin­gle mar­ket with so many peo­ple with means hooked to the in­ter­net.

China now has nearly 750 mil­lion in­ter­net users, more than dou­ble the size of the en­tire U.S. pop­u­la­tion. In­dia, with 1.3 bil­lion peo­ple, boasts the fastest-grow­ing in­ter­net pop­u­la­tion, now at about 300 mil­lion, and it still has less than one-third of its peo­ple con­nected. So Sil­i­con Val­ley’s ad­van­tage of a big home mar­ket for launch­ing prod­ucts is over.

How about its ad­van­tage in sci­en­tific re­search and tech­ni­cal wiz­ardry? That’s look­ing shaky as well.

The Chi­nese gov­ern­ment is in­vest­ing in an AI plan, spend­ing bil­lions of dol­lars on re­search and star­tups. A re­port last Oc­to­ber from the Obama ad­min­is­tra­tion found that China over­took the U.S. as the world’s most pro­lific pro­ducer of re­search pa­pers in deep learn­ing pub­li­ca­tions some­time in 2013—and the gap con­tin­ues to widen. China’s vice min­is­ter of in­dus­try and in­for­ma­tion tech­nol­ogy, Liu Li­hua, re­ported that China has ap­plied for 15,745 AI patents. A re­port by Amer­i­can con­sult­ing com­pany PWC pre­dicts that by 2030 Ai-re­lated growth will in­crease global gross do­mes­tic prod­uct by $16 tril­lion, and nearly half of that growth will ac­crue to China.

The key to cre­at­ing the best AI is be­ing able to feed it mas­sive amounts of data from the on­go­ing be­hav­ior of users. The AI learns from the data and gets bet­ter. In that realm, who­ever has the most and best data usu­ally wins. Now that China has two or three times more users just in its home mar­ket, it will have the most data by a big mar­gin.

China’s tech com­pa­nies at­tracted a record-high $56 bil­lion in dis­closed in­vest­ments last year, ac­cord­ing to Tech in Asia. Bei­jing-based Didi Chux­ing, China’s Uber-like com­pany, has raised about $10 bil­lion and bought Uber’s Chi­nese op­er­a­tions last year af­ter Uber re­al­ized it could not com­pete in that coun­try.

At least the bur­geon­ing Chi­nese startup scene may have wo­ken up Sil­i­con Val­ley. In Septem­ber, a ma­jor San Fran­cisco tech con­fer­ence, Techcrunch Dis­rupt, will give over its main stage to in­ter­views with

top tech com­pa­nies from China, in­clud­ing bike­shar­ing com­pany Ofo, ed­u­ca­tion startup VIPKID and in­vest­ment com­pany Zhen­fund.

And if you want a fun fact with spooky his­tor­i­cal echoes, con­sider that Chi­nese com­pa­nies will be mak­ing 49 of the 103 all-elec­tric cars ex­pected to be on the mar­ket in 2020.

While China will throw up the most likely chal­lengers to Sil­i­con Val­ley, dozens of other coun­tries are right be­hind it. For years, other na­tions have tried to em­u­late Sil­i­con Val­ley, even adopt­ing some ver­sion of its name, like Sil­i­con Round­about in Lon­don. Now, coun­tries are in­creas­ingly play­ing to their cul­tural and mar­ket strengths while point­ing to the dys­func­tional po­lit­i­cal cli­mate in the U.S. and the high cost of run­ning a com­pany in Sil­i­con Val­ley. “I want France to at­tract new entrepreneurs, new re­searchers and be the na­tion for in­no­va­tion and star­tups,” France’s Macron told CNBC. He has taken bold po­si­tions that stand in con­trast to the U.S., like lay­ing out a plan to ban fos­sil fuel cars by 2040.

Fin­land now hosts the high­est-pro­file startup con­fer­ence out­side the U.S., called Slush. It at­tracts 20,000 peo­ple to Helsinki in De­cem­ber, when no­body should want to be in Helsinki. Canada has a grow­ing AI com­mu­nity and com­mit­ted $100 mil­lion this year to de­velop AI com­pa­nies, and Canada is home to D-wave, the best-known startup work­ing on the dif­fi­cult but po­ten­tially world-chang­ing tech­nol­ogy of quan­tum com­put­ing. Is­rael spits out 1,000 star­tups a year and ranks sec­ond in the world in in­no­va­tion, be­hind Sil­i­con Val­ley, ac­cord­ing to the World Eco­nomic Fo­rum.

The fact that tech­nol­ogy com­pa­nies get cre­ated all over the globe is not new. But the mo­men­tum has shifted. Sil­i­con Val­ley and its sis­ter U.S. re­gions—seat­tle, Bos­ton and Austin, Texas— used to win all the time and march their soft­ware and ser­vices out to ev­ery cor­ner of the planet. To­day, that kind of to­tal vic­tory is not so cer­tain.

It’s pos­si­ble the mo­men­tum shift is tem­po­rary. Maybe the de­vel­op­ing cul­tural backlash in Sil­i­con Val­ley will root out dis­crim­i­na­tion, and Trump’s im­mi­gra­tion stance will get re­versed, and the world’s ta­lent will again dream of work­ing in an open of­fice in Ather­ton, Cal­i­for­nia. Maybe a fi­nan­cial down­turn will re­set tech’s busi­ness prac­tices and make Amer­ica sane again. Maybe all that will hap­pen be­fore it’s too late, and Sil­i­con Val­ley will prove re­silient.

“My read­ing is op­ti­mistic,” says En­rico Moretti, au­thor of The New Ge­og­ra­phy of Jobs and a Univer­sity of Cal­i­for­nia, Berke­ley, pro­fes­sor. “Cur­rent ad­min­is­tra­tion poli­cies, how­ever in­com­pe­tent, aren’t likely to make a big dent on the con­cen­tra­tion of tech- nol­ogy jobs and firms in Sil­i­con Val­ley, at least for the next five to 10 years.” Yet, Moretti notes, it’s prob­a­ble that Sil­i­con Val­ley will find it­self in a new era of shar­ing the tech in­dus­try with oth­ers.

No one in the late 1960s would’ve thought Detroit was go­ing to have to face a harsher fu­ture. In 1965, GM, Ford and Chrysler sold 90 per­cent of the cars on Amer­ica’s roads, ac­cord­ing to Ward’s Au­to­mo­tive. That’s now down to about 40 per­cent. So in years to come, don’t be sur­prised if you’re in Kansas City or Phoenix or Bal­ti­more, and you get a ride in a Didi while us­ing apps from Ten­cent. You might even, if things get re­ally crazy, de­pend on soft­ware from some com­pany in France that was started by some­one the French might call an en­tre­pre­neur.


A BIG­GER POND: Sil­i­con Val­ley has been the cen­ter of the tech uni­verse for years, but the pro­gres­sive poli­cies of sev­eral coun­tries are help­ing them build out their tech in­dus­tries and chal­lenge the U.S. for dom­i­nance.

DIG­GING A HOLE: Sil­i­con Val­ley’s bro cul­ture—see for­mer Uber CEO Kalan­ick, top—and Trump’s pan­der­ing to coal in de­fi­ance of eco­nomic trends, right, have opened the door for Chi­nese tech com­pa­nies.

ENTREPRENEURS DU JOUR: Detroit ruled the car in­dus­try for nearly a cen­tury by pump­ing out Fords, Cadil­lacs, Buicks and Ply­mouths, top. Sil­i­con Val­ley rose to promi­nence by pump­ing out data and at­tract­ing ta­lent from all over the world—in­clud­ing Stepan...

A DAY AT THE OF­FICES: The U.S. headquarters of Face­book in Menlo Park, Cal­i­for­nia, and the aban­doned Packard plant in Detroit.

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