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It Must Be Something In The Water


Special Report -- Silicon Valley -- Beyond the Valley

IT MUST BE SOMETHING IN THE WATER

Many regions have tried to duplicate the Valley magic. None has succeeded

Illinois has long aspired to develop a flourishing high-tech community, something of a Silicon Prairie. And in 1993, opportunity pounded on the door. A group of computer science students at the University of Illinois' Urbana-Champaign campus developed the first browser with an easy-to-use graphical format for cruising the Internet. Even then, the browser, called Mosaic, appeared to have staggering potential. In the following four years, the online world would grow to 17.6 million people and the Net would explode into America's consciousness.

What exploded in Illinois was the chance to dominate the Next Big Thing in technology. The University of Illinois and Marc Andreessen, the lead Mosaic programmer, got into an ugly spat over rights to Mosaic. Silicon Graphics Inc. founder James H. Clark recruited him to Silicon Valley and together they founded Netscape Communications Corp., now the dominant Net browser company with a market capitalization of $3.4 billion. The university tried to commercialize Mosaic through an existing Illinois company, Spyglass, but it has largely been squeezed out of the browser market and its market cap is a measly $94 million. Don't expect Andreessen, whose Netscape stock alone is worth $57 million, to help Illinois with big grants to his alma mater. "No contributions, no buildings, no nothing," he says. "They basically tried to shut us down."

So much for Silicon Prairie, or for a dozen other Silicon Valley wannabes in the U.S. and overseas. Time and again, other regions have failed to replicate the technological might--and wealth--of the world's high-tech capital. But it's not for lack of trying. Some thought the trick was to invest tax dollars in startups. The state of Illinois, for example, invested $12.8 million in 76 companies between 1985 and 1993 before abandoning the practice because of budget constraints and limited success. Others put their efforts into infrastructure--the state of North Carolina and local counties spent $35 million on facilities for Research Triangle Park.

And then there has been the research-and-development approach. Singapore, for example, plans to spend $4 billion over the next five years on R&D. Heck, companies in New Jersey and Texas even hired Frederick Terman, the Stanford professor who stressed entrepreneurialism and was dubbed "the father of Silicon Valley," to recreate the original.

IPO POWER. But no region has come close. Despite all the efforts elsewhere, Silicon Valley stands skyscrapers above the rest. The numbers tell the tale: The Valley claims 11% of all tech jobs in the U.S., while representing just 1% of the population. And 20% of the globe's 100 largest tech firms are housed there.

As for the money rolling into techdom, Silicon Valley cleans up. According to a 1996 study of 11 high-tech centers, including Boston, Austin, Tex., Raleigh-Durham, N.C., and Seattle, the Valley boasted 75 out of 161 initial public offerings for all 11 areas. The Valley's take: $2.9 billion, nearly half of the total $6 billion raised in the IPOs. "Everything is kind of dwarfed by Silicon Valley," says John P. Whaley, a partner at Minneapolis-based Norwest Venture Capital.

FALLING FLAT. Why are other regions trying to measure up? In a word: Money. Today, high-tech is a major economic driver--not only in sales of computers, software and semiconductors, but because it's manned by high-paid knowledge workers. Per-capita income in the San Francisco Bay area, for example, is $32,548 vs. the national average of $24,324. For American and foreign governments, that's attractive: There are more taxes to collect and none of the nasty waste of the steel or auto industries. "I get 500 visitors a year asking how the Valley works," says William Miller, a management professor at Stanford University.

The effort, however, is too often misplaced. Most attempts to build a high-tech presence fall to local governments, which can offer tax incentives or small investments but have no hand in inventing or commercializing technology. Research Triangle Park, for example, offers companies about one-third off their property taxes, amounting to some $12 million a year. That has helped attract a solid community of researchers from big-name companies based elsewhere, notably tech giants IBM and Cisco Systems and Glaxo Wellcome and Monsanto in pharmaceuticals. But entrepreneurs can't be bought with slightly lower real estate taxes: Local startups--with a few exceptions, such as SAS Software--are rare. "Research Triangle has looked promising for 10 years and it still hasn't panned out quite yet," says Richard D. Frisbie, managing partner at Battery Ventures in Wellesley, Mass.

Even private efforts to clone the Valley have fallen flat. Terman, the father of Silicon Valley, was hired in the 1960s to recreate the magic in New Jersey and Texas. He focused on establishing strong research institutions, like Stanford, that could provide a petri dish for bright ideas. But Terman was hired by large organizations, including Bell Labs and Texas Instruments Inc., and few company men were willing to chance a startup. "He failed, in part, because he overestimated the importance of academia and in part because he was hired by large companies with no entrepreneurial traditions," says Stuart W. Leslie, a professor of history at Johns Hopkins University, who recently completed a study on Terman's efforts.

CRITICAL MASS. Fostering an entrepreneurial spirit is key to the growth of any tech region. Unfortunately, it's not something that can be taught overnight. In the Valley, Terman's teachings in the 1930s helped launch Hewlett-Packard Co. in 1939. But it was decades before entrepreneurial-minded engineers would leave the computer giant for their own startups. Rolm Corp. was one of the first, and it wasn't launched until 1969 by M. Kenneth Oshman and three HP colleagues. What followed were another dozen HP offspring, including Apple Computer Inc. in 1977. "It takes time for an area to develop the infrastructure for startups," says Ted H. McCourtney, general partner at Venrock Associates, a New York-based venture capital firm. "Silicon Valley has a head start."

That counts for a lot. Today, the Valley has critical mass--in brainpower, in ancillary businesses such as components suppliers, and in the all-important financial backers. The economic advantages can be self-perpetuating, creating what some economists call "increasing returns." With so many tech players in one place, things work better--suppliers and customers can meet faster, info flows more quickly, new ventures are easier to launch. Success becomes a gravitational force, pulling in more people, money, and technology. "The existence of one industry center prevents the emergence of another center," says W. Brian Arthur, an economist at the Santa Fe Institute.

Does this mean other regions can't be big beneficiaries of the tech boom? Not at all. The industry added 240,000 jobs last year to a total of 4.3 million, thanks to big gains in Texas, New York, and Illinois, as well as California, according to the American Electronics Assn.

But other tech centers would do well to focus on areas that complement the Valley rather than come up against it. Boston ran into difficulties when local companies pushed minicomputers in the face of the PC revolution, but its strong university base has fueled recent successes in niches such as Internet security and data communications. Gateway 2000 Inc. turned North Sioux City, S.D., into a tech hotbed by using its low-cost workforce to make mail-order PCs. Overseas, Taiwan has taken advantage of its manufacturing expertise and low labor costs to carve out a niche in semiconductors and PCs. Ditto in New York, where the entertainment community used its expertise to build a respectable multimedia presence.

The one exception to all this: Seattle. The incredible might of resident Microsoft Corp., the No.1 software maker, is drawing some of the brightest technical brains to the foggy Northwest. New York hedge fund manager Jeff Bezos migrated there to launch Web bookseller Amazon.com. Microsoft alumni, such as Progressive Networks Inc. CEO Rob Glaser, are using gains from their stock options to fund new companies. And Microsoft Chairman William H. Gates III is pairing up with local wireless pioneer Craig McCaw to launch Teledesic Corp., a $9 billion satellite system for worldwide data connections.

Does that mean Silicon Valley's lock on the tech industry is not absolute? You bet. Tectonic shifts in technology offer opportunities for new companies and regions to take the lead. Led by Digital Equipment Corp., Boston usurped New York's tech crown when minicomputers overwhelmed IBM's mainframes. "There has never been a region yet that has been able to sustain its advantage," says historian Leslie.

The trouble for the Valley's imitators is that the most significant tech shift of the 1990s looks to be the rise of the Internet. And thanks to Netscape's Clark and Andreessen, the Valley already has staked a big claim in cyberspace.By Peter Elstrom in New York, with Paul M. Eng in Raleigh, N.C., Paul Judge in Boston, and Gary McWilliams in HoustonReturn to top


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