How to Grow a Silicon Valley

Paul Graham observes

I think you only need two kinds of people to create a technology hub: rich people and nerds. They’re the limiting reagents in the reaction that produces startups, because they’re the only ones present when startups get started. Everyone else will move.

Observation bears this out: within the US, towns have become startup hubs if and only if they have both rich people and nerds. Few startups happen in Miami, for example, because although it’s full of rich people, it has few nerds. It’s not the kind of place nerds like.

Whereas Pittsburgh has the opposite problem: plenty of nerds, but no rich people.

Paul Graham is right, but we can be a bit more specific. You need not just rich people, but smart money, and not just nerds, but academic superstars.

The case for academic superstars may be disturbing to egalitarian sensibilities, but the evidence is good. A recent paper, Movement of Star Scientists and Engineers and High-Tech Firm Entry by Lynne G. Zucker and Michael R. Darby of UCLA finds no evidence that ideas, patents, or highly cited science papers has any influence on the creation of new high-tech firms. The New York Times reports on the paper,

The one thing the study does find to be consistently associated with high-tech start-ups is the presence of star scientists — not the ideas, which can be copied, but the scientists themselves. This seems to be the one way in which a university can be used as an engine of business growth. Landing the best scientists in the world can start a place on the way to economic superstardom. The catch is, there are not many superstars and they mainly want to be near one another. The study covered 1981-2004 but identified only 1,838 scientific superstars. That is about the same number of people who played in Major League Baseball over that period.

Many countries want to create high-tech clusters. How should they do it?

The recipe is not complicated. Academic superstars tend to concentrate. You need a first class university where they can congregate. You need quality academics, not quantity. Much like starting a Premier League football club, you will have to pay the market rate for the talent. Get the superstars, and the lesser nerds will follow.

You need not just rich people, but smart money. Smart money is money that is invested by people who really understand the industry and business they are investing in. They have usually made their money in the industry, so they have industry experience, knowledge, and contacts. More value than mere money is therefore added to new enterprises. You need a location that is attractive to these people, and it usually works best if they live not more that one hour’s drive from the firms they are investing in.

So here is the formula,

Academic Superstars + Rich People with Smart Money = High Tech Cluster

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