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10/6/19, 7)55 PMSomething in the air - The geography of start-ups
Page 1 of 11https://www.economist.com/special-report/2012/10/27/something-in-the-air
SPECIAL REPORT: A SENSE OF PLACE
The geography of start-ups
Something in the air Why birds of a tech feather !ock together
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10/6/19, 7)55 PMSomething in the air - The geography of start-ups
Page 2 of 11https://www.economist.com/special-report/2012/10/27/something-in-the-air
Oct 27th 2012
Print edition | Special report
IN THE LATE 19th century Alfred Marshall, a founding father of modern economics, asked
why !rms in the same industry were often geographically near each other. Proximity, he
said, created something “in the air”: “…if one man starts a new idea, it is taken up by others
and combined with suggestions of their own; and thus it becomes the source of further new
ideas.”
Marshall was thinking about Victorian manufacturing, but the same is true of the
information-technology companies of the 2010s. Silicon Valley is home to many of the
industry’s giants, and hopeful founders of young start-ups still head for northern
California. A certain Mark Zuckerberg left Harvard for Palo Alto as soon as he got the
chance. Others beat a path to newer hubs, such as Berlin, London, Moscow, New York or Tel
Aviv.
Economic theory suggests four main reasons why !rms in the same industry end up in the
same place. First, some may depend on natural resources, such as a coal!eld or a harbour.
Second, a concentration of !rms creates a pool of specialised labour that bene!ts both
workers and employers: the former are likely to !nd jobs and the latter are likely to !nd
sta". Third, subsidiary trades spring up to supply specialised inputs. Fourth, ideas spill
over from one !rm to the next, as Marshall observed. But there are also forces that
encourage companies to spread out. One is the cost of transporting their products to widely
dispersed customers. Another is rents, which rise when !rms cluster together.
You might imagine that the dramatic fall in the cost of communications and computing
10/6/19, 7)55 PMSomething in the air - The geography of start-ups
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would have pushed !rms in the information-technology industry (among others) farther
apart. Natural resources do not matter to them; all they need is a good internet connection.
The ease of online communication should reduce the need for their people to be close
together in order to work, to deal with customers and suppliers or to swap ideas. Young
companies really can pick their spot. That would seem to count against Silicon Valley,
where premises are costly, and against London and New York, which are not only expensive
but also lack California’s high-tech history. Berlin is cheaper, but there are plenty of places
all over Europe where costs are lower.
Yet although you can !nd tech companies of all shapes and sizes almost anywhere, the
smaller ones especially have a fondness for huddling together. Jed Kolko, Trulia’s chief
economist, puts this down mainly to the continuing attraction of a deep pool of skilled
labour. “The less an industry needs to be near natural resources, its suppliers or its
customers,” he says, “the more it’s likely to cluster where its workers want to live.”
The magnet factor
For the tech industry, workers want to live either where the jobs already are (eg, Silicon
Valley) or in lively cities (London, New York, Berlin and perhaps San Francisco). At Wooga,
an online-games company in Berlin, the 250 sta" come from 35 countries. Jens Begemann,
the founder and chief executive, says that Australians and Canadians sign contracts even
before leaving home. Dmitry Repin of Digital October, a co-working and meeting place for
start-ups in Moscow, says that “for a university kid, studying in the regions, moving to
Moscow sounds smart.” Even short distances can make a di"erence. Zimride’s Mr Zimmer
says he moved his young company just 30-odd miles (50km) from Palo Alto to San
Francisco because that was where most of his then 20 employees lived (he now has 32).
10/6/19, 7)55 PMSomething in the air - The geography of start-ups
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For programming talent, says Mr Stoppelman at Yelp, nothing beats Silicon Valley. The
Valley is big enough and old enough to have clusters within clusters, from makers of
semiconductors and network equipment near San Jose to Google and Facebook farther
north and a host of smaller young internet companies in San Francisco. Even within the
city, there are divisions between districts: South of Market, or SOMA, with lots of smaller
start-ups; the Design District, which houses Airbnb and Zynga, a games company, in bigger
premises; and Mission Bay, the base of Dropbox, a cloud-storage !rm (see map).
Young companies need more than labour; they also need money and advice. Anthony
10/6/19, 7)55 PMSomething in the air - The geography of start-ups
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Goldbloom of Kaggle, which runs online competitions for data scientists, moved his
company to the SOMA district from Melbourne this year. Mr Goldbloom (who was once an
intern at The Economist) says that being in a cluster “makes serendipity possible”: he can
have more face-to-face meetings, which are often more productive than phone calls or e-
mails, and there is a good chance of bumping into someone interesting, such as a venture
capitalist. The venture funds, indeed, constitute another cluster within the Valley.
The recycling of people is as important as that of money. Brian McClendon, who oversees
Google Maps and Google Earth, says he has been working within a mile of where he is now
for 22 of his 24 years in the Valley: !rst at Silicon Graphics and later at his own company,
Keyhole Earth. That was sold to Google, which now occupies Silicon Graphics’s former
home. “The diaspora of Silicon Graphics”, he says, “created many, many companies
throughout the Valley…as a diaspora we communicate and we contact and we hire each
other and we steal each other’s people.” Google already has a diaspora of its own.
“ The cycles of investment, success, failure and regeneration havemade the Valley what it is In the Valley people are also close to the latest ideas. “Ideas are exposed to that little tiny
region possibly years ahead of the rest of the world,” reckons Mr Stoppelman. “You are
always building on the idea that came immediately before. If you are trying to build the
thing that comes next, early access to information about the things that are out there helps
you.” That sounds like what Marshall had in mind.
Will other hubs ever catch up? New York, London and Berlin have two possible advantages.
One is that they are bigger and therefore livelier and more attractive to young people than
San Francisco, let alone the smaller places on the way to San Jose. Chad Dickerson, chief
executive of Etsy, an online marketplace for handmade and “vintage” goods based in
Brooklyn, jokes that in San Francisco “everything closes at ten o’clock.”
The other is that they have a wider pool of industries and hence skills on which companies
can draw. To many this variety is invaluable. “It’s not just engineering talent,” says Dennis
10/6/19, 7)55 PMSomething in the air - The geography of start-ups
Page 6 of 11https://www.economist.com/special-report/2012/10/27/something-in-the-air
Crowley, boss of Foursquare, which is based in New York. “You can !nd that all over the
place. We may have a whole bunch of engineers, but we also have a whole bunch of product
people.”
New York’s programming pool was deepened when Google started putting engineers into
its o#ce in the city in 2003. Some alumni have since set up or joined start-ups there.
Matthew Brimer of General Assembly, a co-working and education !rm, explains that since
the !nancial crisis people have been readier to work in start-ups; Wall Street has become
less of a draw. People in London start-ups also see the presence of Google and other big
companies as a boon. Some say the same about the city’s advertising and !nancial
industries, but others see them as deep-pocketed competitors for sta".
As for capital, New York and London have their own crop of venture funds. Much of Europe
is serviced from London too, and London and Silicon Valley funds, as well as local ones, are
active in Israel. Is Europe small enough for investors to feel the bene!ts of proximity?
Adam Valkin of Accel Partners in London thinks so. “I woke up in Berlin today and I was in
the o#ce at 9am,” he says. His colleague, Philippe Botteri, adds that on a bad-tra#c day it
can take him three hours to drive from San Francisco to San Jose.
Younger hubs are also trying to conjure up Marshall’s “something in the air”. Alexander
Ljung of SoundCloud, a site for publishing audio !les, was drawn to Berlin from Stockholm
by the German capital’s “strong intersection of technology and art” and “creative chaos”. He
sees a “sense of reciprocity” among its start-ups: his Sunday activity is “trying to advise
people”.
Almost every hub has its co-working spaces, accelerators and incubators where tiny !rms
of perhaps two or three people work cheek by jowl. The provider of the space may o"er
equity or just a place to work, meet and learn. There are also regular convivial gatherings,
such as Silicon Drinkabout in London, where troubles can be shared as well as drowned.
Capital from past successes is being recycled too, through investors such as Stefan Glaenzer
of Passion Capital in London, Christophe Maire, a Berlin-based entrepreneur, and Kai-Fu
10/6/19, 7)55 PMSomething in the air - The geography of start-ups
Page 7 of 11https://www.economist.com/special-report/2012/10/27/something-in-the-air
Special report
A sense of place
Your friendly neighbourhood app
The world in your pocket
Something in the air
New Eindhoven
Open-air computers
Not a cloud in sight
The world is what you make it
The new local
Lee, a former Google executive who now runs Innovation Works in Beijing. Watchers of the
British tech scene are waiting to see what Mike Lynch, the founder and ex-boss of
Autonomy, will do with the money he made when his software !rm was bought by Hewlett-
Packard. HP pushed him out in May.
Nothing quite like the Valley
But no other place has seen the cycles of investment, success, failure and regeneration in
the information-technology industry that have made the Valley what it is, so no other place
as yet has the Valley’s scale and resilience. Some still question whether other young
ecosystems would have the strength to survive anything like the dotcom bust of a decade
ago. They probably would, but until a crash happens, no one knows.
For cities as big and diverse as London and New York, it may not matter much. They have
other strengths. And many other cities too may be about to discover an asset they did not
know they had. It is neither people nor money, but something else in the city air: data.
10/6/19, 7)55 PMSomething in the air - The geography of start-ups
Page 8 of 11https://www.economist.com/special-report/2012/10/27/something-in-the-air
Oct 27th 2012
Print edition | Special report
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