Silicon Valley and the surrounding Bay Area has become a global leader in innovation, technology and new industry creation. This small region, with only 7m residents, boasts more than 150 technology companies valued at more than $1bn.
Most observers instinctively conclude that Silicon Valley is great because it has a unique ability to create start-ups. Most observers are wrong. Many parts of the world now have the necessary ingredients to create start-ups. There are brilliant technical graduates everywhere. Venture capital has gone global.
This even applies to more subtle elements once unique to Silicon Valley, such as broad first-hand knowledge of the start-up process and a cultural acceptance of failure as a necessary byproduct of risk-taking. Through the internet, this essential start-up knowledge is available anywhere. Meanwhile, belief in entrepreneurship is spreading, creating receptive cultures in many regions (from “Silicon Alley” to “Silicon Glen”).
Why does Silicon Valley continue to produce a disproportionate share of industry-transforming companies like Google, Facebook and LinkedIn? Or the next generation of companies like Airbnb, Dropbox, and Uber? The answer, which has been hiding in plain sight, is Silicon Valley’s ability to support scale-ups.
When you examine the history of the best Silicon Valley companies, they quickly increase the number of their customers, revenue and raise organisational scale to fit a global market. Most of the impact and value creation in Silicon Valley actually occurs after the start-up phase ends and the scale-up phase begins.
Building great, world-changing companies requires more than just building a cool app and raising money. Entrepreneurs need to build massive organisations, user bases and businesses, at a dizzyingly rapid pace. That’s how Mark Zuckerberg built Facebook from dorm-room to the world’s most popular internet service in just six years.
So what makes Silicon Valley so good at scale-ups? The obvious answers are talent and capital. Both offer a scale-up positive feedback loops. The competitor that gets to scale first nearly always wins. First-scaler advantage beats first-mover advantage. Once a scale-up occupies the high ground in its ecosystem, the networks around it recognise its leadership, and talent and capital flood in.
Top professionals understand that they can have the greatest impact working for the market leader. Meanwhile, joining a scale-up that is clearly a “rocket ship” offers many of the financial rewards of working for a start-up, with more certainty and less risk. By attracting the best, scale-ups increase their ability to build and bring to market great products, which in turn increases their ability to scale.
A parallel calculus applies to investors. Achieving scale makes it easier for venture capitalists to decide to invest. And because networks disseminate this information quickly and broadly, a rapidly expanding scale-up can raise massive capital. This can fuel explosive, self-reinforcing growth.
Yet talent and capital are necessary but not sufficient. The key success factor is actually a comprehensive and adaptable approach to scale. A scale-up grows so fast that conventional management approaches are doomed to fail. For example, the conventional wisdom is to hire senior management with relevant experience. But if you’re Uber or Airbnb, you can’t simply put up a listing that states: “This job requires at least five years of management experience running a sharing economy service.” The only candidates that can meet that requirement already work there.
With each order of magnitude of scale, you must rethink and rebuild your organisation and processes. Sometimes through existing team members; sometimes by recruiting outside talent, such as when Mr Zuckerberg hired Sheryl Sandberg. Sometimes this means building new products internally, like Google with Gmail, and other times it means acquiring breakthrough technology like Android.
Change, not stability, is the default state at every stage and in every facet of the company. Continually reinventing yourself, your product and your organisation won’t be easy, but it will allow you to use rapid scaling as a strategic weapon to attain and retain market leadership. This is the visible secret of Silicon Valley.
This post originally appeared on Financial Times.