By now you’ve likely seen this week’s The Economist cover story entitled Peak Valley, which features quotes from Claire Haidar. Claire is CEO of WNDYR, an Intelis Capital portfolio company. The article highlights a mixture of outrageous costs-of-living, poor local government, and high operating costs as the catalysts behind an impending Silicon Valley collapse.
We’re skeptical Silicon Valley is “over.” However, we do see its influence dwindling in the next few decades as a direct result of a technological invasion into new sectors that drive the economies of the regions most dependent on them.
Every Industry is a Technology Industry
It should come as no surprise by now that almost every industry has come to rely on technology for some core part of its operations. Yet, there is a large variance in the degree of digitization across sectors that are cornerstones in regional economies outside of the Valley – these sectors have largely been ignored by coastal VCs until the last couple of years.
Industries like energy, agriculture, construction, and manufacturing are lagging behind the innovation curve and represent a multi-trillion dollar opportunity for startups and investors alike. Their importance to regional economies like Texas, the Southeast, and Midwest can’t be overlooked.
We used the Bureau of Economic Analysis geographical definitions of the Southeast in addition to Texas for our analysis for the graph above. Sectors such as power utilities (5.2% of SE GDP), oil & gas (2.54%), transportation (3.43%) and construction (4.83%) contribute much more to the regional economy than the US as a whole and while these percentages look may look small, it’s important to note the size of the US economy was $18.5T in 2016 and the region accounts for about 1/3 of total US GDP.
The ability to build software products is without a doubt Silicon Valley’s competitive advantage, made possible by an unmatched density of engineering talent. Yet because the aforementioned sectors are largely un-digitized, only a minimal level of improvement is necessary in order to replace current analog processes. Thanks to the spread of technology the requisite level of engineering talent can now be found, for less money, in most metropolitan areas.
Additionally, distribution of product is sometimes as important, if not more so. The density of customers and potential partners in other regions provides startups with a ready-made strategy to build revenue from the outset.
These advantages can result in the healthier P&L’s highly-valued by potential acquirers in these sectors, leading to exits that drive ecosystem growth.
Founder / Market Fit
There’s a reason these analog industries have yet to be disrupted. Often they require highly-skilled and specific knowledge, are encumbered by regulation, have entrenched bureaucracy throughout the entire value chain, or in the worst cases — all three.
Witnessing first-hand the ways an industry is broken is crucial to building the foundation of a big business within them. More importantly, it removes any naïveté a founder might have and prepares them for the potential roadblocks ahead. A few obvious and successful examples of this are: Flexport (freight), Robinhood (finance), and Farmers Business Network (agriculture).
Before, entrepreneurs would have had to move to SV to start these companies due to lack of local resources and talent. However, an explosion of cloud-based collaboration and communication software has now made it possible for these executives to tie into specialized talent from the Valley if and when needed.
Moving to the Valley as a contingent of funding is becoming less common distributed work becomes more of an accepted practice, and the rise of new firms focused specifically on not investing on the coasts has given founders more access to capital than ever before. This combination has solved one of the biggest problems of building a business outside of Silicon Valley – access to capital.
It’s clear there are several new sectors and regions are primed for the necessary disruption heading in their direction. Undoubtedly, Silicon Valley will play a direct or indirect role in many of the advances, but for the first time ever that role may not be from the driver’s seat.