Thank you for having me. My name is Jeff Lonsdale. I grew up in Silicon Valley and studied bioengineering. While I invest in and advise some private companies both here in Silicon Valley and in Asia, most of my career I’ve worked in global macro investing. First with Peter Thiel at his hedge fund, and later on with Mike Cagney where I also managed proprietary strategies for family offices. Part of the job of global macro investors is to look at systems around the world and figure out what is making them work and what might change. With the invitation of the consulate, I want to talk to you today about the conditions that develop the best technology ecosystem, and what that means for Vietnam.

I’ve found that one of the best ways to understand a subject is through historical analogy. Understanding why Silicon Valley, an area classified as an agricultural region as late as the 1940’s, beat out Boston Massachusetts Route 128, an area with a two century history of industrialization, can help us understand what Vietnam needs to do to become a sustainable tech power. Keep in mind that back in 1950, there was absolutely no question whether Harvard & MIT were better schools than Stanford & UC Berkeley. Harvard & MIT were even the source of the first modern VC, the America Research and Development Corporation, founded in in 1946 by a former dean of Harvard Business School and a former president of MIT.

The story about why Silicon Valley came out on top really starts with Shockley Semiconductor. William Shockley was a famous physicist who managed the research group at Bell labs who discovered the transistor effect in semiconductors. In 1956, he moved to Silicon Valley from New Jersey because his mother was there and he started Shockley Semiconductor. He won the Nobel prize for his semiconductor work later that year. Eight of the phd students that he recruited to Shockley Semiconductor were tired of his management style, he was very paranoid, and they worried he was working on the wrong research path. They contacted the company’s financier and demanded he step down. Arnold Beckman, the person financing the company took Shockley’s side.

The eight left in 1957 after they reached a deal with Sherman Fairchild, a prolific businessman/inventor. William Shockley famously labeled the group the traitorous eight. Fairchild semiconductor had some success producing transistors and were market leaders in the early 60’s, but what was really successful were the chain of companies to emerge as people left Fairchild in the late 60’s. These companies were known as the Fairchildren. Intel, the chipmaker that today is worth 200 billion dollars. AMD – not quite as successful a chip maker but still worth around $10 billion today. National Semiconductor – First semiconductor company to reach $1 billion in annual sales, in 1981. Kleiner Perkins – Funded companies such as Amazon, Genentech, Google, Intuit, Netscape, Uber, AirBnB and many more.

Fairchild semiconductor is called by some people the first trillion dollar company. Not because of its valuation which never exceeded $2,5 billion, but because of the value created by the Fairchildren who left the company along with future generations in the chain of companies founded or funded by people at Fairchildren descendants. A study in 2014 found that the public companies traceable directly back to Fairchild were worth $2.1 trillion.

Here we have a graphical representation of the different ecosystems.. In part because noncompete agreements were legal in Boston, it was harder for engineers to switch companies. The Fairchilden might have been stuck at Shockley in MA. This led to larger and fewer companies in Boston. Digital Equipment Corporation, founded in 1957, became the largest private sector employer in Massachusetts. They had their Jack Ma, but his name was Ken Olsen. Their one notable child company was Data General, 3 of the 4 founders were employees of DEC (After missteps in the 70’s and 80’s it was acquired for $1.1 billion in 2002)

Meanwhile, in Silicon Valley, it is rare when neither the Founders nor the funders are connected to other significant companies, When government defense spending cooled down in the 1970’s, Silicon Valley slowly pulled away from Route 128 in the race to be America’s technology capital When Route 128 companies missed the rise of the personal computer, most of them moved into obsolescence. The network of many small Silicon Valley companies was much more resilient, If a few large companies missed the trend, then there would be Apples, Yahoo’s and Google’s that figured out what consumers wanted next. Digital Equipment Corporation was acquired by Compaq in 1998 for $9.6 billion, which was itself acquired by HP in 2002.

(We used the historical example of the Fairchildren, but modern story is the PayPal Mafia, where the likes of Peter Thiel, Elon Musk, & Reid Hoffman &U many more went on to fund or found businesses such as Facebook, Palantir, Tesla & Linkedin & many more. And there are many more company networks, though few as obviously successful as the Fairchildren & PayPals).

Legal differences and funding sources aren’t the only reason Silicon Valley came out on top. The culture that drives SV is even more important. The Traitorous Eight had this in their DNA, they were willing and able to stand up to someone who had just been awarded the Nobel Prize because they believed his research approach was headed in the wrong direction. Silicon Valley has a culture that enables the most productive to contribute as much as they are capable. And they have incentives to help the next generation of companies. It is one of the few places that takes young people seriously, the rest of the world wouldn’t trust a 20 year old with real responsibility, here they are often given millions of dollars to turn their vision into a reality.

In many cases, youth is considered an advantage because they haven’t yet learned how to do things the wrong way. Silicon Valley is also less obsessed with traditional status markers, whether that means funding college drop outs, superficially in ignoring traditional fashion requirements, or ignoring the advice of a respected professor telling them their plan is not feasible. The attitude that built SV is to build things that people want, do it better and faster than anyone else, and make lots of money. The archetype of this is Zuckerberg, whose hoodies are pictured in this slide. The Motto early on at Facebook was Move Fast and Break Things. Understanding these cultural advantages are very important for understanding to why SV is where it is today.

Having covered a little bit about what make Silicon Valley work, I want to go over some case studies of what I’ve seen in the Vietnam startup scene.

First, there is a Vietnam payments startup that my friends and I visited in early 2014. They had raised $18M and were excited to show us what they were working on We thought they might have been focusing on building an app with too many different functions instead of focusing on making one thing work very well. However, I was surprised to hear later that they shutdown not because of their apps, but that after hearing that Momo got a payment license and they assumed they would never be given one and returned money to their investors. In SV, the normal pattern, even with Paypal and other companies in the payments space, is that the customers pick the winners not the government. The winner is picked by the ability of the company to execute and by the consumers.

The next case study is Flappy Bird, a game developed by a lone Vietnamese developer which galhed international recognition. In the US, this type of success would be accompanied by many offers of support, people would offer to buy the company, hire him and build on his success to create many more games of his unique style, Instead of being offered support, he was largely hounded by questions about how much taxes he was supposed to pay and whether what he did was even legal. Amid the stress, he shut his games down and the last I heard he had moved to Japan. What could have been a billion dollar gaming empire was killed because people were fighting over hundreds of thousands of dollars.

This final case study is more positive, It’s a SF & Vietnam stealth startup that I’m advising. There were a few engineers from Vietnam in the US on J-1 visas. They were all top students working at top companies, Facebook, Palantir & the Googles of SV. When they had to go back to Vietnam, they formed a company so they could form a Silicon Valley tech culture in HCMC. They are recruiting top students through word of mouth or from hackathons, and in working at the company these students are now learning what it’s like to work in a SV style company.

Creating many more of this types of companies, attracting top talent back to Vietnam to work with just out of school students, who have not yet learned how to do things the wrong way, is one of the ways that Vietnam can transform its vast human potential into a reality of wealth generating technołogy companies. But many other barriers need to be overcome as. we get there.

Just as SV was ahead of Boston thanks to a different legal environment and culture. Vietnam has some disadvantages. First, as is common in developing countries, there is a short term mentality There is a lot of wealth, but there aren’t many angel investors who are looking to put money into companies. They are all looking for shorter term deals where they get their money back in a year + interest.

Those who are funding companies are demanding too much control, not thinking through that the company might need to raise funds again if they are going to be really successful. Some also try to get kickbacks for diverting funding to a company, and create unhealthy scenarios where they win even when others lose.

Startup culture is also different in Vietnam. Not many employees understand the value of options versus cash, which leads companies to prefer to pay employees in cash. While the workforce is very talented, there is also a dearth of certain types of expertise, consumer focused product design being an area where there is more room for improvement. The part of SV that has been copied the best has been the most useless part, there are already plenty of panels, talks and posturing by would-be founders at startup events. While there is real work being done, it’s not usually done by the type of founders who consistently show up to startup oriented functions.

Most worrisome is the pattern of government intervention. As we saw with Flappy Birds and the payment company competitor, companies are being taxed or regulated out of existence before they have a chance to be large enough to be worth taxing.And the risk of rules changing partway are enough to scare off many investors.

(And these foreign investors will not invest directly in Vietnamese companies thanks to the existing rules, but in international companies who own the IP. Most foreign investors are too scared to invest in anything that derives their revenue from inside Vietnam, for fear that it will be taken over by people more politically connected than them.)

DARPA: Defense Advanced Research Policy Agency. ARPA Network 1969 – develop the protocols that would later drive the internet, in recent history they have been key funders of self-driving car research, bringing the teams together before VC funding even took up the slack. Stanford: Numerous Inventions, numerous founders & early employees. Hewlett Packard was founded by two Stanford students, start up financing from a Stanford prof in 1939. Google was founded by two phd students in 1998.

Lincoln Labs @ MIT: Originally an air force lab to develop an air defense syste, hundreds of spin-off companies from these labs including Data General & Digital Equipment Corporation

Bell Labs: The transistor 1947, the laser, solar cells, cell phone tech, communications satellite,

PARC: The Mouse (1965), Laser printer, Graphic User interface 1973 Steve Jobs stole the idea for a mouse and GUl after touring PARC.

Today’s Silicon Valley Ecosystem looks a little more like Route 128, learn from the Silicon Valley of the past

Route 128, while it fell behind Silicon Valley, would still be considered a major tech success story if not for Silicon Valley. Both were built in the backyard of cutting edge research

In Vietnam when I read through the Decision 677 and Decision 844, one part of the decision seems to try to centralize the technology ecosystem and to centralize funding for tech startups. I’d like to emphasize that decentralized funding is a feature of the ecosystem. See the connections between Facebook & Linkedln’s numerous investors. One VC firm alone doesn’t turn a startup into a giant corporation. The VCs compete to find the best opportunities and work together to support their companies and the ecosystem. More importantly, those companies did not need to ask permission to raise capital.

When rules make operating legal businesses too expensive, many companies will operate in the grey market. Grey market companies don’t usually scale as political risk makes attracting capital difficult If government wants to foster a high tech ecosystem, it needs to protect companies from the uncertainty its every changing policies creates

Side note: Protecting IP of investors is advisable when it comes to trade secrets, but keep in mind modern patent law would have slowed down or killed companies like Microsoft & Apple. They both stole the GUI from Xerox PARC. But if there is one message that I would like to get across to conclude this morning is that tech ecosystems are networks that grow in the right conditions, they are not easily just planned.

Source: Amatech

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