Inside Silicon Valley

Empire of the geeks

Silicon Valley should be celebrated. But its insularity risks a backlashJul 25th 2015 | From the print edition

THE English have Silicon Fen and Silicon Roundabout, the Scots have Silicon Glen. Berlin boasts Silicon Allee, New York Silicon Alley. But the brain of the tech world is the ecosystem in and around San Francisco. Silicon Valley’s entrepreneurs and innovators, technologists and moneymen are busy revolutionising nearly every aspect of the global economy.

A place named for its skill in making silicon-packed semiconductors is transforming how firms make decisions, people make friends and protesters make a fuss. Startups touch more people, more quickly than ever before. Airbnb, a seven-year-old firm that helps people turn their homes into hotels, operates in 34,000 towns and cities around the world. “On-demand” firms like Uber are changing what it means to be an employee. Just as the big platforms like Google, Facebook and Apple benefit from “network effects”, because each new user makes the service more valuable for all the others, so the Valley’s success as a venue to launch, fund, staff and sell a technology firm is feeding on itself (see article).

As a result, American capitalism has a new hub in the west. Wall Street used to be the place to seek fortunes and make deals; now it is increasingly the Valley. The area’s tech companies are worth over $3 trillion. Last year one in five American business-school graduates piled into tech. Jamie Dimon, the boss of JPMorgan Chase, has warned of mounting competition for Wall Street. Goldman Sachs recently held its annual shareholder meeting in San Francisco.

The enormous, disruptive creativity of Silicon Valley is unlike anything since the genius of the great 19th-century inventors. Its triumph is to be celebrated. But the accumulation of so much wealth so fast comes

with risks. The 1990s saw a financial bubble that ended in a spectacular bust. This time the danger is insularity. The geeks live in a bubble that seals off their empire from the world they are doing so much to change.

Silicon lining

The American economy would be hit hard by a repeat of the financial shock that followed the dotcom crash in 2000. With the NASDAQ index near its record high, this is a common fear. Fortunately, although money and talent are pouring into the Valley, there is not yet much danger of a disastrous bust. That is because tech companies today not only have more robust business models than their dotcom predecessors did (ie, many actually make money), but they also rely on a smaller group of financial backers.

Today’s firms are staying private for longer. Tech firms that went public in 2014 were on average 11 years old; back in 1999 they waited only four years before listing their shares. Tapping wealthy investors means risk is borne by people who can afford to take losses. It is easy to lament the decline of the publicly listed company (though even when founders do list they keep a tight rein), but if tech firms fall short of their promises, ordinary investors are less likely to see their wealth destroyed.

INTERACTIVE: Track the fortunes of Silicon Valley firms over time with our interactive map

Staying private allows entrepreneurs to avoid the headaches that come from being quoted: the nuisance of activist investors, the drudgery of compliance, the vision-crushing ritual of quarterly reporting. In theory, a coterie of investors is better than an anonymous multitude of shareholders at making sure managers act in the interests of all a firm’s owners.

But staying private has risks, too. One is that firms under no obligation to make public a full set of audited accounts will remain veiled from the scrutiny of analysts and short-sellers and so act irresponsibly. America’s tech “unicorns”—firms that have reached a valuation of more than $1 billion—are worth around $300 billion between them. The danger that some of this capital is being misallocated is high.

The other risk is that a charmed circle with great wealth becomes cut off from everyone else. For a group rewriting the rules for industry after industry, that is a special danger.

The empire of the geeks draws its strength from a culture of techno-evangelism that enables entrepreneurs to rethink old systems and embrace new ones. Many denizens of the Valley believe that tech is the solution to all ills and that government is just an annoyance that still lacks an algorithm. So far the public’s relationship with the tech titans has been mostly harmonious. Consumers enjoy their taxi-hailing apps, music streaming and voice-recognition software.

Yet cracking open established industries inevitably results in conflict. Uber is the firm most embroiled in controversy, whether facing licensed taxi-drivers on the streets or demands from its own drivers in the courts. European regulators are also scrutinising firms like Facebook and Google for everything from antitrust concerns to data protection. And American regulators are reportedly looking at whether Apple has abused its clout in the music business.

Silicon rally: How the US technology sector has changed since 1980

Critics are often from industries wanting to protect their privileges; the geeks’ aggressive behaviour is sometimes part of the creative destruction that leads to progress. But that is not the only source of anger. Silicon Valley also dominates markets, sucks out the value contained in personal data, and erects business models that make money partly by avoiding taxes. There is a risk that global consumers will feel exploited and that the effects of a shrinking tax base will infuriate voters. If the perception takes root that enormous profits from exploiting data and avoiding taxes are crystallised in the fortunes of a few people living on a patch of ground near San Francisco, then there will be a backlash.

Mind the techlash

The Valley’s firms are hardly the only ones to push against taxes and regulation. They are free to operate as they like within the law. But they risk becoming targets because they are so global. They should remember that the law can change. If they want a seat at the table when it does, they need to be part of the markets they sell into, not isolated from them. Even private firms run by geniuses need a licence from society to operate.

At its best Silicon Valley is an expression of iconoclastic freedom and creativity. It would be a terrible shame if it became an unpopular and remote manifestation of elitism.

Silicon Valley

To fly, to fall, to fly again

The tech boom may get bumpy, but it will not end in a repeat of the dotcom crashJul 25th 2015 | SAN FRANCISCO | From the print edition

LOOK out from Crissy Field, in San Francisco, on a fog-free day and chances are you will see some technology entrepreneurs leaping into the sky. The hybrid sport of kitesurfing has become a favourite pastime of the Bay Area’s startup crowd. Lifted by high-tension rigging, unpredictable gusts and a delight in daring, they fly up into the air before splashing back to the cold surf. Some landings are smooth; others are not. The sport requires skill, good equipment and hard-won experience, but chance and ambition also play a part. And even the most experienced cannot control the winds.

On shore, too, exhilaration and risk go hand in hand. San Francisco, Silicon Valley and the strip of land that runs along the shore of the Bay between them have had a tremendous decade as the hub of the global technology industry. The area’s biggest companies have soared to heights once unimaginable, coming to represent all that the world finds most exciting about American capitalism. Even its smaller fry have attracted mountains of money. The Valley has reshaped lives and languages, creating new verbs—to google, to facebook, to uber—and repurposing old ones—to tweet, to message, to like.

Every year new ideas grow from specks to spectacular. Startups are so commonplace that in San Francisco’s Mission district you can buy greeting cards that say “Congratulations on closing your first round.” Uber, a six-year-old taxi-hailing company, is valued at $41 billion; Airbnb, a seven-year-old firm through which people turn their homes into hotels, is valued at $26 billion. Each week bosses arrive from far off places to tour and learn from the centre of innovation. There is a pervasive sense of something wonderful afoot. Living in San Francisco today, with its bustle and big ideas, feels like “living in Florence

during the Renaissance,” effuses Sander Daniels, the fresh-faced founder of Thumbtack, an app that matches skilled labourers with tasks that suit them.

Last year around 20% of American business-school graduates went to work for a technology firm, the highest percentage since 2000. As in gold rushes past, the influx generates grumbling from old-timers and newcomers alike. In every coffee shop from downtown San Francisco to Palo Alto you hear complaints about eye-watering property prices and unbearable traffic.

And at the same time, you hear the worry that the boom underpinning those problems cannot last. The NASDAQ has been hitting all-time highs, most recently on July 20th. Investors scrambling to profit from the next new thing are pushing up the valuations of the most popular, fast-growing startups by billions of dollars. Money has warped entrepreneurs’ expectations. When Facebook paid $1 billion for Instagram, a photo-sharing site with 13 employees and no revenue, three years ago many onlookers thought the price wildly generous. Kevin Systrom, Instagram’s 31-year-old founder, became the pin-up for startup success. Last year Facebook paid an astonishing $22 billion for WhatsApp, a messaging firm with just $10m in sales. Now people say Mr Systrom sold too soon.

Greed, profligacy, tiny companies with outlandish valuations: it is not hard to detect echoes of the turn of the century, when the dotcom bubble burst spectacularly and America’s economy stumbled as a result. But to see history as about to repeat itself is to miss how deeply things have changed. Today’s technology businesses are selling services and products from which they already generate income, rather than just

saying that one day they might. And the group of people doing the investing is much smaller now than it was then. The risks are on fewer shoulders.

MBA graduates entering technology firms, %

All business schools Individual schools

o Berkeley, CAo Chicago, ILo Columbia, NYo Dartmouth, NHo Harvard, MAo MIT, MAo NYU, NYo Pennsylvania, PAo Stanford, CAo UCLA, CAo Virginia, VA

See interactive @ http://www.economist.com/news/briefing/21659722-tech-boom-may-get-bumpy-it-will-not-end-repeat-dotcom-crash-fly

A new breed of hero

That is not totally reassuring. If risks are limited to a smaller number, so too are benefits. The chance to invest in many of Silicon Valley’s most exciting companies is restricted to a charmed circle of connected, wealthy insiders. That not only excludes the average investor; it also shields firms from the scrutiny public companies receive. Such shielding may be letting weak ideas go further than they should, increasing the chances of a reckoning.

The nagging fear of 2000 redux stems in large part from the sheer scale of that bust. In the three years to 2000 the NASDAQ index tripled as millions of Americans used their newly opened online-trading accounts to buy internet stocks. Companies like Garden.com, a website where gardeners would buy supplies and exchange tips, were taken public with no proven business model and no cash reserves. When in early 2000 several telecom companies went bankrupt the whole edifice collapsed; the decline in the NASDAQ wiped out some $4 trillion between March and December 2000. Silicon Valley was devastated; many of its firms went bust. The ensuing “nuclear winter”, when tech deals were at a standstill, lasted for years.

Look beyond the mere size of that boom and bust, though, and the differences with today’s situation are clear. For one thing, the base of today’s success is broader. In 2000 some 400m people around the world had access to the internet; by the end of 2015 3.2 billion people will. And the internet reaches into these people’s lives in many more ways than it could 15 years ago. “Technology is no longer a vertical industry, as it’s been understood by everyone for four decades,” says John Battelle, a journalist and entrepreneur who launched the Industry Standard, a magazine which reported on the dotcom boom before itself going bankrupt in 2001. “Technology is now a horizontal, enabling force throughout the whole economy.”

Smartphones have opened up global business opportunities that could never have existed previously—a taxi-hailing business like Uber could not work without them. Turning such opportunities into embryonic businesses is easy. The cloud, which allows companies to expand their processing power and data storage with no capital investment, keeps costs low; so does open-source software. Firms can use free social media for marketing.

Those advantages apply well beyond the San Francisco Bay; there are thriving tech scenes elsewhere. But nowhere else rivals San Francisco’s special elixir of brains, experience and money. The total value of Bay area tech companies worth more than $1 billion is now a hair over $3 trillion, a figure that has been growing healthily for almost a decade.

Though most technology firms going public today are unprofitable, just as they were in 1999, they have more realistic business models; most are losing money in a premeditated effort to expand, rather than through having no alternative. Last year the average American technology firm that staged an initial public offering (IPO) was 11 years old and had $91m in sales, compared with an average age of four years old, with $17m in revenue, in 1999, according to Jay Ritter, a professor at the University of Florida who studies public markets.

Public investors, some of whom quit their jobs to trade stocks during the 1990s, are less feverish today. Of 632 tech IPOs in 1999 and 2000, around 29% saw the companies double in value on day one, according to Mr Ritter. Of the mere 53 technology companies that went public in 2014, only two “popped” that dramatically. In the first quarter of 2000 the average price-to-earnings ratio on NASDAQ was almost 170. For the billion-dollar tech companies in the Bay area today the ratio is a modest 21.

But this relative sobriety masks two trends towards excess: the ever higher values placed on bigger companies that stay privately held and the amount of cash investors are giving them to spend in order to dominate their business category. Both will continue to have far-reaching impacts on the dynamics of startups, public companies and the city of San Francisco.

Sudden impact

Starting a tech firm has never been easier. Not only does it cost less, but there are more “angel” investors who are willing to write small cheques to breathe life into founders’ ideas. It’s the next stage that demands nerves and deep pockets. Most entrepreneurs and venture capitalists subscribe to the view that technology markets work on a winner-take-most basis. Businesses like Uber’s thrive on “network effects”; the bigger their presence, the more it makes sense for drivers and passengers to do business with them, rather than their rivals. Thus the company that establishes itself early enjoys disproportionate rewards. “First prize is a Cadillac Eldorado…Second prize is a set of steak knives. Third prize is you’re fired,” explains Stewart Butterfield, the boss of Slack, a two-year-old software company with a $2.8 billion valuation, quoting from David Mamet’s play “Glengarry Glen Ross”. Such beliefs produce a positive feedback loop. More funding leads to a higher valuation, which generates more interest from the press, which makes it easier to attract and retain employees, which makes it possible to outperform rivals, which brings in more funding.

Investors are willing to stomach high spending on gaining customers and intimidating competitors in an attempt to create what they call, in hushed whispers, “natural monopolies”. Bill Gurley, a venture capitalist at Benchmark, calls it the “grand experiment”. “There is no precedent of giving all these companies hundreds of millions of dollars, growing them so big, and telling them we don’t care if they are profitable.” And it is an experiment in which everyone has to participate. “If your competitors are acting like capital is free and doesn’t matter, then you have to live in that world,” says Mr Gurley.

As startups grow faster than ever before, many are also staying private longer. It used to be extremely rare to find a startup valued over $1 billion, but today there are 74 such “unicorns” in America’s tech sector, valued at $273 billion (see chart). That is 61% of all the unicorns in the world by number, according to CB Insights, which tracks the private market.

Many entrepreneurs view life as a public company, with its quarterly appraisals and activist shareholders, as akin to being the giant effigy at the focus of the annual “Burning Man” gathering in the Nevada desert: yes, you may be quickly built into the biggest thing around, but the experience promises more than a little pain. And drumming up capital without the help of the public markets is unprecedentedly easy. In the face of low interest rates, investors have scrambled to find any sort of yield. Mutual funds such as Fidelity and T. Rowe Price are investing in unicorns in late-stage rounds, as are hedge funds, sovereign-wealth funds and large firms.

Foul play

As waiting to go public becomes the norm, the attraction of investing early grows. Nice as it was to be an early investor in Google, Amazon or Microsoft, most of the value at those older companies was created after they went public, which gave later investors a chance to make a killing too. By contrast, the venture-capital firm Andreessen Horowitz points out that at LinkedIn, a professional networking website, 40% of the company’s value was created before its 2011 IPO; for Twitter, all the value creation took place before its IPO.

Mark Mahaney, an analyst at RBC Capital, a Canadian investment bank, says it was Facebook that changed the way that investors thought about high prices. Started in 2004, it stayed private for eight years. In 2007, when a $240m investment by Microsoft valued the social-media firm at $15 billion, critical onlookers said the price was a “nosebleed”. Considering Facebook’s $276 billion public valuation today, most wish in retrospect that they had been able to join in the nasal discomfort.

The lack of other investment opportunities and the fear of missing out—an emotion so widely felt as to have earned its own acronym, FOMO—have driven unicorn valuations that are hard to justify using the firms’ financial performance. For example Pinterest, a website that allows users to share photos of things they would like to buy, has negligible revenues but a valuation of $11 billion. “We call [them] ‘private market’ valuations, but it’s not really a market. It’s a handful of optimists” who are setting prices, says one banker.

One cynical venture capitalist sees many of the valuations as relying on a “squint test”: if by squinting you can convince yourself that a company looks vaguely like one which has already commanded a high price, you should value it as people have the other one. For example, squint at Snapchat, a messaging service anomalously based in Los Angeles with more than 100m monthly users but no proven revenue model, and it might look a little like WhatsApp, which sold itself so lucratively to Facebook last year. That could go some way to explaining its $16 billion valuation, despite the firms’ very different offerings.

Magnum force

High valuations obviously come with a risk for investors. As tech firms move into new markets they can face a lot of regulatory uncertainty. Uber, for example, is sparring with regulators across much of the world and risks being forced to recategorise some of its drivers as employees instead of freelancers, which would damage its lean business model. Homejoy, a housecleaning service backed by venture capitalists, has announced it will shut down at the end of July because of lawsuits over whether its workers should be categorised as employees or contractors.

Less obviously, the valuations can damage the unicorns themselves. When a young entrepreneur desperate to join the “three comma” club accepts an overvaluation he runs the risk of a subsequent “down round”—a lower valuation when looking for future funding or going public. That is a reputation killer in a place where reputation has come to matter a lot. In 1999 the mainstream media were just beginning to home in on Silicon Valley; now the press covers it assiduously. “Today the cast of entrepreneurs is acting like Hollywood stars,” says Randy Komisar of Kleiner, Perkins, Caufield & Byers, a venture-capital firm. “There is a lot of strutting and vogueing for the cameras.”

Some unicorns have grown so big that they are sitting in a “valuation trap”, too expensive to be sold to a corporate buyer like Facebook, Google or Apple and unable to successfully float on public markets for what they are claimed to be worth. The high valuations across the board also make it harder for the unicorns to thin their ranks, or to ease the competitive pressures that are forcing them to spend so freely, by turning to eat each other. At least one mooted merger between unicorns in the same sort of business has fallen through because of the rate at which their values rose during the negotiations.

Another problem brought on by the enthusiastic investment in young companies is bidding up talent. Competition for skilled workers “is more intense than I have ever seen it,” says Jim Breyer, a prominent venture capitalist. The average software engineer in San Francisco now earns $150,000, according to Glassdoor, a database for employer reviews and job listings. In HBO’s comedy series “Silicon Valley”, the fictional startup Pied Piper finds itself so desperate for a good engineer that it is willing to make an offer to one who claims to be a cyborg, only to be turned down because he has so many other employers to choose from. It is the sort of exaggeration with a nub of truth that makes the show as popular among San Francisco techies as “Sex and the City” was among women in New York.

A particular bone of contention when it comes to hiring is common stock, which startups give to new hires. The value of common stock is assessed by outside firms, but the appeal of a low value, which maximises the upside for employees, leads some companies to try to make sure the assessment comes out that way. Public companies cannot play such games. Many employees have become wise to this and understand the arbitrage of going to work for a startup instead of a public firm. “Wall Street used to be the only place where there was profit without value,” says the boss of a public technology company. “Now there is the potential of this happening in Silicon Valley.”

http://www.economist.com/blogs/graphicdetail/2015/07/daily-chart-mapping-fortunes-silicon-valley

INTERACTIVE: Track the fortunes of Silicon Valley firms over time with our interactive map

The technology industry is starting to look like Wall Street in other ways, too. Ambitious young things who would once have headed for banks now go into tech instead. “The upside is better, the hours are no worse, and the economy is moving more in the direction of technology,” says Jon Bischke of Entelo, a software company that helps firms recruit. The attraction is not limited to those fresh from college: in some circles Uber is known as “Goldman West” because of its phalanx of former bankers. At a time when Wall Street has had its purse strings pulled tighter by regulations designed to curtail big bonuses, Silicon Valley can still offer spectacular reimbursement, as Google surely did when it recently hired Ruth Porat from Morgan Stanley to become its chief financial officer. Anthony Noto, Twitter’s CFO and a former Goldman Sachs executive, received over $70m in compensation last year.

The last stand

The backlash against such excess has not yet reached the scale achieved by the “Occupy Wall Street” movement in the wake of the financial crisis, but cause for resentment is building, particularly in San Francisco. In the 1990s most of the activity was to the south, in Palo Alto, Mountain View and Silicon Valley itself, which is still where the area’s big public companies are mostly based (see map). Today’s startups tend to be much closer to the city itself; Uber, Dropbox, Pinterest and Airbnb all have their headquarters there. Brash young “brogrammers” who work for companies farther south prefer to live in the city and travel to work each day by a luxurious company bus. Property prices have soared as a result. Districts that were once affordable, like Soma and the Mission, are being overrun by engineers and entrepreneurs, pricing out people who have long called them home.

Demand for office space is as heated as the housing market. Venture-capital firms once happy with just a spot on Palo Alto’s Sand Hill Road, which runs along the side of the Stanford University campus, have opened offices in San Francisco to be near the young, urban entrepreneurs who find the Valley distant and boring. Rents are rising fast enough—for San Francisco as a whole the price per square foot is up by over 30% since 2010—that some failed companies have made up a good bit of their losses thanks to the increased value of their office space. As in the dotcom bubble, startups are signing leases for offices far larger than they need so that they can lock in space at today’s high prices rather than tomorrow’s stratospheric ones. Those who think the property market is bad now should wait until more of the San Francisco-based firms go public, says Naval Ravikant of AngelList, a website that helps startups get funding.

As sure as the fog will roll in, at some point San Francisco’s tech economy will slow down. A rise in interest rates could make investors less enthusiastic about technology, because they could earn a higher yield elsewhere. A few well-known unicorns could collapse, killing the prospects of other startups raising funds. A sequence of down rounds across the sector could spook investors.

But the correction will not be like that of 2000. It will not be as indiscriminate, as deep, or as quick. The fact that so many of the large technology companies are private gives them more time to adjust to a market correction than technology companies had last time. Their investors could mark down the value of their investments slowly, as private-equity firms did during the financial crisis of 2008. In the dotcom bust many firms saw their values fall to zero. Many firms may be overvalued this time, too, but few are worth nothing.

A lot of the unicorns have strong underlying businesses and could pull in their horns if the market turned against them. Indeed, some firms are raising money so they have extra cash on hand just in case. “I’ve asked the board, what’s the best way to store fat for the winter,” says Mr Butterfield of Slack, the software company. “The best answer is cash. You can’t really store up goodwill.” According to Mr Butterfield, his firm has “hundreds of millions of dollars in the bank” and is close to breaking even. Many other unicorns have money that could help cushion them. Palantir, which does data analysis, had $1 billion in cash at the end of last year.

Booms and busts are part of the history of Silicon Valley, and California more generally. But the Valley’s influence over the future of consumers and capitalism is here to stay. It has become a nexus of dealmaking and fortune-seeking, a realm of creativity and wild ideas, and it will remain so. But the geeks and dreamers who populate the Valley will need to be able to navigate both smooth and rough waters. Some will try to go too high and wipe out into the bay. Others will be diverted by wild winds. But many will make it safely back to shore—only to head back out again for the thrill, the challenge and the future.

NYT

Unicorns Hunt for Talent Among Silicon Valley’s GiantsBy MIKE ISAACAUG. 18, 2015

Photo

Mike Curtis, vice president for engineering at Airbnb, said new hires were drawn to the youth of the company, which was founded in 2008. Credit Jason Henry for The New York Times

For the last year, Google’s work force has increasingly been under attack from a herd of unicorns.

The unicorns, a class of hot start-ups valued at $1 billion or more, are all aggressively pursuing the best and brightest minds in Silicon Valley with promises of talked-about workplaces and eye-popping payouts. Amid a general scramble for talent, Google, the Internet search company, has undergone specific raids from unicorns for engineers who specialize in crucial technologies like mapping.

In particular, Uber — the largest unicorn, with a valuation of more than $50 billion — has plundered Google’s mapping unit over the last 12 months, aiming to bolster its own map research. Airbnb, the popular short-term rental start-up, has gone on a more general hiring spree, poaching more than 100 workers.

graphic

Special Section: The Rise of the ‘Unicorns’ APRIL 1, 2015

The recruiting is not confined to the best engineers; sometimes it spills over to nontechnical employees too. Two of the chefs who prepared meals for Googlers, Alvin San and Rafael Monfort, have been hired away by Uber and Airbnb in the last 18 months.

“It’s an employee’s market right now,” said Rodrigo Ipince, 28, a software engineer who recently left Google and was pursued by unicorns, but chose to join a mobile gaming video start-up, Kamcord. Mr. Ipince, who worked at Google for five years, said he received at least one to two emails from recruiters daily, asking if he was eager for a new job.

“It was fairly easy to get my foot in the door of whatever company I want,” he added.

Recruiting battles are a perennial tale in Silicon Valley, where technology companies wage war on one another for top prospects by doling out six-figure salaries and generous stock packages as if they were Halloween candy. The difference now is the scale of the talent clashes, with a large and growing number of young companies jumping into the fight, boasting fat war chests and claiming $1 billion-plus valuations.

There are now more than 124 unicorn companies, according to CB Insights, a research firm that tracks start-ups.

The competition is recognized at the very top. Amazon’s chief executive, Jeff Bezos, in a memo written over the weekend in response to a New York Times article about the company’s workplace, referred to a “highly competitive tech hiring market” and how his employees “are recruited every day by other world-class companies.” He wasn’t specific about which companies were after Amazon workers.

While the unicorns typically pick off small groups of engineers at a time, making little impression on a large company’s total employee numbers, the poaching attacks are often aimed at siphoning off the best talent in strategic technologies. That can sting the likes of a Google, where executives have said one skilled engineer can be worth many times the average.

To snag employees from large rivals, unicorns have a simple recruiting pitch: They are on a path to success, as illustrated by their rising valuations. Many offer generous equity packages of restricted stock units that can later translate to big paydays for employees if the unicorn goes public or is sold — a lure that neither Google nor any other public tech company can dangle. Also, the unicorns say they are far more fleet-footed and cutting-edge than large organizations.

“The things that excite young tech workers are high growth and fast execution,” said Dave Carvajal, founder of Dave Partners, a tech recruiting company. “It’s not that tough for the new unicorns to swing by these big, older tech companies and pick up busloads of talent.”

Mike Curtis, vice president for engineering at Airbnb, which has a $24 billion valuation, said new hires were drawn to the youth of the company, which was founded in 2008. Airbnb, based in San Francisco, has doubled its work force over the last year, now employing about 2,000 people globally.

“These people think quite a bit about what our future growth potential is, what kind of impact we will have on the world, and, yes, what that would mean in terms of their equity,” Mr. Curtis said in an interview.

Apart from Google, the onetime Internet darlings Yelp and Twitter have become prime poaching targets, especially as their share prices have plummeted, reducing their employees’ potential for big gains from equity compensation. Over the last 18 months, Yelp’s stock price has fallen 73 percent from its peak, while Twitter shares are trading near a low.

Yelp’s chief operating officer, Geoff Donaker, acknowledged the unicorn poaching phenomenon in a conference call with analysts last month after the company reported disappointing earnings. About what he called “the unicorn bubble question,” Mr. Donaker said, “We are certainly feeling those impacts.”

The company said that it was having to spend more to hire sales representatives, and that recruiting was not happening as fast as Yelp would like because of the competitive environment.

“We will do what we can to hold the dam on that whole thing and ride it out,” Mr. Donaker added.

Representatives of Twitter and Yelp said their total employee numbers had risen on an annual basis.

“This competition for talent has a better chance at being solved if tech companies work together to increase the talent pool,” said Shannon Eis, a spokeswoman at Yelp. “We have to encourage students to train for careers in the fields that are growing our industry and our economy.”

Among the most aggressive unicorn recruiters is Uber, the ride-hailing company based in San Francisco, which has expanded operations to 59 countries. Uber promises a fast-paced work environment and “world changing” ambitions, according to multiple people who have been approached by the company or work for it. Uber has more than 3,500 employees, up from roughly 1,300 a year ago, not counting its so-called driver partners, who are contract workers.

Uber does not shy away from dangling generous compensation packages to important hires, especially in engineering. In the case of some highly sought-after engineers from Yelp last year, Uber offered millions of dollars in restricted stock units, according to two people with knowledge of the recruiting practices, who spoke on the condition of anonymity.

One of Uber’s prime picking grounds is Google. Uber has systematically hired Google’s experts in mapping technology, a crucial component of Uber’s plans to reduce its reliance on outside companies for mapping. In June, Uber hired Brian McClendon, a Google vice president for engineering who now leads Uber’s driverless car and robotics research center. Uber has also raided Google’s Geo unit, according to people close to the company, hiring at least a dozen mapping specialists over the last year.

Mr. McClendon declined to comment, as did an Uber spokeswoman. Google declined to comment for this article.

Google is not letting its employees go without a fight. Offers from a short list of companies — including Uber, Airbnb, Pinterest and Palantir — will often produce counteroffers, according to two people with direct knowledge of the matter.

The most senior Google employees may get a one-on-one meeting with Larry Page, a Google co-founder, to try to persuade the executive to stay, according to one of these people. Google is often willing to go “over the top” to keep top talent, the two people said.

Now may be an especially opportune time for unicorns to pick off Google workers. The company is in the midst of restructuring into a holding company named Alphabet. That has raised questions as to how employees, and their pet projects, will be situated and funded under the new regime.

In addition, a nimble recruiter from a much-talked-out start-up can still move faster than even the most competitive companies like Google. And sometimes, moving fast enough is all it takes.

“In one case, I replied to a recruiter on Thursday. I was interviewing on-site by Saturday, and I had an offer by Monday,” said Mr. Ipince, the software engineer.

Wall Street and Silicon Valley Form an Uneasy AllianceBy ANDREW ROSS SORKIN

APRIL 1, 2015

Silicon Valley has always had an uneasy relationship with Wall Street.

Tom Perkins, the longtime venture capitalist, once offered a derisive description of the function of bankers. “The term fee-charging middlemen is clearly less attractive, but it’s much closer to an accurate description of their actual function,” he wrote in his memoir.

Mr. Perkins added, “At the end of the world, after all the sharks have long gone, the investment bankers will outlive the cockroaches.”

For nearly the last three decades, Wall Street has sought to overcome Mr. Perkins’s skepticism, often shared by others in the technology sector. The banking industry has tried to befriend — or, at times, wished it could colonize — Silicon Valley, perhaps the world’s greatest birthing ground for start-ups, billion-dollar initial public offerings and tech conglomerates, all of which need financial services (which in turn, generates those fees Mr. Perkins was complaining about).

Silicon Valley’s entrepreneurs and venture capitalists have done their best to avoid letting Wall Street too far inside their club. Remember Google’s unusual “Dutch auction” I.P.O. that was heralded for wresting power from Wall Street and putting more of it in the hands of investors? In hindsight, that offering in 2004 didn’t work out so well, and the Dutch auction never became the future of tech I.P.O.s.

More than a decade later, it appears the relationship between Wall Street and Silicon Valley has thawed. You could say it has even matured. It now appears that a new sort of symbiotic relationship has finally begun to develop as the latest Digital Gold Rush presses on.

The newest new, new thing is a full embrace of the East Coast financial types by putting them squarely in the middle of the entrepreneurial action in a meaningful way. Indeed, the foxes are now guarding the henhouses.

John J. Mack, the former chief executive of Morgan Stanley and an old-school trader if ever there was one, is now a board member and investor in Lending Club, a start-up that could one day upend the mortgage and lending industry. Last week, Ruth Porat, the finance chief at Morgan Stanley, was named the chief financial officer of Google. Twitter, too, looked to Wall Street for its chief financial officer, hiring Anthony Noto from Goldman Sachs.

To the big banks, losing talented executives to successful technology firms isn’t considered a loss. Quite the opposite. To Goldman or Morgan Stanley, it could mean more future fees, as its alumni in vaunted new posts steer business back to them.

Many of Wall Street’s biggest firms have also become pseudo-venture capitalists, investing their clients’ money in start-ups. In January, Goldman Sachs said it had invested $1.6 billion of its private wealth management clients’ money in Uber.

The investment allows Goldman to offer its clients access to a start-up early; it also helps Goldman develop its relationship with Uber as the firm jockeys for position to help underwrite an eventual I.P.O., which will create a huge stream of fees. This practice, which some say is conflict-ridden, is used by virtually all the banks to great effect. (Goldman made a similar move with Facebook ahead of its I.P.O.)

Wall Street is especially keen to get into Silicon Valley companies early because so many of them aren’t rushing for the I.P.O. exit so quickly anymore. Many are staying private for years as valuations skyrocket. JPMorgan helped Jawbone and SurveyMonkey with a special financing instrument it calls “Stay Private Longer.” If and when those companies go public, JPMorgan hopes to land that business, too.

The money at stake for all sides is huge. Last year, JPMorgan and Goldman Sachs collected more than $1 billion in fees from managing initial public offerings worldwide. Getting a close relationship with a successful start-up early on can become a never-ending spigot. The I.P.O. is just the opening act. There are follow-on offerings, debt offerings, money management for executives, mergers and acquisitions, and spinoffs. That’s why Wall Street has long tried to court Silicon Valley so aggressively.

Goldman Sachs set up its first office in San Francisco in 1968. In the 1990s, Wall Street banks sought out “the Four Horsemen,” a contingent of local boutique investment banks that had cornered the market on virtually all the tech start-ups. JPMorgan bought Hambrecht & Quist (Mr. Perkins has long said the only banker he ever liked was Bill Hambrecht of Hambrecht & Quist); Deutsche Bank bought Alex. Brown & Sons; the predecessor to Bank of America bought Robertson Stephens; and Montgomery Securities was bought by NationsBank (which later merged with Bank of America).

The technology boom in the late 1990s prompted Frank Quattrone, a banker regarded as a legend in Silicon Valley, to jump from Morgan Stanley to Deutsche Bank to Credit Suisse in a matter of a little over two years, with each bank bidding ever higher for his services.

Today, the hierarchy of power in Silicon Valley is still up for grabs as financial institutions do just about anything to gain entree to sought-after tech clients.

Morgan Stanley, which is angling for its own role in a potential Uber offering, announced late last year that it was signing on as an early client to Uber’s business service. It published a news release about its use of

Uber in a public effort to ingratiate itself with the company. (Barclays and Deutsche Bank also piloted Uber’s business services early and offered testimonials on Uber’s website.)

And Goldman Sachs recently held a party at the South by Southwest Music Conference and Festival in Austin. Fortune magazine said Goldman “came to tech geek nirvana to make new friends. Specifically, ascendant-tech-startup-entrepreneurs-who-might-consider-retaining-the-services-of-a-certain-investment-bank-when-they-sell-or-IPO friends.”

Those efforts at new client relationships pale in comparison to some of the more aggressive moves to land business.

Mr. Quattrone, in a story that has become a legend in Silicon Valley, once sent a live mule to the office of a prospective client. The chief executive had earlier complained about being “dragged around to meetings like a mule.” (His brash efforts paid off; he got the client.)

The courting of would-be clients is getting more complicated, as some of Silicon Valley’s most-promising upstarts are jumping into the financial world that, if they have their way, would eat away at some of Wall Street’s core business.

The New York Stock Exchange and Vikram S. Pandit, the former Citigroup chief executive, recently invested in Coinbase, a Bitcoin company. James D. Robinson III, the former chief executive of American Express, is on the board of OnDeck Capital, a small-business lender that could one day make the established players obsolete.

The old guard is also trying to join the upstarts in their game. Last week, the staid insurer Northwestern Mutual bought the financial planning start-up LearnVest in an effort to be more innovative.

Even as the East and West Coast hubs of business power seem to coexist in a newfound friendship, how long it will last is an open question. Mr. Perkins had his doubts.

“You may well ask: ‘If you are so disgusted with investment bankers, why do you continue to deal with them?’ You have a good question there,” he wrote in his book. “It’s because they are the S.E.C.-licensed gatekeepers to accessing the public market for capital; they are a necessary evil. Maybe, somehow, eventually through the Internet there will be a way around the bankers.”

NYT

Conference Aims to Bridge the Divide Between the Pentagon and Silicon ValleyBy JOHN MARKOFFSEPT. 8, 2015

ARLINGTON, Va. — The Pentagon will press its effort to build ties with the nation’s scientists and engineers at a three-day conference this week in St. Louis that will highlight a range of future technologies and serve as a forum to promote collaboration across diverse science and technology fields.

The event is the brainchild of Arati Prabhakar, a physicist who studied at the California Institute of Technology and a longtime Silicon Valley venture capitalist who has headed the Defense Advanced Research Projects Agency, or Darpa, since 2012. Ashton Carter, the defense secretary, will open the event, which is expected to draw 1,200 innovators, including military contractors, university and corporate engineers, and scientists and entrepreneurs from start-ups.

The conference is part of a broader effort by the Pentagon to tap into the ingenuity of Silicon Valley.

In August, Secretary Carter, who is also an accomplished physicist, announced a $75 million collaboration with private firms to develop more advanced wearable electronics that might lead to new kinds of sensors for everything from clothing to the hulls of ships and fuselages of aircraft. That followed an announcement in April by the Pentagon that it will create an outpost in Silicon Valley known as “Defense Innovation Unit Experimental.”

Photo

Arati Prabhakar, the head of Darpa since 2012. Credit Mandel Ngan/A.F.P. -- Getty Images

The effort is being made in part to repair the schism between the federal government and Silicon Valley created by revelations of electronic spying found in the documents leaked by Edward J. Snowden, said Andrew McAfee, co-director of the MIT Initiative on the Digital Economy.

“I believe it’s possible,” he said. “The military people I’ve talked to understand that their culture and history are hemming them and slowing them down. I think there is an appetite on both sides.”

The conference, named “Wait, What? A Future Technology Forum,” will include a number of technology demonstrations, such as the agency’s pioneering research in brain-computer interfaces.

The research was started to enable soldiers who had been paralyzed or lost limbs to control a prosthetic from the brain. The conference will also present 100-gigabit wireless networks, advances in diagnostic techniques to combat infectious diseases such as Ebola, and research in synthetic biology that holds the promise of “programming” matter.

In an interview at Darpa headquarters here last week, Dr. Prabhakar said that building a bridge between the Pentagon and Silicon Valley had personal significance.

“I think that this is the common ground and it is at the heart of what I certainly treasure about Silicon Valley — this notion of technology as a force that can change the world and make a better world,” she said. “I think technology is equally core to national security.”

Since the agency was founded in 1958, Darpa’s relationship with the Valley has had its ups and downs.

During the 1960s and 1970s, the agency underwrote research that led directly to the foundational technologies that helped create Silicon Valley. Research that led to techniques to design the first large-scale computer chips — known as very large-scale integration, or VLSI — made the modern semiconductor industry possible. Earlier, the agency also underwrote a series of projects in computing and networking that led directly to the modern personal computer and the Internet.

However, in the aftermath of Sept. 11 and during the Iraq war, the director at the time, Tony Tether, steered the agency toward a closer relationship with the classified world of the military contracting establishment.

He also started the Total Information Awareness program, which was overseen by the former national security adviser John Poindexter. The program, which was intended to create a giant electronic dragnet to hunt for terrorists, outraged privacy advocates and was canceled by Congress.

However, the technologies pioneered by Darpa then drifted into the intelligence community and helped create the program that motivated Mr. Snowden to leak tens of thousands of classified documents to journalists.

Today, Dr. Prabhakar is trying to find ways to use technology to square the circle between security and privacy. The challenge remains a controversial issue that still bitterly divides the nation’s technology heartland from parts of the administration.

In a plan originally debated in 1992 during the Clinton administration, many in the law enforcement and intelligence community wanted an “electronic backdoor” built into encryption and security software to intercept voice and Internet communications. The United States government’s call for such technology has grown louder since the Snowden revelations.

Dr. Prabhakar said she was sympathetic to the views of counterterrorism officials who have called for access to encrypted information.

“I think these are incredibly hard problems,” she said. “Because the people who are charged with really preventing terrorist activity live in a world where that’s a burden that they feel, and I think it’s just hard to imagine if you’re not living in it.

But she has pushed Darpa to find a technological compromise. In March Darpa began a new program, nicknamed “Brandeis,” after Louis D. Brandeis, the Supreme Court justice who helped develop the concept of the right to privacy.

The program aims to give individuals more control over their data while maintaining lawful access.

HBR

Innovation

Renaissance Florence Was a Better Model for Innovation than Silicon Valley Is

Eric Weiner

January 25, 2016

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Urban planners the world over yearn to replicate the success of Silicon Valley: witness Thames Valley (England) and Silicon Oasis (Dubai), to name just two of these attempts. Invariably, these well-intentioned

efforts fail for the simple reason that they’re trying to replicate the wrong model. Silicon Valley is too new, too now, to glean lessons from. Those hoping to launch the world’s next great innovation hub would be better off looking to an older, even more remarkable genius cluster: Renaissance Florence. The Italian city-state produced an explosion of great art and brilliant ideas, the likes of which the world has not seen before or since. This hothouse of innovation offers lessons as relevant and valuable today as they were 500 years ago. Here are a few of them.

Talent needs patronage. The Medicis of Florence were legendary talent spotters, leveraging their wealth with selective generosity. That was especially true of Lorenzo Medici, better known as Lorenzo the Magnificent. One day when he was strolling through the city, a boy not more than 14 years old caught his eye. The boy was sculpting a faun, a figure in Roman mythology that is half man, half goat, and Lorenzo was stunned by both his talent and his determination to “get it right.” He invited the young stonecutter to live in his residence, working and learning alongside his own children. It was an extraordinary investment, but it paid off handsomely. The boy was Michelangelo. The Medicis didn’t spend frivolously, but when they spotted genius in the making they took calculated risks and opened their wallets wide. Today, cities, organizations, and wealthy individuals need to take a similar approach, sponsoring fresh talent not as an act of charity, but as a discerning investment in the common good.

Mentors matter. In today’s culture, we tend to value youth over experience and have little patience for old-fashioned learning models. Ambitious young entrepreneurs want to tear down the corner office, not take lessons from the people in it. However, the experience of innovators in Renaissance Florence suggests this is a mistake. Some of the greatest names in art and literature willingly paid their dues, studying their craft at the feet of the masters. Leonardo da Vinci spent a full decade — considerably longer than was customary — apprenticing at a Florentine bottega, or workshop, run by a man named Andrea del Verrocchio. A good artist but a better businessman, Verrocchio surely spotted the burgeoning genius in the young artist from an “illegitimate” family, but he nonetheless insisted Leonardo start on the bottom rung like everyone else, sweeping floors and cleaning chicken cages. (The eggs were used to make tempera paint before the advent of oil.) Gradually, Verrocchio gave his charge greater responsibility, even permitting him to paint portions of his own artwork. Why did Leonardo stay an apprentice for so long? He could easily have found work elsewhere, but he clearly valued the experience he acquired in the dusty, chaotic workshop. Too often, modern-day mentoring programs, public or private, are lip service. They must instead, as during Leonardo’s time, entail meaningful, long-term relationships between mentors and their mentees.

Potential trumps experience. When Pope Julius II was deciding who should paint the ceiling of the Sistine Chapel, Michelangelo was far from the obvious choice. Thanks to the Medici patronage, he had become well-known as a sculptor in Rome as well as Florence, but his painting experience was limited to small pieces — and little in the way of frescoes. Still, the pope clearly believed that, when it came to this “impossible” task, talent and potential mattered more than experience, and he was right. Think of how much that mindset differs from what we do today. We typically hire and assign important tasks only to those people and companies who have previously performed similar jobs in the past. A better approach might be to take a page from Julius II and assign difficult tasks to those who don’t seem like the best fit but who can succeed (often in a more innovative way) because they have demonstrated excellence in another field. We need to bet on more dark horses like Michelangelo. Is it risky? Yes, but the potential payoff is enormous.

Disaster creates opportunities. Florence reminds us that even devastating events can yield surprising benefits. The city’s Renaissance blossomed only a few decades after the Black Death decimated the city, and in part because of it. Horrible as it was, the plague shook up the rigid social order, and that new fluidity led directly to artistic and intellectual revolution. Likewise, Athens flourished after it was sacked by the Persians. A period of upheaval almost always precedes a creative awakening. Innovators must internalize this lesson. They need to constantly ask themselves, “What good can come from this? Where is the opportunity hidden amid the distress?” Consider Detroit’s attempt to remake itself into something other than Motor City as car industry employment declined, or New Orleans’s slow but steady efforts to rebuild

after Hurricane Katrina. Don’t aim to restore some glorious — and likely illusory — past. Instead, leverage catastrophe to create something entirely new.

Embrace competition. Renaissance Florence was rife with rivalries and feuds. The two giants of the age, Leonardo and Michelangelo, couldn’t stomach one another, but perhaps that’s what propelled them both to produce such fine work. The decades-long feud between Lorenzo Ghiberti and Filippo Brunelleschi had the same effect. When Brunelleschi failed to win the commission to build the Gates of Paradise in Florence, he traveled to Rome to study ancient structures, like the Pantheon, then brought those lessons home to build the city’s iconic landmark, the Duomo. The Florentines appreciated the value of healthy competition. We’d be wise to do the same, recognizing that both “winners” and “losers” benefit from it.

Seek out and synthesize ideas. Florence was not exactly a democracy, but its leaders recognized the importance of injecting fresh faces, and ideas, on a regular basis. For instance, the bylaws of the Opera del Duomo, the committee that oversaw construction of the now-iconic cupola in the city center, demanded that leadership change every few months, no matter how well the group was performing. They knew that nothing torpedoes a creative endeavor as quickly and thoroughly as complacency. The Florentines (and especially the Medicis) also looked to different cultures and the past for inspiration. They dispatched emissaries far and wide in search of prized ancient Greek and Roman manuscripts. This was not cheap — a single book cost, in relative terms, as much as a car does today — so every acquisition was carefully weighed, its potential value patiently considered. They recognized that innovation involves a synthesis of ideas, some new, some borrowed, and there’s nothing wrong with that.