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Bay area housing market begins to crack

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It’s about time! See Calcuated Risk for further discussion. (Note this data covers some regions which are quite far from the bay itself.)

Standard bubble wisdom: they last longer than you think is possible, then pop faster than anyone expects.

I’ve been calling the bay area bubble since as far back as 2004 / 2005 (actually, from before I started this blog!). I expect the last bubble market to pop will be Manhattan, but pop it will.

It must hurt to think that a house you purchased a year ago might be worth a third less today, with still further to go.

SF Chronicle: Across the nine counties, the median price paid for resale homes, new homes and condos in June plunged 27.1 percent from a year ago to $485,000, dipping below the half-million-dollar mark for the first time in four years, DataQuick Information Systems of La Jolla (San Diego County) reported Thursday.

Among resold homes, bank-repossessed foreclosures – which usually are discounted – accounted for 28.7 percent of all existing-home sales, up from just 3.5 percent in June 2007. Solano County, with foreclosures at 57.7 percent of all resales, had the highest percentage; San Francisco, at 3 percent, had the lowest.

Affluent areas such as Marin County and San Francisco, which until now had resisted most price erosion, saw existing single-family home median prices fall by about 11 percent. Including new homes and condos, the Marin County and San Francisco medians fell about 12 percent to $846,000 and $726,750, respectively.

“This is pretty grim; double digits across the board,” said Christopher Thornberg, principal at Los Angeles’ Beacon Economics. “It was eminently predictable if you had a realistic view of the world. I heard a lot of people say the Bay Area was never going to see prices fall, San Francisco was untouchable; in San Mateo, it was impossible; San Jose, not with all the tech money, blah, blah, blah. But prices at the peak relative to people’s incomes never made any sense.”

Note the 27% figure for change in median price is a bit tricky to interpret: it’s alway possible that the composition of units sold has changed, with a lot of owners of high end homes sitting on them, refusing to accept the current market price. In that case the average price decline would be less than 27%. It is typical in a real estate crash for sellers to remain in denial for some time, during which the big decline is in number of transactions rather than actual price levels. It’s only after the sellers have capitulated that the big price drops occur. In light of that, it’s rather ominous that only 7,178 new and resale homes changed hands in June – the lowest June figure since 1993 🙂

Written by infoproc

July 20, 2008 at 9:38 pm

The plight of the serial entrepreneur

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Below are profiles of two serial entrepreneurs, Avi Rubin and Max Levchin. These are guys who have succeeded before but are still at it, still tooling, still cranking, to the benefit of society. Avi Rubin, the older of the two at 44, seems to have had his share of successes and failures, coming close to bankruptcy with his latest startup before a serendipitous Google acquisition. It’s a long and difficult road.

Why do it? Why risk failure every few years when you could take a cushy, secure job at a big company? I don’t really know, but it is people like this who are disproportionately responsible for innovation in society.

When I was in college, a few of my friends were devotees of Ayn Rand. I dismissed this interest as sophomoric and her ideas as simplistic, but the more time I spend around startups and in technology the more I come around to her point of view…

Rand on Objectivism: “My philosophy, in essence, is the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute.”

Avi Rubin and the Google phone:

NYTimes: …Mr. Rubin then became an entrepreneur in residence at a Silicon Valley venture firm and retreated for a few months to the Cayman Islands, where he began writing software and tried developing a digital camera. But he could not find a backer for the camera, so he returned to his original idea of creating a next-generation smart cellphone. Using a domain name that he had owned for several years, Android.com, he started a new business and assembled a small team of engineers and product planners. Their goal was to design a mobile hand-set platform open to any and all software designers.

Mr. Rubin spent all his savings on that project. He called his friend Mr. Perlman and told him he was broke.

“How soon do you need the money?” Mr. Perlman asked.

“Now!” was the answer.

Mr. Perlman went to the bank and withdrew $10,000 in $100 bills, brought them to Mr. Rubin’s office and set them in a stack on Mr. Rubin’s desk. Ultimately, he lent him a total of $100,000, which helped Android complete its business plan.

This time, venture capitalists loved the idea. So did Craig McCaw, the early cellular telecommunications pioneer who is now chairman of Clearwire, a wireless network operator. As Mr. Rubin was negotiating terms with Mr. McCaw, he sent an e-mail message to Mr. Page informing him of the potential partnership. Within weeks, Google acquired Android for an undisclosed sum. Mr. McCaw declined to comment on the sale. …

Max Levchin, formerly of PayPal:

NYTimes: …A few years ago, Mr. Levchin, one of the young princes of Silicon Valley, bought his first home, a 12-room Edwardian high atop a hill here, for $3.4 million. But Mr. Levchin, who made a fortune at age 27 selling PayPal, the online payment service he helped start in 1998, never moved in. He sold it two years later without having slept there for even one night.

Since then, Mr. Levchin has moved into his second home, a more expensive one found for him by Nellie Minkova, his girlfriend of eight years who has become his fiancée. But so consumed is he by work on his second company, an Internet start-up focused on sharing photos and videos, that the cartons that contain what Mr. Levchin described as “85 percent of my worldly possessions” are still stacked in his living room, five months after moving day.

Mr. Levchin, who is now 32, is typical of a new generation of junior titans in Silicon Valley who might be called the prematurely rich — techies worth tens of millions of dollars, sometimes more, at an age when many others are just starting to figure out what to do with their lives.

The Internet, a low-overhead medium with a global reach, has greatly accelerated the wealth creation phenomenon, producing a larger breed of multimillionaires even younger and richer than in the past.

They are happy to be wealthy, of course, but many of these baby-faced technology tycoons often seem indifferent to the buying power of their money, at least at this stage of their lives. Instead, nearly all of them have chosen to throw themselves back into a start-up, not so much because they want a spectacular new home or a personal jet — though many of them do — but because they are in a competition with themselves and one another.

“For most of us, doing it again means surpassing what we’ve done previously,” said Peter A. Thiel, Mr. Levchin’s partner at PayPal, who also has started a new business, a hedge fund called Clarium Capital. “And that can be a really high bar.”

Even among this jittery group of overachievers, Mr. Levchin stands out. In part that is because outdoing PayPal may be an all-but-impossible goal. Mr. Levchin acknowledges that he has already earned more money than he could ever spend. But he said he would not consider Slide.com, the photo and video sharing site he founded in 2005 that is still in its start-up phase, a success unless it is ultimately worth, in real dollars, “at least $1.54 billion”— the price eBay paid for PayPal.

“Otherwise,” he asked rhetorically, “what have I learned?”

During his PayPal days, Mr. Levchin was so committed to seeing the company succeed that he often sacked out at the office in a sleeping bag he kept under his desk. Considering that he described his apartment during some of this time as “scary,” that had a certain logic. Cardboard boxes served as his living room furniture; a discarded computer desk was his dining room table.

These days, despite the phenomenal success of PayPal, which gave him the bulk of a fortune worth around $100 million, Mr. Levchin continues to work an average of 15 to 18 hours a day.

“We occasionally go out to eat, he sleeps a few hours, he works out,” Ms. Minkova said. “But other than that, Max works.”

Ms. Minkova half-joked that she might appreciate her occasional evenings out with Mr. Levchin more, if only he were not on his BlackBerry, answering e-mail messages and checking his Web site.

One friend, Dennis Fong, who sold a company to MTV Networks last year for $102 million (and is already at work on a new start-up), talks about the “weird growling sound” that Mr. Levchin tends to make when someone even mentions the name of his chief rival, RockYou.

And so committed is Mr. Levchin to seeing Slide.com succeed that he keeps a blood-pressure monitor on his desk. “I don’t know what I would do if I couldn’t start companies,” he said. “I’d probably think about slitting my wrists.”

Wealthy at a Young Age

Maximillian Rafael Levchin was born and raised in Kiev, Ukraine, a Jew living under Soviet rule for 16 years. As the Soviet Union was crumbling, the family moved to the United States and settled in Chicago. But the worst year of his life, he said, was not when he was growing up but after eBay bought PayPal.

He thought he would spend the time after the sale “exploring my inner self.” Instead, he spent the better part of 12 months “feeling worthless and stupid” and baffled by what he might do with the remainder of his life. He felt too young to retire or downshift a gear or two — and too restless to become a philanthropist.

“I enjoy sitting on nice beaches and hanging out with my girlfriend and playing with my dog, but that’s three hours a day,” Mr. Levchin said. “What about the remaining 18 hours I’m awake?”

At first, free time was not much of a problem. Coming into a lot of money at a very young age, Mr. Levchin found himself forced to ponder things like irrevocable trusts and secondary beneficiaries. Several times a week, he would listen to the gentle hectoring of older, well-dressed men and women whom he playfully mimicked, employing a basso profondo, game-show announcer’s voice.

“Think of the kids you don’t have,” Mr. Levchin quoted them as saying. “Think of your unborn grandkids.”

As those obligations of his new wealth subsided, Mr. Levchin contemplated what he might do next. For a time, Mr. Levchin, a graduate of the University of Illinois at Urbana-Champaign, thought about returning to school and earning a doctorate. That is what his mother, a physicist, had always wanted him to do, and it seemed to suit his temperament.

But discussions with a friend who teaches computer science at Stanford convinced him that academia was not the life for him. “This friend said, ‘Don’t kid yourself, you’re going to start another company,’” Mr. Levchin said. “It was one of those things where as soon as he said it, I knew it was true.”

He thought, too, about becoming a venture capitalist or an angel investor, a well-paved path for generations of entrepreneurs before him. Sequoia Capital, one of Silicon Valley’s top venture firms, gave him a desk to use while he figured out his next step. The partners at Sequoia would regularly invite him to join pitch meetings, but that experience taught him that he was hardly suited to the more nurturing side of the profession.

“I took this perverse pleasure in seeing if I could make someone cry,” he said.

At Sequoia, Mr. Levchin met James Hong, another successful entrepreneur who today is one of his closest friends.

“We’d go out drinking, and Max’d talk about how miserable he was, and I’d talk about how miserable I was,” said Mr. Hong, who was 27 when he and a friend started HotOrNot, a Web site popular with the under-30 crowd.

Mr. Levchin added, “We were both pretty pathetic.”

While not nearly as rich as Mr. Levchin, Mr. Hong describes himself as well off enough so that work is optional. He was collecting more than $1 million a year from HotOrNot, a project he and his partner had created in seven days and which demanded little of his time.

“All of a sudden, you have the luxury — or the curse — of being able to ponder the meaning of life,” Mr. Hong said. “You ask yourself, ‘Why am I not happier given how lucky I’ve been?’”

Only later did Mr. Hong diagnose the real source of his angst: he was not doing much of anything. So like most of his peers, Mr. Hong decided to throw himself back into work, in his case refocusing on HotOrNot in the hopes of transforming the Web site into a larger business.

In Silicon Valley, said Robert I. Sutton, a professor of management science and engineering at Stanford and co-founder of the Stanford Technology Ventures Program, remaining relevant, if not also admired and respected, requires that an entrepreneur continue to speed along in the fast lane.

“In other parts of the country, things like a great estate are the symbols people most respect,” Mr. Sutton said. “But here, the greatest status symbol is a person’s ability,” he added, to “still bring out hot new companies” and show that you are “working on the hot new technologies.”

Written by infoproc

November 4, 2007 at 7:27 pm

Working class millionaires

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A nice series in the Times by Gary Rivlin. It does a good job of capturing how real startup people think about wealth, their lives and families.

I’m glad I live in Eugene, Oregon — easier to resist the hedonic treadmill in this eco-hippy college town 🙂

In Silicon Valley, millionaires don’t feel rich (check out the video as well).

Living modestly, despite a nice nest egg (this guy is successfully resisting the hedonic treadmill).

Making do, with $10 million (keeping up with the Joneses in the valley — one of the rare times a journalist accurately describes the “carrying costs” of the wealthy lifestyle; I guess he had help).

Angry commentary from Metafilter, and more from Dave Winer.

…Silicon Valley is thick with those who might be called working-class millionaires — nose-to-the-grindstone people like Mr. Steger who, much to their surprise, are still working as hard as ever even as they find themselves among the fortunate few. Their lives are rich with opportunity; they generally enjoy their jobs. They are amply cushioned against the anxieties and jolts that worry a vast majority of people living paycheck to paycheck.

But many such accomplished and ambitious members of the digital elite still do not think of themselves as particularly fortunate, in part because they are surrounded by people with more wealth — often a lot more.

When chief executives are routinely paid tens of millions of dollars a year and a hedge fund manager can collect $1 billion annually, those with a few million dollars often see their accumulated wealth as puny, a reflection of their modest status in the new Gilded Age, when hundreds of thousands of people have accumulated much vaster fortunes.

“Everyone around here looks at the people above them,” said Gary Kremen, the 43-year-old founder of Match.com, a popular online dating service. “It’s just like Wall Street, where there are all these financial guys worth $7 million wondering what’s so special about them when there are all these guys worth in the hundreds of millions of dollars.”

Mr. Kremen estimated his net worth at $10 million. That puts him firmly in the top half of 1 percent among Americans, according to wealth data from the Federal Reserve, but barely in the top echelons in affluent towns like Palo Alto, Menlo Park and Atherton. So he logs 60- to 80-hour workweeks because, he said, he does not think he has nearly enough money to ease up.

“You’re nobody here at $10 million,” Mr. Kremen said earnestly over a glass of pinot noir at an upscale wine bar here.

…A few even choose to jump off the golden treadmill.

That is what Mark Gage, 51, an engineer, and his wife, Meredith, did when they left the Bay Area in 2005 with $3 million or so in assets. They bought a house in Bend, Ore. — “a bigger, much nicer home with dramatic views” — and now Mr. Gage works only when the perfect consulting job presents itself.

Yet the same drive that earned so many of the engineers and entrepreneurs who live here their fortunes keeps them tied to the Valley, which resembles nothing so much as a sprawling post-war suburb, though one whose roadways are thick with cars costing in the six figures.

Written by infoproc

August 4, 2007 at 8:53 pm

China’s Silicon Valley

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Creative destruction at work in Beijing. I was in Z-Park (short for Zhongguancun Science Park) briefly a few years ago, but didn’t have time to look around in any systematic way.

Businessweek: … Z-Park, China’s homegrown Silicon Valley, is the jewel in his innovation crown. The biggest and oldest of the 53 national high-tech zones in China, Z-Park has become an important port of call for global corporations looking both to develop R&D for all sectors and to get a foothold in the Chinese market. For China watchers, it also serves as a window into how the evolving giant interacts with global market and social forces—and how it is turning to private resources to build its vaunted innovation economy.

Z-Park is made up of a group of seven parks, covering an area of about 100 square kilometers at the northwest edge of Beijing, close to the city’s internationally esteemed educational institutions such as Tsinghua University, the University of Beijing, and the Chinese Academy of Science (CAS). It was founded in 1980, when Chen Chuxian, a researcher at CAS, returned from a trip to Silicon Valley. He opened the Advanced Technology Service Assn., the first privately funded, civilian-run, scientific and technological consulting firm in China. Soon after, other scientists came to the district, attracted by the support afforded by both CAS and the central government. A virtuous circle began, with new ventures spinning off from Chinese universities. Foreign companies also set up shop.

… by 1996, global corporations such as IBM (IBM), Sun (SUNW), Nokia (NOK), and Microsoft (MSFT) had all established R&D centers there. Non-tech companies such as P&G were also lured, while homegrown (often university-grown) companies such as Lenovo (originally known as Legend), Founder, and UFSoft all had their start in Z-Park.

Today, some 18,000 companies operate in Z-Park, including more than 1,500 foreign firms. In 2006, Z-Park generated $85.75 billion in revenues and $12.6 billion in exports. From January to November of last year, the IT industry within Z-Park generated $45 billion in revenues, including $5.8 billion in technology income, $16.8 billion from new products sales, and $7.29 billion in exports.

Companies such as Vimicro (VIMC) and ARCA are making real strides in mobile technology and integrated chip design. Vimicro’s intellectual property, for instance, entered the world market in 2003, when the company’s Starlight 4 mobile-phone color message processing chip was adopted by Sprint. While these signs are rarely visible to the world at large, partly because many of the R&D centers’ efforts are focused on designing products for the domestic market, the result is there are currently 73 Z-Park companies listed on the Shenzhen, Shanghai, Hong Kong, and NASDAQ stock exchanges.

Former Expats Are Today’s Recruits

Z-Park has aggressive growth plans. Its representatives are constantly visiting high-tech areas such as Silicon Valley and Research Triangle Park in North Carolina in an effort to poach companies, experts, and investors. Offering benefits such as reasonable rent, travel perks, high wages, and easier startup conditions, they have lured tens of thousands of Chinese expats away from foreign high-tech centers.

Jennifer Pan, for instance, graduated in computer science from the University of Beijing, obtained her EMBA, and worked in Houston with Compaq and BMC Software (BMC) for eight years before returning to China to work with Z-Park. In 2005, she founded ChinaSense, a company that provides business services to faculties and students of foreign universities. Pan saw China as a better place to pursue her “American dream” and Z-Park as the gateway to success. As she puts it, “There are many issues in China, but there is also an innovation imperative here. China is like a first-time parent with a teenager that is full of energy, eager to learn, and full of hope. It is doing the best it can, while the U.S. is not. It is an exciting place to be.”

In nurturing Z-Park, the government has played a key role in designing an environment in which high-tech ventures and high-growth enterprises can flourish (or die). Entry is regulated, driven by a set of conditions stipulating that 50% of revenues must be from high-tech projects, while R&D expenditure cannot be less than 3% of total revenue. In addition, at least 20% of employees must have a college degree.

A Laboratory for Policy

With its focus on high-growth software and integrated circuit design companies, Z-Park provides appealing financing arrangements through cooperation with commercial Chinese lending institutions. Small and midsize companies such as Analogix, a venture capital-funded Silicon Valley semiconductor company, arrived in 2006, attracted by financial sources such as the Z-Park Development Fund or the Beifang Microelectronic Industry Development Fund.

Tax incentives for those companies headquartered in the park have also been highly effective: The income tax rate is 15% for foreign-funded high-tech enterprises (10% if the export output exceeds 40% of the gross output). “High-tech” enterprises are exempt for the first three years, and the rate is reduced by 50% for the following three years.

A set of very open regulations—translated by law firm Perkins Coie as “Anything not prohibited is allowed”—allow for a fuzzy definition of the business scope of an enterprise within Z-Park, and these encourage startup and emerging venture capital, in contrast with general business regulations in China, which are markedly more prohibitive.

Plan is “Not a Reality Yet”

The park and its ilk are part of a systematic national effort to bring an educated, creative workforce to China, while waiting for the new generation of creative thinkers to come of age. It’s a tough balancing act, and as professor Henry Rowen, co-director of the Stanford Project on Regions of Innovation and Entrepreneurship, and co-author of Making IT: The Rise of Asia in High Tech, points out, “The nation’s self-reliance plan is not a reality yet.” According to him, despite the impressive figures, “several thousands of Z-Park’s companies are not real,” meaning that it includes many micro- and small-business enterprises with doubtful futures.

He’s not wrong: A small or medium enterprise crashes and burns within Z-Park every nine minutes. He also points out that “all technologies have come from the outside.” But Rowen also argues that the government is moving in the right direction, toward a role of indirect support, and that there are signs of innovation in R&D, business models, and services. The U.S. and other nations, he believes, will face new opportunities for collaboration—as well as significant challenges in competing with the rise of an innovative China.

For its part, China remains focused on building an innovation infrastructure to encourage the development of formidable companies like global telecommunications giant Huawei, which generated $8.5 billion in sales in 2006 with a 10% spend on R&D. As Jan Gronski, general manager of Cisco’s (CSCO) China R&D Center, puts it, Huawei “did not get there just by copying.” Others would be ill-advised to underestimate his assessment.

Written by infoproc

June 5, 2007 at 3:55 pm

China’s Silicon Valley

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Creative destruction at work in Beijing. I was in Z-Park (short for Zhongguancun Science Park) briefly a few years ago, but didn’t have time to look around in any systematic way.

Businessweek: … Z-Park, China’s homegrown Silicon Valley, is the jewel in his innovation crown. The biggest and oldest of the 53 national high-tech zones in China, Z-Park has become an important port of call for global corporations looking both to develop R&D for all sectors and to get a foothold in the Chinese market. For China watchers, it also serves as a window into how the evolving giant interacts with global market and social forces—and how it is turning to private resources to build its vaunted innovation economy.

Z-Park is made up of a group of seven parks, covering an area of about 100 square kilometers at the northwest edge of Beijing, close to the city’s internationally esteemed educational institutions such as Tsinghua University, the University of Beijing, and the Chinese Academy of Science (CAS). It was founded in 1980, when Chen Chuxian, a researcher at CAS, returned from a trip to Silicon Valley. He opened the Advanced Technology Service Assn., the first privately funded, civilian-run, scientific and technological consulting firm in China. Soon after, other scientists came to the district, attracted by the support afforded by both CAS and the central government. A virtuous circle began, with new ventures spinning off from Chinese universities. Foreign companies also set up shop.

… by 1996, global corporations such as IBM (IBM), Sun (SUNW), Nokia (NOK), and Microsoft (MSFT) had all established R&D centers there. Non-tech companies such as P&G were also lured, while homegrown (often university-grown) companies such as Lenovo (originally known as Legend), Founder, and UFSoft all had their start in Z-Park.

Today, some 18,000 companies operate in Z-Park, including more than 1,500 foreign firms. In 2006, Z-Park generated $85.75 billion in revenues and $12.6 billion in exports. From January to November of last year, the IT industry within Z-Park generated $45 billion in revenues, including $5.8 billion in technology income, $16.8 billion from new products sales, and $7.29 billion in exports.

Companies such as Vimicro (VIMC) and ARCA are making real strides in mobile technology and integrated chip design. Vimicro’s intellectual property, for instance, entered the world market in 2003, when the company’s Starlight 4 mobile-phone color message processing chip was adopted by Sprint. While these signs are rarely visible to the world at large, partly because many of the R&D centers’ efforts are focused on designing products for the domestic market, the result is there are currently 73 Z-Park companies listed on the Shenzhen, Shanghai, Hong Kong, and NASDAQ stock exchanges.

Former Expats Are Today’s Recruits

Z-Park has aggressive growth plans. Its representatives are constantly visiting high-tech areas such as Silicon Valley and Research Triangle Park in North Carolina in an effort to poach companies, experts, and investors. Offering benefits such as reasonable rent, travel perks, high wages, and easier startup conditions, they have lured tens of thousands of Chinese expats away from foreign high-tech centers.

Jennifer Pan, for instance, graduated in computer science from the University of Beijing, obtained her EMBA, and worked in Houston with Compaq and BMC Software (BMC) for eight years before returning to China to work with Z-Park. In 2005, she founded ChinaSense, a company that provides business services to faculties and students of foreign universities. Pan saw China as a better place to pursue her “American dream” and Z-Park as the gateway to success. As she puts it, “There are many issues in China, but there is also an innovation imperative here. China is like a first-time parent with a teenager that is full of energy, eager to learn, and full of hope. It is doing the best it can, while the U.S. is not. It is an exciting place to be.”

In nurturing Z-Park, the government has played a key role in designing an environment in which high-tech ventures and high-growth enterprises can flourish (or die). Entry is regulated, driven by a set of conditions stipulating that 50% of revenues must be from high-tech projects, while R&D expenditure cannot be less than 3% of total revenue. In addition, at least 20% of employees must have a college degree.

A Laboratory for Policy

With its focus on high-growth software and integrated circuit design companies, Z-Park provides appealing financing arrangements through cooperation with commercial Chinese lending institutions. Small and midsize companies such as Analogix, a venture capital-funded Silicon Valley semiconductor company, arrived in 2006, attracted by financial sources such as the Z-Park Development Fund or the Beifang Microelectronic Industry Development Fund.

Tax incentives for those companies headquartered in the park have also been highly effective: The income tax rate is 15% for foreign-funded high-tech enterprises (10% if the export output exceeds 40% of the gross output). “High-tech” enterprises are exempt for the first three years, and the rate is reduced by 50% for the following three years.

A set of very open regulations—translated by law firm Perkins Coie as “Anything not prohibited is allowed”—allow for a fuzzy definition of the business scope of an enterprise within Z-Park, and these encourage startup and emerging venture capital, in contrast with general business regulations in China, which are markedly more prohibitive.

Plan is “Not a Reality Yet”

The park and its ilk are part of a systematic national effort to bring an educated, creative workforce to China, while waiting for the new generation of creative thinkers to come of age. It’s a tough balancing act, and as professor Henry Rowen, co-director of the Stanford Project on Regions of Innovation and Entrepreneurship, and co-author of Making IT: The Rise of Asia in High Tech, points out, “The nation’s self-reliance plan is not a reality yet.” According to him, despite the impressive figures, “several thousands of Z-Park’s companies are not real,” meaning that it includes many micro- and small-business enterprises with doubtful futures.

He’s not wrong: A small or medium enterprise crashes and burns within Z-Park every nine minutes. He also points out that “all technologies have come from the outside.” But Rowen also argues that the government is moving in the right direction, toward a role of indirect support, and that there are signs of innovation in R&D, business models, and services. The U.S. and other nations, he believes, will face new opportunities for collaboration—as well as significant challenges in competing with the rise of an innovative China.

For its part, China remains focused on building an innovation infrastructure to encourage the development of formidable companies like global telecommunications giant Huawei, which generated $8.5 billion in sales in 2006 with a 10% spend on R&D. As Jan Gronski, general manager of Cisco’s (CSCO) China R&D Center, puts it, Huawei “did not get there just by copying.” Others would be ill-advised to underestimate his assessment.

Written by infoproc

June 5, 2007 at 3:55 pm

China’s Silicon Valley

leave a comment »

Creative destruction at work in Beijing. I was in Z-Park (short for Zhongguancun Science Park) briefly a few years ago, but didn’t have time to look around in any systematic way.

Businessweek: … Z-Park, China’s homegrown Silicon Valley, is the jewel in his innovation crown. The biggest and oldest of the 53 national high-tech zones in China, Z-Park has become an important port of call for global corporations looking both to develop R&D for all sectors and to get a foothold in the Chinese market. For China watchers, it also serves as a window into how the evolving giant interacts with global market and social forces—and how it is turning to private resources to build its vaunted innovation economy.

Z-Park is made up of a group of seven parks, covering an area of about 100 square kilometers at the northwest edge of Beijing, close to the city’s internationally esteemed educational institutions such as Tsinghua University, the University of Beijing, and the Chinese Academy of Science (CAS). It was founded in 1980, when Chen Chuxian, a researcher at CAS, returned from a trip to Silicon Valley. He opened the Advanced Technology Service Assn., the first privately funded, civilian-run, scientific and technological consulting firm in China. Soon after, other scientists came to the district, attracted by the support afforded by both CAS and the central government. A virtuous circle began, with new ventures spinning off from Chinese universities. Foreign companies also set up shop.

… by 1996, global corporations such as IBM (IBM), Sun (SUNW), Nokia (NOK), and Microsoft (MSFT) had all established R&D centers there. Non-tech companies such as P&G were also lured, while homegrown (often university-grown) companies such as Lenovo (originally known as Legend), Founder, and UFSoft all had their start in Z-Park.

Today, some 18,000 companies operate in Z-Park, including more than 1,500 foreign firms. In 2006, Z-Park generated $85.75 billion in revenues and $12.6 billion in exports. From January to November of last year, the IT industry within Z-Park generated $45 billion in revenues, including $5.8 billion in technology income, $16.8 billion from new products sales, and $7.29 billion in exports.

Companies such as Vimicro (VIMC) and ARCA are making real strides in mobile technology and integrated chip design. Vimicro’s intellectual property, for instance, entered the world market in 2003, when the company’s Starlight 4 mobile-phone color message processing chip was adopted by Sprint. While these signs are rarely visible to the world at large, partly because many of the R&D centers’ efforts are focused on designing products for the domestic market, the result is there are currently 73 Z-Park companies listed on the Shenzhen, Shanghai, Hong Kong, and NASDAQ stock exchanges.

Former Expats Are Today’s Recruits

Z-Park has aggressive growth plans. Its representatives are constantly visiting high-tech areas such as Silicon Valley and Research Triangle Park in North Carolina in an effort to poach companies, experts, and investors. Offering benefits such as reasonable rent, travel perks, high wages, and easier startup conditions, they have lured tens of thousands of Chinese expats away from foreign high-tech centers.

Jennifer Pan, for instance, graduated in computer science from the University of Beijing, obtained her EMBA, and worked in Houston with Compaq and BMC Software (BMC) for eight years before returning to China to work with Z-Park. In 2005, she founded ChinaSense, a company that provides business services to faculties and students of foreign universities. Pan saw China as a better place to pursue her “American dream” and Z-Park as the gateway to success. As she puts it, “There are many issues in China, but there is also an innovation imperative here. China is like a first-time parent with a teenager that is full of energy, eager to learn, and full of hope. It is doing the best it can, while the U.S. is not. It is an exciting place to be.”

In nurturing Z-Park, the government has played a key role in designing an environment in which high-tech ventures and high-growth enterprises can flourish (or die). Entry is regulated, driven by a set of conditions stipulating that 50% of revenues must be from high-tech projects, while R&D expenditure cannot be less than 3% of total revenue. In addition, at least 20% of employees must have a college degree.

A Laboratory for Policy

With its focus on high-growth software and integrated circuit design companies, Z-Park provides appealing financing arrangements through cooperation with commercial Chinese lending institutions. Small and midsize companies such as Analogix, a venture capital-funded Silicon Valley semiconductor company, arrived in 2006, attracted by financial sources such as the Z-Park Development Fund or the Beifang Microelectronic Industry Development Fund.

Tax incentives for those companies headquartered in the park have also been highly effective: The income tax rate is 15% for foreign-funded high-tech enterprises (10% if the export output exceeds 40% of the gross output). “High-tech” enterprises are exempt for the first three years, and the rate is reduced by 50% for the following three years.

A set of very open regulations—translated by law firm Perkins Coie as “Anything not prohibited is allowed”—allow for a fuzzy definition of the business scope of an enterprise within Z-Park, and these encourage startup and emerging venture capital, in contrast with general business regulations in China, which are markedly more prohibitive.

Plan is “Not a Reality Yet”

The park and its ilk are part of a systematic national effort to bring an educated, creative workforce to China, while waiting for the new generation of creative thinkers to come of age. It’s a tough balancing act, and as professor Henry Rowen, co-director of the Stanford Project on Regions of Innovation and Entrepreneurship, and co-author of Making IT: The Rise of Asia in High Tech, points out, “The nation’s self-reliance plan is not a reality yet.” According to him, despite the impressive figures, “several thousands of Z-Park’s companies are not real,” meaning that it includes many micro- and small-business enterprises with doubtful futures.

He’s not wrong: A small or medium enterprise crashes and burns within Z-Park every nine minutes. He also points out that “all technologies have come from the outside.” But Rowen also argues that the government is moving in the right direction, toward a role of indirect support, and that there are signs of innovation in R&D, business models, and services. The U.S. and other nations, he believes, will face new opportunities for collaboration—as well as significant challenges in competing with the rise of an innovative China.

For its part, China remains focused on building an innovation infrastructure to encourage the development of formidable companies like global telecommunications giant Huawei, which generated $8.5 billion in sales in 2006 with a 10% spend on R&D. As Jan Gronski, general manager of Cisco’s (CSCO) China R&D Center, puts it, Huawei “did not get there just by copying.” Others would be ill-advised to underestimate his assessment.

Written by infoproc

June 5, 2007 at 3:55 pm

Location, location, location

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The Sunday Times on innovation and Silicon Valley. It’s all true, although the author is a bit too sanguine for my taste — he’s ignoring Skype, Baidu, and a host of others. Nevertheless, if you’re starting a tech company, consider moving it to the bay area. Otherwise, be prepared for the sickening feeling that you’re running a race in the outside lane on a circular track.

NYTimes: In our celebrity-studded world, where we make a cult of genius and individual achievement, the mind rebels at the notion that geography trumps personality. Yet the inescapable lesson of the iPod, Google, eBay, Netflix and Silicon Valley in general is that where you live often trumps who you are.

Just ask Sim Wong Hoo. About seven years ago, I met Mr. Sim in Singapore, where he was born and was then living. He talked about the rising creativity of Singaporeans and with a flourish, as if to dramatically make his point, he pulled out a prototype of a hand-held music player that he insisted would replace Sony’s famous Walkman.

Mr. Sim’s device was breathtaking, possessing all the elements of what we now know as the MP3 player. Yet today, a Silicon Valley icon, Apple, dominates the market for MP3 players with the iPod. In recognition of its emergence as a music powerhouse, last month Apple dropped the word “computer” from its name.

Some months after my Singapore encounter, I visited the thriving code-writing communities in Tallinn, Estonia; Reykjavik, Iceland; and Helsinki, Finland, three Nordic cities that were being transformed by advances in cellphones, mobile computing and the Internet. Their tight-knit network of engineers seemed poised to create the tools required to make good on a much-hyped prediction: the death of distance. After all, if necessity is the mother of invention, no one had more need than the hardy Estonians, Icelanders and Finns, living on the frozen edge of Europe, when it came to killing distance as a barrier.

Yet these Nordic innovators were blindsided by two Silicon Valley engineers whose tools we experience whenever we “Google” the Web. Their company, Google Inc., posted a quarterly profit of $1 billion on Jan. 31.

Google’s astonishing rise and Apple’s reinvention are reminders that, when it comes to great ideas, location is crucial. “Face-to-face is still very important for exchange of ideas, and nowhere is this exchange more valuable than in Silicon Valley,” says Paul M. Romer, a professor in the Graduate School of Business at Stanford who is known for studying the economics of ideas.

In short, “geography matters,” Professor Romer said. Give birth to an information-technology idea in Silicon Valley and the chances of success seem vastly higher than when it is done in another ZIP code.

No wonder venture capitalists, who finance bright ideas, remain obsessed with finding the next big thing in the 50-mile corridor between San Jose and San Francisco. About one-quarter of all venture investment in the United States goes to Silicon Valley enterprises. And, according to a new report from Joint Venture: Silicon Valley Network, a regional business group, the percentage has risen, to 27 percent in 2005 from 21 percent in 2000.

Many times in the past, pundits have declared an end to Silicon Valley’s hegemony, and even today there are prognosticators who see growing threats from innovation centers in India and China. Certainly, great technology ideas can come from anywhere, but they keep coming from Silicon Valley because of two related factors: increasing returns and first-mover advantage.

These twin principles, debated in head-scratching terms by professional economists, essentially explain why Intel maintains a lead in high-performance chips, why Apple sustains a large lead in music players and why Google’s search engine remains a crowd pleaser.

On a gut level, we all can understand how these two factors work. Who wouldn’t want to play for a perennial contender? For the same reason that Andy Pettitte signs with the Yankees, the best and the brightest technologists from around the world make their way to northern California.

“All that venture capital attracts a lot of ideas — and the people who are having those ideas,” said Stephen B. Adams, an assistant professor of management at the Franklin P. Perdue School of Business at Salisbury University in Maryland who has studied the rise of Silicon Valley.

Newcomers plug into an existing network of seasoned pros that “isn’t matched anywhere else in the world,” says AnnaLee Saxenian, dean of the School of Information at the University of California, Berkeley, and author of “Regional Advantage,” a book about the competitive edge held by tech centers like Silicon Valley and the Route 128 suburbs near Boston. “That allows people to recombine technical ideas much more quickly here than anywhere else,” Professor Saxenian added.

“In terms of creativity, the Valley remains as far ahead of the rest of the world as ever,” she said. “People in the Valley generate new ideas and test them much more quickly than anywhere else. They aren’t a super race; it’s their environment.”

Silicon Valley is not invincible. The logic of increasing returns and the first-mover advantage can be overdrawn. Other clusters in the United States and around the world will commercialize great ideas, and the Valley will endure down cycles again, as it has in the past. Remember how the Japanese conquered memory-chip manufacturing in the 1980s, until then a staple of the Valley’s business? And, of course, the dot-com bust of five years ago remains a painful reminder of how success breeds hubris and humiliating failure.

Americans naturally harbor many fears about losing their edge, especially with the nation mired in war, the dollar’s value sliding and the health care system strained. Rivals, notably in India and China, see Silicon Valley’s pre-eminent position as a prize that they will inevitably take. Yet they face an elusive foe. Every time Silicon Valley recovers from failure, it seems to grow more durable, almost in the same way a person becomes “immune” to a disease after a brush with it.

Fifty years ago, chips were the engine of Silicon Valley. In the late 1970s came the personal computer and data-storage drives, then software, and more recently the dynamic vortex of the Web, new media and online commerce. (EBay, Netflix and, of course, Google and Yahoo are among the names that come to mind.)

These serial renewals are a marvel.

SIR PETER HALL, the British scholar of urban clusters, asks in “Cities in Civilization,” his history of geography and business innovation: “What makes a particular city, at a particular time, suddenly become immensely creative, exceptionally innovative? Why should this spirit flower for a few years, generally a decade or two at most, and then disappear as suddenly as it came?”

Sir Peter’s words highlight an enduring human mystery. In the case of Silicon Valley, the world rightly waits for the flame of creativity to burn out. That’s fair enough. To each, a season (or maybe a few). Living long and large, Silicon Valley surely will wither like a dead flower someday. My advice, though, is: Don’t hold your breath.

G. Pascal Zachary teaches journalism at Stanford and writes about technology and economic development.

Written by infoproc

February 11, 2007 at 5:54 pm