A while ago… okay a little over three months ago Paul Graham (also known by many of us on Hacker News as PG) posted an article called “Can You Buy a Silicon Valley?” It was an interesting look into what it might take to economically recreate Silicon Valley in another geographical area, and make it a startup hotbed. Money can certainly attract talent, and make a city a much more attractive area to do business as a startup. There’s one thing that money can’t buy, and that’s Legacy. Legacy is the reason that Silicon Valley has become what it is today.
Legacy continues the cycle in Silicon Valley and allows the next generation of startups to flourish. One company has a moderately decent success and it spawns off a whole new wave of startups. You eventually see the rise of what some have started to call “Mafias”. Mafias in the technology world are companies that are formed by employees of a previous venture that is usually successful. Over time, early employees or even later employees, leave the startup as it grows up into a bigger company or becomes assimilated by the acquiring company. Their backers are usually the founders who struck it rich via the sale of the previous company or angel investors who are trusted contacts from that previous venture.
The most well known Mafia is the Paypal Mafia. PayPal itself was a huge success, first IPOing then selling itself to EBay afterwards for 1.5 Billion dollars. The founders of PayPal- Peter Thiel, Max Levchin, and Elon Musk all profited wildly to the tunes of tens of millions of dollars. That’s great- the true American dream, and the type of exit that most founders dream of while tucked away in bed or under their desks for a quick nap. What’s more important is to take a look at the companies that the Paypal Mafia has spawned and/or been the first major investor in, and you’ll quickly realize why the Mafia effect breeds startups fast enough to make Silicon Valley what it is today.
- Reid Hoffman- LinkedIN
- Steve Chen, Jawed Karim, and Chad Hurley- YouTube
- Peter Thiel (First Investor)- Facebook
- Max Levchin- Slide
- Jeremy Stoppelman and Russell Simmons- Yelp
- David Sacks- Geni+Yammer
- Premal Shah- Kiva
- Elon Musk- Tesla, SpaceX
- Dave McClure, Reid Hoffman, Roloef Botha, Keith Rabois- Invested + Advised All together the Paypal mafia is responsible for over 50 investments in the Web 2.0 space over the past few years (Sequioia Cap, Founders Fund, Angel Investing,etc.)
Without the PayPal mafia we may not have many of the top successes of the web in the past five years. We’ve also seen a plethora of new startups get investment such as Digg. Think about that, and then think of other geographical areas around the Globe. None can even compare with the PayPal Mafia alone. The thing is, the PayPal Mafia is just one example. We’re starting to see the Google Mafia (Friendfeed, Aardvark, Cuil,etc.) and the Facebook Mafia (Dustin Moskovitz’ new venture, Adam DAngelo is now working on Alma Networks, and there are probably more to come as Facebook is over 5 years old).
You can also see mafias form out of Venture Funds and more importantly seed capital firms like YCombinator. YCombinator is only about four years old, so most companies are still working through towards their first exit. Some are already on their second. When I lived in the Valley, the YCombinator companies were the closest group of individuals I saw. They always threw parties or some sort of gathering, and everyone was looking to help each other out. With over 118 companies or so, that’s a huge network. The really interesting effect to observe will happen in probably the next 2-5 years, as the usual seven year investment cycle winds down. I’m sure many of the companies will mix founders and take investment from repeat YCombinator angel investors like Paul Buchheit.
The real key to a technology Mafia is there ability to provide startups with two essential resources that can be the deciding factors in their eventual success: Founders and Investors. First off, finding the right group of co-founders is a huge part of making a startup successful. They are your brothers and/or sisters for the next few years, and need to share the same creative passion as you. Finding a co-founder through a local meetup is one thing, but having worked with them in the past in a previously successful startup is a whole lot better. Secondly, finding investors if you need them can be a whole lot easier. You will already have one thing behind you that most will not have when raising money: a proven track record making your potential investor (former boss) successful.
In closing, it may be possible to throw a ton of money into a town and have some successful startups come about, that eventually spawn more startups off in a Mafia style. I’m sure there are “Mafias” in New York and Boston, but they’re not as numerous. The scale of this model is so intense in Silicon Valley, that it breeds innovation and more startups at an unprecedented level. It also keeps everyone close by. Take this very hypothetical scenario: A city like Miami was offering 5 million dollars in funding to any former googlers, paypalers, facebookers,etc. who would move to the city and do their startup there. I doubt many, if any would move to the area from Silicon Valley. Would something like this have swayed Paul Buccheit to start FriendFeed elsewhere, I don’t think so.