Silicon Valley hubris watch, TJ Rodgers edition

By Felix Salmon
June 1, 2012
Chrystia Freeland has found a classic example of Silicon Valley hubris in TJ Rodgers, the CEO of Cypress Semiconductor.

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Chrystia Freeland has found a classic example of Silicon Valley hubris in TJ Rodgers, the CEO of Cypress Semiconductor. Rodgers reckons his taxes shouldn’t go up; his reasons are pretty simple. If that happened, he explains, he’d have less money to invest in Silicon Valley. And since “taking money from the investments, my investments, out of Silicon Valley, where they have been very, very good for the economy” is self-evidently a really bad idea, then raising his taxes can’t possibly make any sense.

The first problem with this is that Silicon Valley is not a place where TJ Rodgers’s money is magically transmogrified into growth and jobs. Yes, Silicon Valley is a very innovative place. But it would be a very innovative place even if it had significantly less money than it has right now. I actually lived in Palo Alto in the mid-80s, when Silicon Valley had long since matured as a vibrant technology center, and as I recall it cost about $500 a month to rent a nice family home. Since then, the amount of money in Silicon Valley has increased enormously, along with the price of Palo Alto real estate. But it’s far from clear that all that new money has made the Valley any more innovative.

In fact, we know exactly what would happen if a lot of the wealth in Silicon Valley suddenly got taken away: we know because it happened, when the dot-com bubble burst in 2000-01. The researchers kept on researching, the innovators kept on innovating, and the main effect of the dot-com bust was that bits of San Francisco looked, briefly, as though they might actually become affordable. That didn’t last for long.

But Chrystia herself provides the much stronger rebuttal to Rodgers, when she quotes Nandan Nilekani, the co-founder of Infosys, pointing out that huge amounts of Silicon Valley wealth are built on US government spending.

“It’s the role of governments to create public goods which are platforms for innovation. If you look at the U.S., the Internet was a government defense program on which today you have this huge innovation ecosystem. GPS is another example.” That system “was designed for military applications. But today it’s used for maps or car navigating systems or whatever. So the ideal is to create these global public goods or these national public goods that are platforms. And then make them open so that people can innovate.”

The big money in Silicon Valley these days is very much around anything that can credibly call itself a “platform”. Facebook might be worth a lot less than it was worth a couple of weeks ago, but it’s still worth vastly more than it would be if it were merely a media company making $1 billion a year selling ads. The bulk of Facebook’s value is embedded in the fact that it’s a platform: it’s the tool we use, all over the internet, to be ourselves and to have connections to our friends.

Innovation is in large part about building things on other things: build an iPad location tool on the GPS architecture, for instance, or build a social network using existing internet architecture. And underneath it all is a system of base-level infrastructure which needs to be carefully tended lest it all fall apart. One difference between Rodgers and Nilekani is that Rodgers has been living in Silicon Valley long enough that he takes a huge amount for granted: he has everything he needs to run a great business right on his doorstep. Nilekani, by contrast, needs to deal with obstructive Indian bureaucracy all the time: he knows that India, as a platform, is vastly inferior to the Bay Area.

Once you build a platform, you never know how you might be able to extract value from it. I was talking to the SecondMarket guys yesterday, for instance, and they talked a bit about what they’re calling their new marketing platform. They spent a lot of time building up a huge database of accredited investors interested in putting money into private companies — and now they’re looking to monetize that database by essentially renting it out to other shops looking for that kind of investor.

Art funds, diamond funds, wine funds, distressed-mortgage funds, tax-lien funds, you name it — somewhere in that SecondMarket database there’s a group of people who are likely to be very interested. And SecondMarket itself needs to do very little work, since they’re basically just acting as a high-tech dating agency, matching investors with fund managers. The investors came for the pre-IPO equity; they’ll stay for all the other goodies that SecondMarket can introduce them to.

And the USA is, in many ways, the ultimate platform — a massive market and currency zone, which can provide enormous demand for great products while also providing peace, prosperity, strong and stable institutions, and everything else that someone like Rodgers needs to be successful. It makes sense to invest in that platform — and it makes sense, too, that the people who get the most out of it should be asked to reinvest the most back into it.

You can call that reinvestment “stimulus” if you like, although that word seems to have gone out of favor these days. But what’s sure is that unless the USA keeps its infrastructure up to date, it’s going to lose a lot of competitiveness over the long term. We need a smart energy grid, we need a much better transportation network, we need to improve our educational system, and ultimately we need to have a much more constructive legislature than we have right now. If we fail in that, the whole country will decline, and it will take the likes of Rodgers down with it.

Nick Hanauer, another Silicon Valley multi-millionaire, uses the gardening metaphor: we need to maintain our garden if we’re going to reap abundant crops. So long as people like Rodgers think that the government is good for nothing but misguided cash-for-clunkers schemes, and that the best thing it can do is just get out of their way, they’re going to be the worst kind of free-rider: the kind who doesn’t even know they’re free-riding. Maybe we should tell him to try to build a great technology company in, I dunno, Greece, and see how that works. Only then might he appreciate just how much of his net worth he owes to his country.

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