Are Innovation Cities Still Working?

As someone who started my own tech company when I was 14 years old and eventually got my mobile ad startup Vungle acquired by private equity firm Blackstone in 2019, I've always been interested in tech innovation. Right now that has also led me to look carefully at innovation cities and centers, especially since I am in the real estate investing space and also invest in property technology (proptech) startups.

Traditionally, America's lead innovation center has been Silicon Valley south of San Francisco, and Route 128 north of Boston, Massachusetts. But in recent decades, other areas like Austin, Texas, and other areas near major tech companies and universities in Seattle, Chicago, Los Angeles, and others have also been producing great innovation.

The classic treatise on innovation centers is Dr. Anna Lee Saxenian's book Regional Advantage, published in 1996 by Harvard University Press, but newer scholarly studies have been published since. Personally, I still believe in Ms. Saxenian's treatise, namely that culture plays an important factor in creating innovation and startups.

In a nutshell, Saxenian argued that in areas like Route 128, which is near the Massachusetts Institute of Technology (MIT) and Harvard, many of the tech companies there were doing work for the Department of Defense (DoD) or were old-guard tech companies like Digital Equipment Corporation (DEC). The culture there in the '70s was East Coast formal, with people wearing long-sleeved dress shirts and ties to work, and a hierarchy that prevented junior engineers from contacting their superiors and financiers. The financiers there were also generally old-world wealth. Since in the tech industry, there were older companies like DEC and Polaroid, you could not simply bring an idea to a financier or make a pitch.

Saxenian pointed out that the culture was really different on the West Coast. For example, Steve Jobs simply cold-called Bill Hewlett, the co-founder of Hewlett Packard, to look for computer parts and was offered a job. Jensen Huang of Nvidia in later years held his founding meeting at Denny's. Restaurants in Silicon Valley and others, like clubs, have been venues where Silicon Valley tech founders, angel investors and venture capitalists, and professors from Stanford and UC Berkeley and other universities in the area could meet for a pitch.

The differences have reduced over the years. The East Coast culture is now more laid back compared to what it was in the '70s, and tech founders, angels, and VCs can meet just as easily in Boston or Cambridge cafes or incubators. Similarly, this is true for Austin, Los Angeles, Chicago, and other areas. Basically, the fewer barriers to communications and higher tolerance for failed startups are what create innovation.

Not every startup that gets created results in success like Meta, Google, Nvidia, Uber, and other tech giants. But the fact that failure is acceptable, and entrepreneurs are encouraged to try again with angel and venture funds, is the point. Although, of course, that also means that you will occasionally see frauds like Theranos and FTX/Alameda in the mix. But that is sometimes the price of seeing successful tech giants. You need to have enough chaff to have enough wheat to separate from.

Plus, there is something about face-to-face communication that goes beyond what is spoken. There are body language and instinctive cues to establish trust that we humans derive that date back to our survival instincts from primal times.

Unfortunately, the pandemic has disturbed this by introducing the concept of work-from-home and video conferencing. Now there is software that allows teams of developers to collaborate on projects. Hardware manufacturing requires more face-to-face collaboration and actual prototyping in a lab or factory, of course, but design teams can now be located elsewhere.

On the other hand, artificial intelligence (AI) threatens to eliminate some types of innovator jobs. A Twitter announcement from a company called Cognition Labs claims that they have developed an AI software engineer they call Devin that can do much of what human software engineers can do.

While it remains to be seen whether they can actually replace human software engineers with their claim, several experts argue that this is the direction we are headed anyway.

Is there still room for innovation cities, regions, or even small districts? It is a bit complicated, but the short answer is yes. Although there is a lot of tech innovation work that can be subcontracted to other places or even to AI, at least for the foreseeable future, if we want to merge young university tech talent, interested angel and VC investors, key tech suppliers, and consultant expert professors, we still need to do it in places where these people are co-located close together and accept that culture of innovation exists.

It is pretty hard to gain someone's confidence to the point where you want to invest millions in that innovator's idea and incubate it well if you do not meet and socialize with that person because they are located hundreds of miles away. Sure, there are some cases where that is being done, but if you want that critical mass of innovation, you generally need these hotbed innovation cities to continue to work and foster meaningful face-to-face communication and relationships.