Innovation Peer Pressures

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Could the geographic proximity of Twitter to Facebook and vice-versa be hurting each other’s development as they shadowbox over how users update status?

A good deal of modern American upbringing is teaching awareness of (and mostly resistance to) peer pressure.   Fiction has no shortage of such tales, and in quantitative Asch Conformity Experiments we know it’s real: people appear to deliberately trump their judgments to give wrong answers more in conformity with what others have answered before.   Peer pressure can of course have its benefits.  One is production itself — to keep up with the Joneses; it is a solvent to the instinct for resting on ones laurels, and almost a synonym for creative destruction.  The downside is conformity, keeping up with the Heathers.

I think it was either Paul Graham or Eric Ries (or someone else?  Let me know!) who said start ups shouldn’t live in San Francisco because you spend too much time going to parties listening to other people’s business plans.  This was expressed as a concern for the time waste, but I think the greater peril is the subtle gravity it effects on ones own business plan.   Ironically, the further away companies are from the center of the activity mass,  the more innovative I’ve found their product to be.  There is some selection bias in my sample, but even so, these far-flung companies tend to be less confident about the absolute prospects of their product.

Among our clients who have had superb iPhone games, they have mostly come from places off the usual development path.  Of our four most commercially successful iPhone clients, only one, Bolt Creative, is based in San Francisco.  Firemint (Australia), Critical Thought (St. Louis), and 2XL (Phoenix) created extremely innovative games outside the tech let’s-get-coffee-or-see-you-at-that-event circuit.  Rockridge is in Tenneesee, and Retronyms is partly in Cleveland.

Yet the certitude of commercial success amongst San Francisco developers is certainly higher than elsewhere.   Everyone they know has an iPhone, and consumes upwards of hundreds of games a year.  It is very easy to conceptualize their own success in that environment, no matter how many tens of thousands of iPhone games one competes against.  There are so many reference points for them, a year after the inception of the iPhone, the sheer number of concepts they’re already exposed to in depth probably limits their ability to completely think outside the box in which they are so nested.  Nearly any developer event one attends, within moments of meeting such a developer, the iPhone is whipped out, UDIDs are asked for and games are being shown with zest and enthusiasm.  They do not blanch at asking for financing or marketing.

In New York last month by contrast I would nearly have to beg to be shown games by self-proclaimed entrepeneur/developers.   It would be a pleasant surprise then to see the quality was surely at least as professional in their game mechanic and often better in their art as most succcessful market entrants.  I met a developer whose Tower Defense game I would think would be amongst the top few market offerings.  He was unsure whether even to bother to release it.   Another created a Sudoku variant using shapes and colors that I was instantly taken by but he too was unsure whether to promote it.    The reinforcement mechanism that iPhone games can succeed is simply not present in New York, and creators of which are regarded as far down the food chain of media.  They have not considered even asking for financing or marketing.

The same holds for other fields.  Consider financial services in New York.   With great elan and unshakable confidence I’ve met bankers who have started boutique investment banks and despite offering pretty much the same product, if at a lower price than the titans of the industry, are perfectly confident of success.   They are looking to line up investors to service nearly any half-dead industry one can think of; down means “great time to buy,” and perhaps they’re right.   They are confident commodity providers!  By contrast a surprising proportion of all the innovative companies in finance in the last twenty five years have been outside of New York (and Chicago.)  Charles Schwab of San Francisco introduced discount brokerage, the mutual fund powerhouses are scattered from Boston (Fidelity) to Baltimore (Legg Mason, T. Rowe Price), Florida (Templeton, Raymond James), even San Mateo (Franklin.)  Kansas City is the home of now 10.8% of US Nasdaq trading at BATS one year after launch, and so on.   The hedge funds I know getting started in the Bay Area (or in Rhode Island — just far enough that NY is not a daily commute) have innovative pricing models and areas of focus, but can be sheepish about the prospects of success or even what success will constitute.

Where New York did innovate — mostly derivates in banking that did not account for exogenous effects — it was a disaster.   If all the mortgage traders weren’t living near each other, isn’t it considerably more likely that fewer would leverage up 30-to-1 to chase the remaining alpha out of each other’s trades?  Perils of concentration are probably apparent in similarity of works coming out of the Iowa’s Writers Workshop.   Or the Enlightenment — isn’t Geneva-based Rousseau or the Philadelphian Franklin the most interesting luminary of such days?

Self-referential re-inforcement leads to bubbles, which leads to bursting bubbles, and wanton economic (or literary!) destruction.  The further untethered a closed group becomes from the rest of economic society, the risker the fallout can be.   Why then should it be that such concentrations of talent occur, or persist?

There is no longer a need to start a company with hundreds of people who have done the same thing before (thus, in tech, you could only do it in the Bay, Seattle, or Boston) when one or two will do.   So the remaining reason is because that is where concentrations of money occur.  Money has traditionally wanted to be proximate to their investments; the most primal “mind the store” instinct even if the fund is multiple billions in size.  Though that is slowly changing, and if social pressure is a truly great determinant of what course a business takes, then companies should be relatively isolated.  Marketing, finance, operational work can be farmed out to consultants in the centerpiece cities.  But for creative inputs?  The web and social media have made the exchange of salient professional information liberated from the cocktail party.

As the cost of building a company has come down, so too should the walls of financing them.   “I don’t think we have enough venture capitalists to spread the wealth to the 7 billion creative minds out there,” said Tim Draper to the New York Times, which is exactly right.   They aren’t all going to live in San Francisco or New York.  Most of the venture industry is collapsing around the notion that there is too much capital chasing too few ideas (but, whoa, a Twitter ecosystem company?  Look at that adoption curve!  Monetize later — Sign me up now!)  Investors best able to develop heuristics for conferring trust in people in far away places who are not already known by three other people in their social-professional local circle will deliver outsized returns.  The cost of communication has dropped — do Sand Hill Road VCs really visit in person their companies so often that that advantage should foreclose the prospect of better returns elsewhere?   (Some A List firms such as Benchmark Capital are remarkably loosening on this score.  Ironically its the seed stage firms that seem most adamant to want to be near their babies.)

Should Facebook, or Reddit, or any number of other companies have moved to the Bay Area for the access to (expensive) talent?  Would many of the now departed executives have stayed if still in Cambridge?   There isn’t enough time in a company’s life to A/B test your location.  But unleashed from the peer pressures that comes with the proximity to an activity’s capital, a revolution in financing the ideas of small teams anywhere would create a tsunami of creativity, confident in itself instead of looking over its shoulder.

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