silicon valley | Paul Wallbank - Communications Professional

You call that a graph?

A good chart can help tell a story, all too often though graphs are designed to mislead.

One way to illustrate a story is with charts. All too often though misleading graphs are used to make an incorrect point.

A Verge story on Groupon shows how to get graphs right – clear, simple and tells the story of how the group buying service’s valuation soared and then plunged while it has never really been profitable.

The vertical axis is the key to getting a graph right, cutting off most of the y-axis’ range is an easy way to mislead people with graphs. In this case you can see just the extent of Groupon’s valuation, profit and loss over the company’s short but troubled history.

Since its inception, The Verge has been showing other sites how to tell stories online, their Scamworld story exposing the world of affiliate internet marketing sets the bar.

Using graphs well is another area where The Verge is showing the rest of the media – including newspapers – how to do things well.

For Groupon, things don’t look so good. As The Verge story points out, the company’s income largely tracked its workforce which grew from 126 at the start of 2010 to over 5,000 by April of 2011. Which illustrates how the business was tied into sales teams generating turnover.

The spectacular growth of Groupon and other copycat businesses couldn’t last and hasn’t. The challenge for Groupon’s managers is to now build a sustainable business.

For investors, those graphs of Groupon’s growth were a compelling story. Which is another reason why we all need to take care with what we think the charts tell us.

Graph image courtesy of Striker_72 on SXC.HU

PayPal struggles with the Soviet customer service model

Just as Silicon Valley’s new businesses has challenged a whole range of incumbent operators, they too are at risk from upstarts who value their customers. This is something PayPal’s management has to face.

CNN reports that internet payment giant PayPal is looking at an “aggressive changes” to its fraud detection systems which see thousands of customers accounts frozen every year.

PayPal’s announcement follows last year’s promise by CEO David Marcus to institute a “culture change” at the company,

Our intention has always been to protect our customers. Not to mess around with our merchants.
I want to share two things with all of you:

#1 — there’s a massive culture change happening at PayPal right now. If we suck at something, we now face it, and we do something about it.

#2 — you have my commitment to make this company GREAT again. We’re reinventing how we work, our products, our platforms, our APIs, and our policies. This WILL change, and we won’t rest until you all see it. The first installments are due very soon. So stay tuned…

Screwing around merchants and buyers has become synonymous with PayPal and their parent company eBay who together are the poster children for the Silicon Valley Soviet Customer Service Model.

Reader comments to the CNN article cited at the beginning of this post give a taste of just how bad the problem is at PayPal.

Once your business attracts the attention of PayPal’s algorithms, you’re locked into a Kafkaesque maze of dead ends and arbitrary, made up rules.

To be fair to PayPal and eBay this problem isn’t just theirs, it’s shared by Google, Amazon and almost every major online company. Their view of customer service is to shoot first and ask no questions, they certainly won’t answer anything from their victim beyond a trite passive-aggressive corporate statement.

Part of the current Silicon Valley mania around web and app based services is that, along with providing free content, users will provide support for each other and that customer service is an unnecessary overhead which should be kept to a minimum.

In this respect, many of these new businesses are little different from the legacy airlines, telcos and declining department stores who have spent the last thirty years stripping away customer service with the result of locking them into shrinking commodity markets.

That failure to value customer service is the biggest weakness for companies like eBay, Amazon and Google. The very forces that favour them, the reduction of the entry barriers, also makes it easier for more customer orientated businesses to grab market share.

Silicon Valley and the virtues of going private

Is the technology industry swinging back to investing in private businesses with solid cash flows?

Last week there were a pair of interesting stories about the tech industry’s investment models.

The biggest story was the rumours that PC manufacturer Dell may go back to being a private company and the other was Survey Monkey’s raising of $800 million through debt and private capital.

Not your usual VC play

Polling company Survey Monkey’s capital raising is notable because it’s very different to the standard VC equity models used by Silicon Valley companies of this size.

Adding to the unusual nature of Survey Monkey’s behaviour is the declaration that they have no intention of becoming a public company. By ruling out an obvious way for investors to cash out of the business, they are making a clear statement that those putting money into the venture are doing so for the long term.

That Survey Monkey is also taking on debt indicates management believe they are going to have the cash flow to service payments. Not playing to the Greater Fool business model makes the online polling company very different to most of its contemporaries in Silicon Valley.

Dell going private

Survey Monkey’s $800 million is dwarfed by Dell’s market cap of 22 billion dollars so the talk of the PC manufacturer buying out its stock market shareholders and becoming a private company is big news indeed.

The New York Times Dealbook has a close look at the of the idea of taking Dell private and comes to the conclusion it’s not likely to happen.

While there are challenges, there is merit to the idea. Richard Branson delisted Virgin from the London Stock Market in 1988 after becoming frustrated with the short term objectives of his shareholders and there’s a possibility of Michael Dell may feel the same way.

For Dell, the challenge lies in moving away from the commodity PC sector. The Dell Hell debacle showed the company’s management has struggled with the realities of the low margin computer market and things aren’t getting better.

Dell themselves are steadily moving away from PCs with bigger investments in services and other computer hardware sectors.

Project Ophelia, a USB stick sized computer running Google’s Android operating system was one of Dell’s announcements at the Consumer Electronics Show and could mark where the company is going in the post-PC environment.

Given portable and desktop PCs represent over half of Dell’s income moving away from those markets is going to be a major change in direction for the company.

A change is though what the company needs with revenues down 11% on last year which saw profits nearly halved.

Whether going private or staying public will allow Dell to recover its profitability remains to been seen, but management could probably do without the distraction of answering to stock markets while dealing with a complex, challenging task.

Both Dell and Survey Monkey are showing that there isn’t one path to raising funds for technology companies, in fact there’s plenty of businesses raising money privately without the razzamatazz of high profile venture capital investments.

It may well be though that we’re seeing private companies coming back into fashion as individual investors see the advantages in businesses with good cash flows rather then the hyped loss leaders which have dominated Silicon Valley’s headlines.

Image of Wall Street courtesy of Linder6580 on SXC.HU

Pulling up the drawbridge

Is the unpaid content model of unpaid journalism not only unsustainable, but hypocritical?

“Online bloggers and tweters are not subject to the financial incentives which affect the print media.”

While there’s much to disagree with in Lord Justice Leveson’s Australian speeches last week, particularly the bizarre suggestion that bloggers and social media are driving the decline in journalistic standards, he is correct about the economics of online publishing. It’s tough to make a buck on the web.

It’s so tough, many of the new media startups are founded on not paying for the articles they publish. This model has become so entrenched, that some venture capital investors will only invest in media start ups if they don’t have any reporters or editors.

Pure platforms

New media startup Buzzfeed‘s founder, Jonah Peretti, mentioned Silicon Valley’s reluctant to pay writers in a staff email republished by Chris Dixon;

Tech investors prefer pure platform companies because you can just focus on the tech, have the users produce the content for free, and scale the business globally without having to hire many people.

This antithesis to paying creatives and content creators is one of the notable aspects of the current Silicon Valley model, who needs editors and writers when a billion people will post to Facebook, Twitter or Instagram?

Arianna Huffington has been the most successful with this model in the media industry, parlaying a largely unpaid for content business into a fat pay-off. Chris Anderson described this model best in a description of his website Geek Dad’s economics.

Reading the comments

For readers, much of the value in sites like the Huffington Post and Geek Dad lie in the comments stream where readers give their views and experiences and build the communities so many investors and advertisers are looking for.

This is a point made by Rachel Hills when commenting about Australian website Mamamia’s payment policies;

When I visit Mamamia. I don’t go to Mamamia for the articles, which usually don’t tell me anything I haven’t already read somewhere else. I go for the comments.

Rachel concludes with the thought that Mia Freedman’s Mamamia is providing a platform for discussion. This is true, but that’s no different from newspapers, the six o’clock news, current affairs shows or even the weekend’s football match.

Those football players, newsreaders and journalists are all paid for their work, just like Chris Anderson and Mia Freedman were as magazine editors.

The hypocrisy of unpaid content

Which leads us to the core hypocrisy of the unpaid content model; its promoters – people like Mia Freedman, Chris Anderson and Arianna Huffington – have all been well paid in their careers yet now choose to deny the next generation of writers and journalist an income.

A business adviser once remarked to me that the management of a corporation that were locking in their entitlements while cutting middle management were “pulling up the drawbridge”, that line seems apt as older, affluent journalists demand younger ones work as unpaid contributors or interns.

The bleat from online publishers is “we can’t afford to pay contributors”, in most other industries being able to pay your workers is a measure of whether your business is solvent. That many new media outlets can’t may mean that the entire industry is insolvent.

Writers get exposure

Were the local cafe to say it couldn’t afford to pay its waitstaff, but it was giving them valuable work experience they’d be rightly scorned for exploiting workers. There’s little difference with online publishers.

It may well be because there is no shortage of manipulative, attention grabbing garbage designed to provoke reactions and increase pageviews, which is the flaw in the “writers get exposure” excuse used by many of these sites.

As middlemen, publishers have to add value in order to have a role, ‘offering exposure’ to unpaid writers isn’t a reason in itself. This is an industry with shaky foundations and it’s not surprising founders are desperately trying to find greater fools to fund their exits.

Image of Michael Arrington from Kevin Krejci on Flickr.

Disrupting the disrupters

Silicon Valley’s investment models are changing as attention moves from the consumer to the enterprise.

Two days ago, iconic venture capital investor Fred Wilson, wrote about the changing nature of the tech industry’s VC investments.

Fred puts the changes down to three factors; maturing markets where big players increasingly dominate, the move to mobile which Cristina Cordova examines in more detail and the shift in focus from the consumer market to the enterprise sector.

The last factor bears more examination as consumer and enterprise are very different and there’s no guarantee that businesses built around thousands of people downloading apps or accessing websites can pivot into selling into corporations and government agencies.

Probably the biggest problem is the consumer or small business freemium model doesn’t cut it in the enterprises who are prepared to pay big sums for highly reliable and secure services.

Similarly the enterprise model of fat sales commissions paid for by big implementation costs and expensive support contracts doesn’t quite fly either for these start up business. There’s also a good argument that high margin enterprise model is doomed anyway as cloud services displace costly in-house installations.

In the transition from consumer to enterprise is difficult and most companies have struggled to make the jump, even Google Docs has been a hard sell into the corporate sector.

At the enterprise end, cloud services are cutting margins as IBM and Oracle are finding. Both companies are moving across to cloud products and now a lot of salespeople and consultants in those organisations are looking at a substantial drop in their standards of living.

More importantly for the startup and VC communities, the “greater fool” model doesn’t work in the enterprise space. Hyping a business which has barely made a cent in revenue but does have a million users is very different to building a stable corporate platform.

It may well be the move to the enterprise by Silicon Valley is because the consumer model has run out of “greater fools” who’ll buy overhyped photo sharing apps or social media platforms of dubious value.

This change in investment behaviour also has lessons for governments trying to copy Silicon Valley. The puck moves fast in the investment community while governments, by definition, are slow.

By the time governments have setup their programs, the markets have moved on and many of the hot technologies of two years prior are now old hat. This is exactly what we’re seeing in the apps world.

We often hear about technology causing disruption, often though we forget that those disruptive technologies can be ephemeral as they are disrupted themselves.

As these industries evolve, we’ll see how well the disrupters deal with being disrupted.

Silicon lemmings

How many investors blindly following Silicon Valley’s manias will lose their money?

Despite their self proclaimed belief in thinking different, many of today’s internet entrepreneurs tend to travel in flocks and follow the whichever business model is currently being hyped by Silicon Valley’s insiders.

From the original dot com boom in the late 1990s to today, web entrepreneurs and their investors jump onto the bandwagon of the day – it could be online shopping, photography applications, group buying services and taxi apps which are the flavour of the moment.

The latest taxi app is Click-a-Taxi, a European venture which has raised a stingy $1.5 million in second-round funding, which joins a legion of taxi and hire car apps following in the wake of market leader Uber.

Unfortunately for the investors in these taxi and hire car apps, these services are making some pretty powerful enemies.

Around the world gatekeepers such as taxi companies and booking services do their best to keep drivers in poverty while over charging passengers for a poor service.

The new apps disrupt that business model by offering a better service for customers and a better deal for drivers – most importantly it deprives the gatekeepers of their cut.

Predictably, the backlash is fierce with 15 US and Canadian cities proposing to tighten the rules on the use of GPS and smartphone apps.

These backlashes are going to prove expensive to the investors as Silicon Valley entrepreneurs have a habit of under-estimating the power of regulatory barriers. How the current crop of taxi apps deal with this will determine which lemmings go over the cliff* and which ones survive.

One group of Silicon Valley lemmings lying dazed at the bottom of a cliff face are those who invested in the group buying hype of the last two years.

Market leader Groupon is now reportedly moving away from daily deals to ‘always on’ deals, which kills the whole point of group buying sites. Most of the copycats are already dead.

Former Cudo CEO Billy Tucker predicts that in the Australian market – which was flooded by a wave of Groupon imitators in 2010 and 11 – will only have a dozen survivors out of the top 50 listed earlier this year.

Investors in these look-a-like services had a gamble that a greater fool would buy the operation, usually a big corporation run by executives with a fear of missing out. The ones who missed out quietly swallowed their losses and moved on to the next mania – which appears to be taxi apps.

For the taxi applications, the buyers of the apps will probably be the incumbent gatekeepers, who aren’t really fools at all.

It wouldn’t be surprising to find the smarter look-a-like operators are already talking to the taxi companies about an app which will, miraculously, comply with all the requirements of the local regulators.

As for the rest, they’ll do their dough.

What is going to be interesting though is the battle between Uber and the various taxi regulators around the world, particularly in countries where politicians jump to the whims of their business cronies.

*lemmings don’t really throw themselves off cliffs, that myth was invented by the Walt Disney Corporation. Sadly Australian, particularly NSW, politicians favouring ticket clippers and rent seekers is no myth.

Raising venture capital is not the measure of success

Bringing investors on board is an important part of a business’ growth, not the end game.

“Those guys are successful, they’ve raised half a million from investors,” one startup commentator recently said about a business.

Is raising money the benchmark of business success? Surely getting investors on board is part of the journey, not the destination.

Having some investors coming on board means others share the founders’ belief their idea is a viable business and it’s a great ego boost for those working hard to bring the product to market.

That cash also exponentially improves the survival chances of the business – too many promising ventures fail because the founders haven’t enough capital.

While it’s an important milestone in the growth of a business, raising capital is not the end game. Only minds addled by the Silicon Valley kool-aide believe that.

In fact, if you’ve set up a business because you hated working for a boss, you might find your new investors are the toughest task masters you’ve ever worked for.

Good luck.

Does Facebook’s float mark social media’s peak?

Is social media about to plunge into the trough of disillusionment?

After its successful float on Friday, social media giant Facebook’s stock is now 18% down on the IPO price and there are claims some investors were aware of revised analyst expectations shortly before shares went on sale.

Facebook’s share price isn’t being helped by large advertisers, most notably General Motors, publicly expressing their dissatisfaction.

In SmartCompany’s survey on business tech use, one statistic that stood out was that less than 30% of businesses were happy with their returns on social media.

Facebook can’t even win in the courts with a Californian magistrate throwing out the social media platform’s trademark case against a Norwegian pornography site.

It’s been clear for some time that the tech industry has been in an investment bubble and social media services have at been the centre of that hype .

The huge expectations of Facebook’s float value has been one of the drivers of Silicon Valley’s investment boom – a dangerous feedback loop in itself.

So now Facebook’s share price is in decline and angry investors are asking “why” and demanding answers from advisors and banks.

The real question though is does Facebook’s float mark the peak of the current tech boom in the same way AOL’s merger with Time Warner in January 2000 marked the peak of the original dot com mania?

One of the great similarities with the original dot com mania is the businesses’ failure to make money from their services – today’s Pintrest and Twitter have that much in common with the great Dot Com boom debacles of Pets.com and Boo.

The biggest problem with the social media services is most of them are advertising dependent. As we see from General Motors’ dissatisfaction and that of the businesses in the Smart Company survey, most businesses aren’t happy with the performance of social media platforms.

Getting the advertising, or other revenue streams, right is key to the survival of these services. Google cracked this after the original dot com boom and are now one of the most successful companies ever.

The companies that figure out the revenue models for social media, or online news, will be the next Google’s and Facebook could well be the business that cracks the code for social media.

For the social media industry overall, it appears the sector is now at what Gartner calls the “Peak of Inflated Expectations” on their hype cycle.

The next stage from the peak is the tumble into the “trough of disillusionment” and that appears to be where Facebook is heading.

As Gartner points out, that trough is also where good, stable businesses are built. While the sector or technology is scorned, those who survived the tumble out of fashion are able to consolidate and learn from the harsh lessons they’ve received.

Eventually the market rediscovers the technology or industry and eventually becomes accepted as a mature part of business or as Gartner put it, they enter the “plateau of productivity.”

This is exactly the process Amazon went through during the dark days of 2002 and 2003 after the tech wreck which today finds them as one of the Internet’s giants.

Whether Facebook can emulate Amazon or Google is for history to judge, but social media’s falling out of favour is not a bad thing, the wreckage of the current tech mania will see much stronger and viable social media businesses that will deliver real value to industry and society.

In the wreck of the dot com boom we saw HTML “coders” reduced from driving Porsches to driving buses, the same thing will probably happen to many of today’s social media experts. That in itself is not a bad thing.

Now Facebook’s challenges really begin

How can Facebook build their revenues to justify the huge market valuation.

The long awaited float yesterday of social media service Facebook was a triumph for the business’ founder Mark Zuckerberg, his management team and advisors.

A market valuation of 100 billion dollars for a business started less than ten years ago is an impressive achievement and that sum now presents massive challenges for management who have to deliver on what investors believe the service is capable of.

At US$38 a share, Facebook is valued at 76 times its projected 2012 earnings of 50 cents a share, and nearly twenty times its expected revenues of US$5 billion. This compares to Google which trades at less than 15 times its 2012 profit estimate and six times revenue.

For Facebook to match Google’s value, the social media service is going to have to start making serious money beyond they can from charging egoists and corporations $2 a time for featured posts.

Google’s success was in moving out of their walled garden, had Google focused on advertising just on their own search pages the company would be earning a fraction of the billions they now make every quarter.

It’s difficult to see how Facebook can move off their platform into other sites and with users moving to mobile, the company will find itself even more constrained by Google and Apple who want to control access to their devices.

A more obvious course for Facebook is to maximise income from the massive data base of likes, preferences, relationships and opinions they have amassed from their users. How they do this will probably be the biggest challenge to Facebook’s management.

In monetizing their database, Facebook will push the limits of the law, tolerance of privacy advocates and possibly the patience of their user base. This is going to test a company that has in the past been slow to respond to public concerns.

Another challenge is perception – with such a massive valuation, Facebook is going to attract critics regardless of what they do.

A good example of this is the number of people criticising the float for not ‘popping’ on the stock market debut. At the end of the first day’s trading the stock had only gone up 0.6% and some in the media claimed this showed the IPO wasn’t the successful.

The idea a successful IPO is one that soars on the first day of trading is a naive view from a 1980s mindset. The idea was born out of the privatisation of British and Australian utilities in the 1980s and 90s where taxpayers were seduced by the idea of “free money” in exchange for selling community assets cheaply.

A ‘stag profit’ from a share that soars on its public float is theft from the existing shareholders and a transfer of wealth to insiders and their advisors.

Silicon Valley venture capitalists and startup founders aren’t dumb and have never fallen for that trick – investors pay dearly for stock in their ventures.

While no-one would call Mark Zuckerberg and his management team dumb they have a big job ahead of them finding revenue sources to justify the $100 billion market valuation. It’s going to be an interesting ride.

Bubble values

What Facebook tells us about the new tech bubble in Silicon Valley

The argument continues about Facebook’s purchase of photo sharing site Instagram.

One side claims a billion dollars for a business with barely any revenue and 13 employees is clear evidence of a bubble while the other side say its a strategic purchase that is only 1% of Facebook’s estimated $100 billion market value.

The latter argument is deeply flawed, comparing the purchase price against the value of other assets is always risky – particularly in a market where those underlying assets are being valued at the same inflated rates.

We could think of it in terms of a Dutch farmer in early 1637 claiming that paying a thousand Florins for a tulip is fine when he has a warehouse containing hundreds of them.

In reality, that farmer during the Dutch Tulip mania of the 17th Century held contracts for delivery; just as modern day investors held Collateral Debt Obligations.

Measuring value against other inflated assets is always dangerous and only fuels a bubble.

A much more concerning way of judging the wisdom of Facebook’s investment is against profit and revenue.

If we compare the purchase of Instagram against Facebook’s revenue, then the investment has cost them three months income.

Should we compare the acquisition against profit, Instagram has cost Facebook five years of profit at current rates.

Both of those numbers are very high and it indicates how big a gamble the Instagram acquisition is for Facebook.

It can be argued there is a lot of blue sky ahead for Facebook and that future profits and revenues will justify the Instagram purchase.

There’s also a very compelling argument that Facebook has to get into mobile services and Instagram does that.

Whether Instagram is worth three months income or five years profit to Facebook remains to be seen, but we should have no doubt it indicates we are well into Tech Boom 2.0.

Bubble economics

The fear of missing out drives most investment booms. Today’s Silicon Valley is no different.

You know you’re in an investment bubble when the pundits declare “we’re not in a bubble”.

A good example of this is Andy Baio’s defence of Facebook’s billion dollar purchase of Instagram.

Justifying the price, Andy compares the Facebook purchase with a number of notorious Silicon Valley buyouts using two metrics; cost per employee and cost per user.

Which proves the old saw of “lies, damn lies and statistics”.

The use of esoteric and barely relevant statistics is one of the characteristics of a bubble; all of a sudden the old metrics don’t apply and, because of the never ending blue sky ahead, valuations can only go up.

Andy’s statistics are good example of this and ignore the three things that really matter when a business is bought.

Current earnings

The simplest test of a business’ viability is how much money is it making? For the vast majority of businesses bought and sold in the world economy, this is the measure.

Whether you’re buying a local newsagency outright or shares in a multinational manufacturer, this is the simplest and most effective measure of a sensible investment.

Future earnings

More complex, but more important, are the prospects of future earnings. That local newsagency or multinational manufacturer might look like a good investment on today’s figures, but it may be in a declining market.

Similarly a business incurring losses at the moment may be profitable under better management. This was the basis of the buyout boom of the 1980s and much of the 1990s.

Most profitable of all is buying into a high growth business, if you can find the next Google or Apple you can retire to the coast. The hope of finding these is what drives much of the current venture capital gold rush.

Strategic reasons

For corporations, there may be good strategic reasons for buying out a business that on paper doesn’t appear to be a good investment.

There’s a whole host of reasons why an organisation would do that, one variation of the Silicon Valley business model is to buy in talented developers who are running their own startups. Google and Facebook have made many acquisitions of small software development companies for that reason.

Fear Of Missing Out

In the Silicon Valley model, the biggest strategic reason for paying over the odds for a business is FOMO – Fear Of Missing Out.

To be fair to the valley, this is true in any bubble – whether it’s for Dutch tulips in the 17th Century or Florida property in the 20th. If you don’t buy now, you’ll miss out on big profits.

When we look at Andy Baio’s charts in Wired, this is what leaps out. Most of the purchases were driven by managements’ fear they were going to miss The Next Big Thing.

The most notorious of all in Andy’s chart is News Corp’s 580 million dollar purchase of MySpace, although there were good strategic reasons for the transaction which Rupert Murdoch’s management team were unable to realise.

eBay’s $2.6 billion acquisition of Skype is probably the best example of Fear Of Missing Out, particularly given they sold it back to the original founders who promptly flicked it to Microsoft. eBay redeems itself though with the strategic purchase of PayPal.

Probably the worst track record goes to Yahoo! who have six of the thirty purchases listed on Andy’s list and not one of them has delivered for Yahoo!’s long suffering shareholders.

The term “greater fools” probably doesn’t come close to describe Yahoo!’s management over the last decade or so.

While Andy Baio’s article seeks to disprove the idea of a Silicon Valley bubble, what he shows is the bubble is alive, big and growing.

One of the exciting things about bubbles is they have a habit of growing bigger than most rational outsiders expect before they burst spectacularly.

We live in exciting times.

Hyping start ups for pleasure and profit

The Silicon Valley VC model is not sustainable for most businesses and industries.

Monday’s announcement that Facebook would buy photo sharing website Instagram shows the power of Silicon Valley investor networks and how they operate, we should be careful about trying to emulate that model too closely.

Intagram has been operating for 18 months, has 13 employees, has no prospects of making a profit and is worth a billion dollars to the social media giant. Pretty impressive.

A look at the employees and investors in Instagram shows the pedigree of the founders and their connections; all the regular Silicon Valley names appear – people connected with Google, Sequoia Capital, Twitter, Andreessen Horowitz.

The network is the key to the sale, just as groups of entrepreneurs, investors, workers and innovators came together to build manufacturing hubs like the English Midlands in the 18th Century, the US midwest in the 19th Century and the Pearl River Delta at the end of the 20th Century, so too have they come together in Silicon Valley for the internet economy.

It’s tempting for governments to try to ape the perceived successes of Silicon Valley through subsidies and industry support programs but real success is to build networks around the strengths of the local economy, this is what drove those manufacturing hubs and today’s successful technology centres.

What’s dangerous in the current dot com mania in Silicon Valley is the rest of the world is learning the wrong lessons; we’re glamourising a specific, narrow business model that’s built around a small group of insiders.

The Greater Fool business model is only applicable to a tiny sub set of well connected entrepreneurs in a very narrow ecosystem.

For most businesses the Greater Fool business model isn’t valid.

Even in Silicon Valley the great, successful business like Apple, Google and Facebook – and those not in Silicon Valley like Microsoft and Amazon – built real revenues and profits and didn’t grow by selling out to the dominant corporations of the day.

The Instagrams and other high profile startup buy outs are the exception, not the rule.

If we define “success” by finding someone willing to spend shareholders’ equity on a business without profits then these businesses are insanely successful.

Should we define business success by creating profits, jobs or shareholder value then the Silicon Valley VC model isn’t the one we want to follow.

We need to also keep in mind that Silicon Valley is a historical accident that owes as much to government spending on military technology as it does to entrepreneurs and well connected venture capital funds.

It’s unlikely any country – even the United States – could today replicate the Cold War defense spending that drove Silicon Valley’s development and much of California’s post World War II growth.

One thing the United States government has done is pump the world economy full of money to avoid a global depression after the crisis of 2008.

Some of that money has bubbled up in Silicon Valley and that’s where the money comes to buy companies like Instagram.

Rather than try to replicate the historical good fortune of others, we need to make our own luck by building the structures that work for our strengths and advantages.