Silicon Valley, Tel Aviv, London, Paris, Sydney, Moscow, Sao Paulo, Singapore, and Bangalore… what do these cities have in common? They have the enviable distinction of being among a few select cities in the world that continuously attract start-up entrepreneurs and venture capitalists.
The economic advantages of investment flowing into an area are obvious. The local economy benefits from increased trade and growth of supporting industries. Jobs are created and the government benefits from tax revenues. California's economy is the eight largest in the world and Silicon Valley accounts for one third of all venture capital in the United States. Many of the world's largest software and semiconductor companies are headquartered in San Jose, California, the defacto capital of Silicon Valley.
While there is no dispute that Silicon Valley is the Mecca for start-up companies, many other cities have been able to replicate this success. Tel Aviv, Israel is one of the most notable examples. In 2012, 660 Israeli tech start-ups received $1.9 billion in funding from venture capitalists. Only 24% of that amount was sourced from local investors; international investors channeled $1.44 billion into the Israeli economy with the majority of the start-ups operating out of Tel Aviv. This is an amazing feat because unlike other popular start-up regions such as San Jose and New England, only three decades ago, Israel was a socialist country. A sustained government effort, which begun in the mid-1980s to encourage start-ups and woo venture capitalists, has paid off big time. So, how have Israel and other successful start-up magnets like Sao Paolo, Singapore and Bangalore managed to attract tech entrepreneurs and venture capitalists, and what can African nations learn from their experience?
There are some general factors that attract tech entrepreneurs to an area. These include; well-established and cheap ICT infrastructure such as fiber optic networks, tax concessions, general macro- economic stability, low crime rate and a wide range of other issues to consider. The presence of an incubator or accelerator is also a key consideration for a tech entrepreneur. OECD defines technology business incubators as, "variants of more traditional business incubation schemes that assist technology-oriented entrepreneurs in the start-up and early development stages of their firms by providing workspace, shared facilities, and a range of business support services." In the cities mentioned at the beginning of this article, there is evidence that start-ups associated with business incubators succeed at a faster rate than non-incubated start-ups. For example, beginning from the 1990s, Israel sponsored incubators that took up shareholding in start-ups. These programs are responsible for the success witnessed today.
In addition to these general factors, there is also the cluster effect. Once a region begins to establish itself as a tech start-up destination, it tends to attract more and more entrepreneurs, and consequently a greater number of venture capitalists. This has certainly been the case with Silicon Valley.
The three main lessons that African policy makers should learn from the leading tech start-up destinations are; work on the general factors needed to attract entrepreneurs such as setting up or promoting incubators and accelerators, secondly, create an atmosphere where entrepreneurs and investors want to live and work, and third, come up with clear values that are backed up by action. For example, one of Silicon Valley's long-established values is a huge appetite for risk and a long-term outlook – a key consideration for today's tech entrepreneurs.