BIBLE: Success in Silicon Valley - hard work or hard cash?

The most important factors

Ask a Silicon Valley startup to name two of the most important factors for its success and you'll probably hear some rambling definition on the entrepreneurial ethos surrounding the new company coupled with the availability of that all important commodity... Hard cash.

The different proportions of these, not to mention how they are applied, go some way to explaining how a barren patch of desert has become the world's most fertile breeding ground for high tech success.

Ask Robert Friedman, chief executive officer Web.com , a network of directories and free Web services, and he'll point straight at "the culture of the industry in Silicon Valley. That's what creates the universal knowledge and understanding of what the rules of the game are".

Friedman, who started working for Web.com while still at college, firmly believes the Valley's success is down to a combination of three components: money, people and execution. Although no company will ever play down the importance of vast sums of venture capital, there is general agreement that this is itself is not enough to guarantee success, no matter how good the idea. "You need at least two out of the three components," says Friedman, "You can have all the money in the world, but it won't mean a thing if you don't have the people."

The workforce culture in the valley is vital he says.

The fact it is the people out on the ground who are making the decisions and driving the industry forward gives Valley startups an edge that traditional companies, particularly in the UK, lack. "It's been vital that there are a lot of young people in the Valley forming and re-forming companies, who aren't in the upper echelons sitting in big offices with their feet on the desk. They really know what's going on," he says.

Thankfully, this culture of communal support is beginning to appear in the UK, with London quickly establishing itself as the European centre for Internet startups. Helping things along is First Tuesday, an Internet networking group that aids startups. Conceived in a bar just last year, it now boasts over 11,000 members and holds events in 30 cities throughout Europe. "There is a very vibrant community here. Everyone knows everyone," says Ernesto Schmidt, president of Peoplesound.com, "It is true that if there are two European startups with roughly the same idea and roughly the same team, the one in London is likely to be more successful. That's because here you're knitted into the community, which is linked into the PR and news community."

The First Tuesday phenomenon is also creating the virtual infrastructure of support services that exists in Silicon Valley, bringing entrepeuners into contact with Internet friendly lawyers, advertising agencies and public relations firms.

The founder of First Tuesday Julie Myers, believes there is a psychological need for a community network that is vital for nurturing self-confidence among the startup community. After her company's first event she recalls attendees thanking her for making them realise that they "weren't alone". Once entrepreneurs understand there is a groundswell of activity here in London it leads to the US style of confidence, crucial when approaching investors. "No one will give you money if you don't believe in yourself," says Myers.

However, for all the bright, talented young things in the Valley, companies would never get past the starting blocks were it not for the money.

Despite the positive vibes permeating the UK startup scene, money is still a problem. John McFarlane, president of Sun Microsystems' Solaris Software says there was approximately £1.02bn pumped into Valley startups alone last year. Compare that with a tentative estimate from Jupiter analyst Nick Jones of around £1bn for the whole of the UK and a picture emerges.

In the US venture capitalists are falling over each other to offer companies funding, and are prepared to finance companies of any size just to meet their targets. "Lots of venture capitalists are forced to do very low quality deals just to get through the funds they've got," says Keith Teare CEO RealNames, "So they know that there is a good chance that several companies are gong to fail."

This situation can be made to work in a company's favour, as the attention can push up its perceived valuation and often leads to a situation where you have a virtual team of investors working for the company. "OK, I'm going for £2m funding," recalls Friedman, "If there is interest from five VCs who each want to put in £2m, that instantly up the stakes so that the valuation of the company changes during the negotiation process. VCs don't want to be in it alone, they want the security of others saying that it is a viable prospect. They're not all working together but in effect they're your team," he says.

The good news for UK startups is that the venture capital starting to flood into the UK means British companies could soon benefit from the Valley-style bidding battles that have, thus far, kept the Americans at the top of the startups league.

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