What do Silicon Valley and job boards share? Network effects!
SF and Silicon Valley Giants in the Tech World
Silicon Valley and San Francisco have long been the pulsating heart of technological innovation and venture capital – today’s Florence of the modern Renaissance era. Their dominance is often juxtaposed against San Francisco’s growing challenges: over-regulation, bureaucratic sluggishness, and increasing social issues. Yet, despite these drawbacks, these regions retain their central role in the global tech landscape. The secret to their resilience lies in the power of network effects, akin to those seen in legacy job board platforms like Monster.com, Indeed.com, LinkedIn.com and Craigslist.com (try them out!).
What is Silicon Valley?
Those trying to recreate “Silicon Valley” or Israel’s “Startup Nation” have an extremely tough task at work. Silicon Valley’s unique status as a tech hub isn’t easily mirrored elsewhere, largely due to its dense aggregation of tech entities and venture capital. This density fosters potent network effects, simplifying the acquisition of both human and capital resources for companies, and offering investors rich deal flow that doesn’t stop! The Valley’s inherent culture champions innovation and embraces risk, an ethos not readily found in other regions. Crucially, U.S. policies, including R&D tax incentives and immigration norms, effectively attract global talent and investment, bolstering Silicon Valley’s position. The U.S. education system, especially in California, consistently produces high-caliber engineers and tech professionals, further solidifying the Valley’s dominance in the tech world.
Silicon Valley stands as a paradigmatic example of how a social network and marketplace, interwoven with skilled labor, high-risk and growth capital, and cutting-edge research, can create a thriving ecosystem. This region is not just a geographic location; it’s a vibrant network where ideas, investments, and talent flow continuously, rendering it both adaptable and resilient.
Central to Silicon Valley’s success is the robust infrastructure of the United States: rule of law; deep capital markets; a huge homogeneous market in the US; a very friendly tax and business environment for company formation, company growth, company bankruptcy, angel and VC/PE investing; as well as the best-funded top higher education research institutions; plus a talent-welcoming immigration system.
What underlies Silicon Valley and SF is a culture, a mindset that accepts risk-taking and failure, values innovation and progress. To a founder a failed startup is like a battle scar of honor. In cultural terms, Silicon Valley accepts failure (but does not promote it). This culture of no dress codes, ease to work around the clock, flexibility to disagree and be contrarian (that was SF, unsure if it still is so) begets innovation and entrepreneurship. Much like how Hollywood once spread California’s culture globally, Silicon Valley’s ethos is now permeating the world, aided by remote work and digital media. Venture capital, following the footsteps of private equity’s global expansion since the 1980s, is also becoming a worldwide phenomenon.
Silicon Valley’s network is a powerhouse comprising talented individuals in product development, technology, marketing, and sales. It is the home to world-leading tech companies and corporations like Salesforce, Meta, Cisco, Apple, and Netflix. The region’s weather, often an overlooked aspect, also plays a role in its attractiveness. This entire network, underpinned by a culture that celebrates innovation and risk, continues to set Silicon Valley apart as a global epicenter of technology and entrepreneurship.
Paradox of Legacy Job Boards and the Power of Network Effects
Just like Monster.com or Craigslist, which despite their archaic interfaces and dated technologies continue to draw users, San Francisco and Silicon Valley have a staying power rooted in their history and network density. In the world of tech, where novelty often reigns supreme, these areas are anomalies, weathering criticisms about their deteriorating urban environments and quality of life. Network effects offer a lens through which to understand this. In plain words, the more users a network has, the more valuable it becomes to each user. This principle is what keeps LinkedIn relevant despite its clunky interface and what underpins the enduring relevance of Silicon Valley. To read more about network effects check out NfX’s network effects bible, FJ Labs and Sameer’s Breadcrumbs blog.
Job board network effects
Job boards like Monster, ZipRecruiter, Indeed, Craigslist (a classifieds more than a job board), LinkedIn (a professional social network that monetizes via job postings, inter alia) function as powerful job ad exchanges due to their inherent network effects, openness and ease of use. The fundamental principle driving these network effects is straightforward: the more job listings a board has, the more job seekers it attracts, and conversely, the more job seekers that use the board, the more employers are motivated to post their listings there. This creates a self-reinforcing cycle of growth and utility. As the volume of both job listings and job seekers increases, the value of the job board to each group escalates. Employers gain access to a larger pool of potential candidates, and job seekers benefit from a wider array of job opportunities. This cycle of mutual benefit cements the position of job boards as pivotal platforms in the job market, making them a go-to resource for both employers and those seeking employment.
However, this comes at a cost. Job seekers apply to where they aspire to work. In fact well over 95% of applicants to job postings don’t fit the requirements (whether actual or superficial – that’s another issue with job postings: they’re just ads meant to attract clicks. Some companies even spend on job postings as they do on regular ads as part of their employer branding!). Job boards also often face criticism for being legacy, clunky tools that can be remarkably ineffective in today’s rapidly evolving job market with remote and GenAI on stage.
Many of these platforms have not kept pace with the technological advancements and changing dynamics of the workforce – as they are ad exchanges, not recruitment nor tech companies (save for LinkedIn). They frequently offer a one-size-fits-all approach that fails to account for the nuanced needs of different industries or the specific preferences of job seekers and employers.
Additionally, the sheer volume of listings can lead to information overload, making it difficult for candidates to find relevant positions and for companies to identify and easily screen for qualified applicants. The lack of personalization and intelligent matching algorithms further contributes to their inefficiency, often resulting in a frustrating experience where quality connections between employers and potential employees are lost in a sea of listings. This outdated model, while still widely used, is increasingly facing challenges. More on that in the future.
Silicon Valley’s and SF’s network effects
Applying ideas on network effects in marketplaces, one can draw parallels with San Francisco and Silicon Valley. These regions, much like successful marketplaces, have amassed a critical mass of tech talent, investors, and infrastructure. This density creates an extremely powerful, self-sustaining ecosystem where the availability of one resource amplifies the value of others. Above all, this is due to the quality and stickiness of this network – it’s real ie. in the world of atoms and human relationships, and not just digital. And, moreover, it’s quality also stems from strong financial incentives and feedback loops.
Why the comparison to marketplaces? Because it’s accurate, because we’re building the leading AI-first hiring marketplace at Gyfted. And marketplaces make for really strong businesses – just look at AirBnB, Uber, Pinterest, Turo, Cragislist, Indeed, Glassdoor, DoorDash and so on, and because it’s a fun thought experiment for a blog post.
Brief note: SV’s ‘cold start problem’
The way Silicon Valley came about is best described by one of the top entrepreneurs and entrepreneurial thought leaders in the world – Steve Blank, who points out how the US government’s R&D investments during and after WWII fundamentally altered US universities, setting the stage for Silicon Valley’s ascendance. The Office of Scientific Research and Development (OSRD) was instrumental in this, acting as a wartime R&D powerhouse that funneled significant funds to universities, turning them into key players in military tech development. This move, a starting point for federal funding in university research, created a symbiotic relationship between academia and the military and laid the foundations for Silicon Valley. Post-war developments saw continued government investment in university research and defense research during the Cold War, cementing the US’s and Silicon Valley’s global dominance in tech innovation. Spin-offs, product/tech creation and so forth ensued. Stanford University was central to this, with the formation of Hewlett Packard out of the university almost a century ago. The rest is history – read more about it here.
Silicon Valley as a marketplace
We can think of Silicon Valley as a marketplace of ideas, products, talent, capital, tech startups to work for, research projects, and culture. Its ‘liquidity’ comes from the abundance of talent, ideas, and capital. This liquidity ensures that despite better, newer options elsewhere, stakeholders continue to gravitate towards it. In marketplace terms, San Francisco and Silicon Valley have high ‘side-switching’ costs. For a tech professional or investor, moving away from this ecosystem means losing access to a concentrated network of opportunities and resources.
According to Elad Gil, industry towns such as Silicon Valley, San Francisco, Beijing, and Bengaluru have risen to prominence due to a critical mass of resources like talent, investors, customers, and service providers concentrated in a specific area. They continue to thrive by consistently attracting these resources. Being located in an ‘industry town’ like Silicon Valley can significantly enhance a startup’s probability of success because of network effects, early customer access, unique insights, and access to knowledgeable investors.
Silicon Valley’s dense network structure
Silicon Valley has thrived due to its dense network connections and high creator/builder/founder talent density in this network. This is key for a tech ecosystem as a dense network facilitates interactions and information flow. The ability to launch, fund, grow and exit a startup enhances this network’s robustness by enhancing incentives (financial, success) and by providing fast feedback loops in terms of company creation.
Geography matters in shaping Silicon Valley as a network. Nestled in a relatively compact area of ~10 mln people in the Bay Area, geographical closeness fosters an environment where various network clusters thrive, allowing for frequent and efficient interactions among tech professionals, investors, and entrepreneurs – those from the older corporations in the peninsula/bay, to the younger techies and rebels (at least that was so) in San Francisco. Proximity creates a hotbed for collaboration and innovation, where ideas can be quickly shared and iterated upon, and implemented as startup projects.
The region exemplifies a network with dense clusters where participants are highly interconnected, leading to frequent and meaningful interactions. This density enhances engagement and, consequently, the attractiveness of the network for new participants. Additionally, the presence of network bridges – connections that link different network clusters – facilitates the spread of ideas and innovations, enabling the ecosystem to scale beyond its immediate geographic boundaries.
Silicon Valley’s “liquidity” is not only in volume, but in quality
Liquidity, which is key to the functioning of any marketplace, can be applied to analyzing SF/SV. Silicon Valley has it all (pretty much) in terms of what’s needed. Silicon Valley’s success stems from the concentration of diverse professionals – engineers, designers, marketers, investors – and their synergistic interplay. This ecosystem, where ideas and resources merge, drives innovation and company growth. The interconnectedness of these highly able and experienced professionals creates a multiplier effect where each success story amplifies others’ potential. This highest concentration of highly intelligent, interconnected people in the world is testament to the true quality of Silicon Valley.
SV’s thriving startup environment is less about the sheer volume of startups or capital but more about the quality of interactions and mutual support within this ecosystem. It is an environment that enables startups to survive and thrive against the odds, thanks to a culture of collaboration and support that doesn’t rely on pre-existing connections. Y Combinator is probably the best microcosm example of this ecosystem – it created a ‘meta-company’ environment where startups, while legally independent, benefit enormously from their network’s strength. Sam Altman underlines this importance of a supportive, interconnected ecosystem, where long-term relationships are more valued than immediate gains, a principle crucial for Silicon Valley’s success.
Silicon Valley’s ability to facilitate ‘marketplace side switching’, where individuals can switch or combine roles from employee to builder to investor to researcher, strengthens this network.
Financial ‘liquidity’ in the form of financial success that comes from company exits empowers the startup ecosystem with the continuous success of top VCs, and the birth of new angels and new multimillionaire LPs contributing to new pre-seed/seed/growth venture funds, which then invest in new startups. And this cycle continues. As long as other ‘tech hubs’ do not replicate this positive feedback startup investment cycle (eg. because many neglect ESOPs) – they will lag behind. And no, public money won’t help, nor will ‘financial investors’ who simply don’t ‘get’ what it takes – and the culmination in the 2020-2022 startup bubble is best testament to it.
Silicon Valley’s defensibility
Once again let’s reiterate, that it’s not just about the number of connections, but the quality and intensity of these interactions, fostered by the geographical setup of Silicon Valley, that underpins its enduring success and influence in the global tech landscape. The nature of connections in Silicon Valley, ie. in the form of a real social network – whether these are personal relationships, university/alumni relationships and professional relationship networks – strengthens the tech ecosystem’s defensibility. User identity values contributions which are recognized and valued, creating positive feedback effects that are less likely to shift to competing networks. This is visible through the ties and collaborations formed in this tech community, where personal connections and reputations play a significant role. The unique identity of each participant in this network, coupled with strong network bridges, amplifies the defensibility and scalability of the tech ecosystem.
Silicon Valley and SF share similarities with job boards
Much like the aging yet unyielding job boards of the early internet era, San Francisco’s and Silicon Valley’s status may be fraught with challenges and many living inefficiencies (more on that in a later post on decoupling SF/SV’s network effects). However, their deep network effects create a gravitational pull too strong to resist for anyone in the tech and venture capital sectors. The legacy of these regions, much like that of Monster.com or Indeed.com, is not in their pristine conditions but in the unmatched network density they offer.
To finish things off, comparing SV to marketplaces is an interesting thought experiment, but SV is really more like an evolving organism. Though I don’t know much about biology so I’ll spare you on this, except to note this – Silicon Valley’s culture has and is pollinating the world over for new tech ecosystems to develop, above all by infecting others with its amazing culture. More countries around the world would be better off by adopting US business standards and the SV culture mindset.
Robert
ps. If you’re interested in how to interview for YC – read this. pps. If you’re hiring for cultural fit (eg. startup mindset) – check this out.