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Steve O’ Hear at ZDNet wrote a thoughtful and intriguing post regarding the prominence of Silicon Valley investing in social software and media companies (and high-tech in general).  Steve’s main point is to follow the money - that while the referenced New York Times article highlights the Valley as a reemergent hotbed for high-tech companies, this is in most part due to the high-tech investment machine located in the Valley.   If you haven’t already, I highly encourage you to read Steve’s post - it is one of the more omniscient posts I have read in a while (not because he referenced our maps, but use them to illustrate a profound point).  Zonk at SlashDot posted a follow-up question, “Is the success of Valley-area projects the result of a more creative environment, or is the cachet of the area (and the resulting money) the reason behind their success?” 

My response leans toward the latter, that the cachet and the resulting money is the driving force behind the innovative success of the Silicon Valley.  This echoes Steve’s main point, but I would like to elaborate from a network perspective.  Some examples can help illustrate:

(1) In the social media arena, social networking site Visible Path was located in New York, but mainly funded by Kleiner, Perkins, Caufield, & Byers (KPCB), located on Sand Hill Road in the Valley.  Recently, Visible Path relocated their main offices to Foster City.  Here we see a prominent company migrating to the Silicon Valley, one can surmise this is in part to be closer to their main investor (and those that invested in subsequent rounds of financing). 

(2) The Forbes 2007 Midas List ranks the top 100 dealmakers in the world.  On our LinkSViewer Midas List Page we were able to generate relevant maps for 97 of the 100 Midas List members because the people and/or firms were tied to Silicon Valley companies or investors.  I just did a mini-analysis on the locations of the companies on the list: 88 had offices in the Bay Area (most all in the Valley) and 38 were headquartered on Sand Hill Road.  It seems like Valley investors are alive and well.

(3) The cachet of the valley can be operationalized by the network term, Relational Capital (the source of the title for this blog) = the value added worth of a network or the strategic advantage afforded by key relational ties.  KPCB prominently display the importance of relationship and venture capital on the front page of their Website.  The rationale behind this message is that they offer more than just money to their portfolio companies - they can forge partnerships, find clients, staff successful executives, and link to investors in subsequent financing rounds.  The investor ties in the valley are notoriously well-connected and KPCB leverages their relational capital toward successful portfolio companies. 

After examining thousands of Valley high tech networks (yes, I have nothing else to do), I have mapped a multitude of relationships between companies, people, and investors.  From my experiences, the key connections (or the ones that make the maps most interrelated) are the investors.  The first example provided on the ZDNet blog illustrates this point.

Note the prominence of the investors (Yellow and Tan circles) in the above map in both number of ties and positioning.  Relational venture capital refers to the relative centrality of these investors in the map - that they forge the connections between companies.  Note the multiple ties and centrality of KPCB, Sequoia Capital, and Accel Partners in the map.  These are three of the most connected VCs in the valley.  I next removed the investors from the left map (i.e., hid the green links):

Note how the overall structure of the map changes.  This is an indication that LinkedIn, Facebook, and Friendster have multiple interrelated ties because of their investors (this is your life without VC connections).  Granted, investors have more deals than people on management teams or boards, but the main point for investors lies in their connectivity, not their sheer numbers of ties.  SV investing firms frequently co-invest with each other and thus assume a collaborative versus competitive relationship.  When a Google makes it big, there is plenty of money to go around. 

The subtitle of this post, ”The Map is Not the Territory,” references a General Semantics credo that implies that you can never completely know all about something - that our belief systems (particularly linguistic ones) are subject to multiple interpretations of reality.  On the one hand, the subtitle is a humble admission that network maps cannot tell everything - that there must be insight that guides one’s interpretation of the maps (I felt Steve did a good job on this).  Metaphorically, I use this point to indicate that company location does not tell the entire story.  More important are the ties that bind companies together and foster innovation - the Valley VCs.  And while most VCs are on the Valley map, their company territory spreads far and wide.

For those interested in other CapitalBLOG posts related to social media capital networks, check out:

The VC Web Chart - Network of the Networkers

Web 2.0 Relational Capital 

This entry was posted on Friday, February 16th, 2007 at 4:19 pm and is filed under Company Analysis, Investor Analysis, In the news. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.