Beware the pitfalls of Silicon Valley

A recent article in Frankfurter Allgemeine Zeitung titled “Will Facebook Enslave Us?” captures a sentiment prevalent among companies around the world: admiration for Silicon Valley — albeit, with a dash of fear.

International media outlets eagerly cover disruption developing in labs up and down the San Francisco peninsula. Boards of directors are spending hours debating how to react to the next wave from Silicon Valley. Today’s common conclusion is an old one: If you can’t beat them, join them. But for many, that is easier said than done.

The obstacles to joining forces

Many global business leaders want to experience Silicon Valley firsthand to understand what makes this hotbed of technology so unique, to uncover its secret recipe and to tap into potential collaboration opportunities.

According to San Francisco’s Bay Area Council, European firms have more than 1,000 permanent outposts and have invested $4 billion in the area (many U.S. firms headquartered outside of Silicon Valley also have a presence in the Valley). Germany’s consul general hosted about 3,000 German political and business leaders on weeklong visits to Silicon Valley in 2015 alone, and a far greater number actually hit the ground but were not hosted by the consulate.

But outside of Silicon Valley, firms point to several obstacles that limit their success.

Many businesses are hesitant to defer to foreign or not-invented-here thinking. There also are cultural differences, and often a clash between the hands-on entrepreneurial culture of the Valley and the more conservative approaches of the boardroom or CEO.

There also is the oxymoron of fixing issues at the core of an organization, namely lack of innovation, by outsourcing it to a tiny outpost on the other side of the world. As one executive put it, “Silicon Valley is not a zoo where you can study dangerous animals in a neatly fenced environment that you can visit for a day or two and then fly back home and expect to have it all sorted out.”

Too many decision makers are unclear about what they want to achieve in Silicon Valley and, perhaps even more importantly, what they bring to the table that makes them interesting enough to grab the attention of Silicon Valley.

How to do it right

Even with the drawbacks, there are examples of how companies can profit from active collaboration with Silicon Valley firms, proving that it can be a worthwhile undertaking to maintain a presence there.

Bay Tek Games, the market leader in arcade gaming systems founded in 1977 and headquartered in Pulaski, Wisconsin, was challenged by declining interest from millennials and their children. Innovation had been stagnant for a while, and a general wisdom had developed that the time for arcade games was over.

However, research showed that if the machines were connected to smartphones, arcade gaming could be revolutionized to again become attractive for younger generations. The company could not come up with a cost-effective solution for that connectivity, but then teamed up with Crestlight Ventures, a Silicon Valley venture fund that specializes in applications for the Internet of Things.

Crestlight helped Bay Tek Games join forces with local startups that connected the arcade machines to the Internet and provided a basic cloud platform within a few weeks. Crestlight then organized a hackathon at Plug and Play in Sunnyvale, California. The result was an abundance of interesting application prototypes to revamp the arcade platform. Fast-forward one year: Bay Tek Games has won industry awards, begun to use lean startup principles in R&D, and captured record-breaking revenues.

Another salient example is Axel Springer. When Mathias Döpfner became CEO of the German publishing house in 2002, he prominently defined three priorities for his tenure: Internet, Internet and Internet — a bold statement only one year after the burst of the dot-com bubble.

Döpfner knew print revenues would continue to decline and Axel Springer would not survive unless he radically shifted the business model. Among other initiatives, he led an expansion into Silicon Valley. In 2013, Axel Springer opened a presence in Palo Alto, California, to enable a culture change among the firm’s leadership and open the firm up for digital business models. Alongside this presence, he established an investment fund specifically to create new business models.

Today, Axel Springer has sustained revenue above its 2002 level, and the company is on a solid growth trajectory with its digital business models attributing to 60 percent of its revenue and 70 percent of profits.

Three lessons

With Bay Tek Games and Axel Springer, there are three practical lessons for firms that want to engage with Silicon Valley:

• Have a clear purpose and objective for what you want to achieve. For both Bay Tek Games and Axel Springer, much was at stake. But instead of defining “we are going to save the company” visions for their engagements, they defined very practical and measurable objectives: bring the arcade systems into the cloud and drive digital revenue, respectively.
• Drive initiatives from the top of the company. Silicon Valley must be a CEO agenda item, and the outpost must be more of an “inpost.” Rather than simply dipping into the Valley and grabbing a few tips, Bay Tek Games and Axel Springer maintained a presence there, and engaged with its innovative players.
• Figure out what you bring to the table that makes collaboration worthwhile. For Bay Tek Games, the answer was a specific application and access to a promising new ecosystem for arcade gaming. For Axel Springer, it was fund access to a growing digital publishing network.

Success for international firms is never guaranteed, but there are tangible steps to assist with a smooth engagement in Silicon Valley. Firms outside the U.S. are right to look on in awe and aspire to collaboration with Silicon Valley. But they should also be familiar with the potential drawbacks.