BCG tips SoCal to be next great tech ecosystem

15 May 2018 7 min. read
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Amid talk of ‘peak Silicon Valley’, the hunt is on for the world’s next great tech ecosystem and Southern California has all the ingredients for victory, according to BCG analysis. With an integrated strategy, and tactically deployed venture capital, the leading management consultancy believes ‘SoCal’ can soon outshine its northern rival. 

Oversaturated and ripe for change, there are growing signs that Silicon Valley has reached the pinnacle of its influence and is now on a downwards trajectory. A victim of its own success, the Bay Area has less to offer ambitious talent and innovative startups than it did before. Noting that the number of startups targeting the same customers has risen exponentially, while their operating costs doubled from 2009-2014, the Boston Consulting Group (BCG) is steering the tech conversation away from the Valley towards more fertile territory. 

The Big Three strategy consultancy formed a partnership with the Alliance for Southern California Innovation —which is dedicated to boosting the region’s startup ecosystem — to assess SoCal’s potential to emerge as a dominant tech hub. In a report titled ‘Stars Aligning: How Southern California Could Be The Next Great Tech Ecosystem’, BCG interviewed 100 thought leaders in the tech sphere and evaluated the region — which covers eight counties, including Orange County, LA, San Diego and Riverside. The counties were evaluated on six key metrics: Human Capital; Financial Capital; a Strong University System; Strong Corporate Environment; Adequate Infrastructure; and a Culture Conducive to Innovation. 

Six ingredients of a great tech ecosystem

Aware that SoCal faces competition beyond the Silicon Valley old guard, the report authors — Jody Foldesy, Raj Varadarajan, and Raoul Correa — included analysis of the same metrics for other well-established and emerging tech hotspots dotted around the globe. These included New York City (dubbed Silicon Alley), Boston, Austin, and Israel. 

Across all metrics SoCal was competitive with its rivals, including the Bay Area which maintains a substantial lead in Human and Financial Capital. SoCal was fourth for Human Capital but was much closer to NYC and Israel in second and third, than to Boston and Austin. A similar story was told in Financial Capital, where SoCal was just edged out by NYC and Boston, but easily outgunned Austin and Israel. SoCal performed well on Corporate Environment and Infrastructure and led the pack on Strong University System.

How SoCal stands up against rival tech nodes

Education is one of SoCal’s strongest assets — BCG analysis notes that SoCal produces more tech-related PhDs than any other American region. Meanwhile, more startups are formed at UCLA and patents generated at CalTech than at any other American universities. Four SoCal institutions rank among the top 20 research universities in the country. The report stresses that, “The more integrated an area’s high-powered universities are with the local startup ecosystem, the more robust the startup scene.”

A thriving startup culture is a prerequisite for any serious tech ecosystem, let alone one attempting to take the crown from Silicon Valley. But for startups to succeed, the cost-benefit analysis of establishing themselves in a particular location must make sense. Here BCG demonstrates that Los Angeles enjoys a crucial competitive advantage over New York and San Francisco, each of which pose extreme real estate-related and human capital costs for new enterprises.

LA offers cost benefit for startups

Commercial rent is 75% higher in San Francisco compared to Los Angeles. In the Bay Area the average tech worker is paid $123,128, significantly higher than the $95,617 received in LA. BCG analysts calculated the cost differential over 20 years for a startup with 5,000 employees in its tenth year and estimated that it would save $1.6 billion by choosing LA over San Francisco. The talent pool is also greater in LA, which counts diversity, youth and strong migration patterns among its strengths, while high rents and living costs in San Francisco actively discourage migration — whether from Seattle or Shanghai.

Nodes of excellence 

SoCal offers far more than elite education, diverse human capital and cheaper rent. Outside of the tech bubble, the region is a cultural icon with a reputation that spans every corner of the globe. SoCal doesn’t just boast West Los Angeles — with its 2,000 plus tech companies and staggering ‘entrepreneurial density’ — or ‘Silicon Beach’, a hotbed of innovative energy; the region also has Hollywood and a near-perfect climate. Snapchat and SpaceX are already headquartered there, so the question asked by BCG is why isn’t SoCal already home to the world’s leading tech ecosystem? 

Major SoCal tech nodes of excellence

One answer lies in geography. BCG identifies eight ‘nodes of excellence’ which are each centers of excellence in particular fields. Pasadena, for instance, is known for its high-tech engineering and data analytics, while Burbank’s strengths lie in content creation. The problem for SoCal is that these nodes of excellence are spread over an area eight times larger than the cluster of tech ecosystems that together comprise Silicon Valley. The BCG report cites one leading executive who believes the lack of a central hub prevents SoCal entrepreneurs from ‘maximizing their potential’. 

To counterbalance this disadvantage, BCG recommends greater interconnectivity between SoCal’s different nodes, achieved with the help of universities and the Alliance for Southern California Innovation. Other advice includes more effective advertising of SoCal’s tech capabilities and higher levels of Diversity & Inclusion in the tech workspace than witnessed in the perceived ‘tech bro culture’ of Silicon Valley. 

Sources of venture capital

The second problem is venture capital, or a lack thereof. BCG notes that SoCal matches the Valley for funding at the pre-seed stage, but falls well behind at the seed and early-stage rounds. By the time the venture-funding cycle gets round to the later stages, Silicon Valley has established an insurmountable lead, making it prudent for successful entrepreneurs from SoCal to head to the Bay Area when the big leagues beckon.

BCG provides a framework for venture capital investment which the consulting firm believes would be necessary for SoCal to evolve into a leading tech ecosystem. At present venture capital investment stands at around 7% of the levels seen in Silicon Valley. By increasing this to between 25% and 40% by 2025, BCG claim this could directly create up to a quarter of a million new jobs while increasing funding across all stages of the venture-funding cycle to up to $40 billion. By this point SoCal’s rising star may well have eclipsed Silicon Valley’s fading light, although any number of disruptive developments in the tech sphere could radically alter the course of both ecosystems.