The next unicorn may not come from Silicon Valley

Seph LawlessPeruse the headlines, and you'll find hundreds of articles predicting the "next Silicon Valley." Pundits claim that the growing cost of living in the Bay Area is driving businesses away to more affordable regions that are rich in tech talent such as Austin, Phoenix, Boulder, and Miami.

But try as they might, these "hubs" won't ever beat Northern California at its own game - the area will continue to dominate information technology because of its unique arbitrage of thought, culture and research.

But that's okay, because striving to replicate the success of the Bay Area limits us by imposing an arbitrary constraint on our imagination. After all, does Silicon Valley represent the pinnacle of success in human innovation, or are there regions that have the potential to evolve into something even greater?

"Tech" is Dead

There's a strong argument to be made that the rate of innovation in the traditional "high-tech" space (e.g. ecommerce, social media, computer hardware, and telecommunications) is slowing.

Much of this is due to the fact that we are arguably reaching a point of saturation in the consumer internet. According to TechCrunch, smartphone users spend 84% of their time on just five apps. Moreover, almost two-thirds of consumers fail to download any apps in a given month.

Tiller PartnersSmartphone User's Number of App Downloads Per Month.

This problem has been confounded by a disturbing trend that Tim Wu pointed out almost five years ago in his book The Master Switch. In essence, Mr. Wu analyzed long-term trends in information technology and found that disruptive technologies tend to become closed and consolidated over time.

Indeed, it's helpful to remember that AT&T was once considered a scrappy startup challenging the entrenched Western Union telegraph monopoly. So while Google, Amazon, Apple and Facebook may have once been agitators to the ancien régime, they're now incumbents with the capability to crush or control potential threats to their business models.

With the exception of the blockchain, companies touting even seemingly transformative technologies such as mixed reality or chat bots may find it hard to achieve escape velocity from an orbit made ever tighter by the increasing influence that incumbents have over digital distribution.

That's not to say that many great companies won't continue to come out of Silicon Valley, but we may need to look elsewhere if we're expecting to see the same level of disruption that accompanied the late 90s and early aughts.

Long Live Tech

In his book The Third Wave, Steve Case argued that we're reaching an inflection point where "the term 'tech-enabled' will start to sound as ludicrous as the term 'electricity-enabled.'"

Indeed, the next big thing in "tech" probably isn't "tech," but rather the application of intelligence to the broader marketplace.

A handful of developments seem on pace to create the framework for our connected future; areas such as artificial intelligence, big data and IoT are likely to be a cornerstone in every industry. To the chagrin of George Orwell, in fifty years much of our work may be done by robots that can think and learn, and are connected to each other.

As such, disruption is no longer limited to ecommerce, software, the consumer internet, or social media, and looking for the next "Unicorn" may be myopic. Instead, we might want to ponder the next TRILLION dollar company.

After all, if Amazon disrupted retail, and Facebook disrupted media, who is going to disrupt energy, manufacturing, agriculture, healthcare and finance? In other words, why look for the next Uber when we should be looking for the next Apple?

How Detroit Could Beat Silicon Valley at Its Own Game (Seriously)

In one frontier technology, Detroit may hold several competitive advantages over Silicon Valley.

Although predictions range significantly, many research organizations forecast that autonomous cars will be the first place that the public sees true Artificial Intelligence, with widespread adoption by 2030.

This has led to a burgeoning war between Silicon Valley and Detroit, with many assuming the city that personifies urban blight can't compete with the likes of Elon Musk and Larry Page.

But critics may be missing several distinct advantages that the motor city holds over Silicon Valley. In particular: it's becoming a highly-attractive location for STEM talent, it has a rapidly expanding (and hungry) tech scene and it has a localized industry cluster that may be difficult for Silicon Valley to replicate.

Paris of the Midwest

Silicon Valley owed much of its initial success to three factors: a highly-educated population, relatively low cost of living and large pool of talent in STEM fields.

Like the Bay Area in the 70s, contemporary Detroit shares many of the same advantages.

First, the Detroit-Ann Arbor area boasts a highly-educated population. According to WalletHub, nearby Ann Arbor is ranked #1 on the list of most educated cities, ahead of both San Jose (#3) and San Francisco (#7).

Second, the cost of living in the area is below the national average and significantly below Silicon Valley.

Finally, Detroit is becoming much more attractive for STEM talent. Not only has STEM job growth outpaced traditional by 6x, the city is midst of the kind of cultural revival that serves as catnip for millennial technologists.

Once known as the "Paris of the Midwest" - Detroit is intent on regaining its former glory with a hip new culinary scene bolstered by a combination of cheap housing and an influx of restaurateurs and chefs, and a revitalization of the local fashion industry led by entrepreneurs such as Tom Kartsotis (founder of the uber-chic Shinola). As one resident noted in the New York Times "it feels like TriBeCa back in the early days, before double strollers, sidewalk cafes and Whole Foods…there is a buzz here that is real, and the kids drip with talent and commitment, and aren't spoiled."

Indeed, although Detroit's population declined over the last 10 years, the city also saw a 59% increase in the number of young, college-educated residents in the same time period.

In addition, the startup scene is Michigan is much more diverse than the nation as a whole. According to Forbes, 28% of the VCs in Michigan are women, people of color or LGBT.

"Detroit Hustles Harder"

In 2008, fashion entrepreneurs Joseph "J.P." O'Grady and Brendan Blumentritt of Aptemal Clothing LLC released a t-shirt line with the phrase "Detroit Hustles Harder" proudly emblazoned across the front. The slogan caught on like wildfire because it captured an underlying entrepreneurial spirit - one pioneered by original Detroit-based disruptors such as Henry Ford.

Indeed, Detroit is hustling. Tiller Partners

It's startup scene has seen remarkable growth over the last 10 years: According to the Michigan Venture Capital Association Annual Report , there were 36 VC firms in the Detroit area in 2015 with $5.3 billion in AUM, an increase of over 100% in the last five years. In addition, the amount of investment and the number of startups receiving investment has been steadily climbing.

On top of the local VC scene, Detroit also has a thriving tech startup scene. According to a ReCode series written last February, there are 100 tech startups in Detroit alone, and 248 tech companies were started in Michigan in 2014. In fact, 2014 represented the first time that startup activity in Detroit outpaced that in nearby Ann Arbor.

These developments have been bolstered by billionaire and Detroit native Dan Gilbert, founder of Quicken Loans, who has invested heavily in the local startup scene in an effort to rebuild Detroit's blight into a trendy, bustling movement.

Finally, Motor City has seen significant interest from the Silicon Valley elite. For example, Amazon, Alphabet and Facebook all have offices in Detroit. In an article in CIO magazine, Peter Faricy of Amazon explained that "Michigan is a rapidly growing technology corridor and we're eager to bring the incredible local Detroit talent to Amazon."

Revenge of the Big Three?

Much of Silicon Valley's success can be traced to its industry cluster in information technology. Research and funding from Stanford and Berkeley combined with local giants such as HP, AMD, Intel, Xerox, Cisco and Apple to form a synergistic "melting pot" for information technology.

As many experts predict that autonomous cars may be the first instance of widespread adoption of Artificial Intelligence, an argument can be made that Detroit has a similar advantage with both the University of Michigan and the "Big Three" automakers.

The Wolverines, in particular, are taking a strong interest in artificial intelligence. The school boasts the second highest R&D expenditure in the nation, and its research is boasted by the Artificial Intelligent Lab, which houses ten distinct research groups. In addition, Toyota recently launched a multi-million dollar partnership with the University of Michigan to develop AI.

Perhaps more important, however, is the influence of Ford, GM and Chrysler on the development of the field.

Often misjudged as anachronistic, the leadership in today's Detroit is anything but - all three CEOs are relatively young and two have held the post for fewer than three years. As GM CEO Mary Barra recently declared to Business Insider, "We are trying to disrupt ourselves; we're not trying to preserve a model of yesterday."

Bill Pugliano/GettyGM CEO Mary BarraThis zeitgeist has manifested in an infatuation with being the first to develop autonomous vehicles. General Motors recently paid over $1 billion to acquire Cruise Automation, a startup dedicated to creating the sensors and technology necessary to build an autonomous vehicle. The company also invested $500 million for a 9% stake in Lyft, perhaps due to Lyft's (and Uber's) vision of eventually replacing their independent contract-based workforce with autonomous transport.

Ford, meanwhile, recently announced a $75 million investment in Velodyne, whose LiDAR technology is helpful for the 3D mapping, sensing, and security that autonomous vehicles will require. The company has also acquired SAIPS, an Israeli machine learning firm, and in July Ford announced that would provide $6.6 million in seed funding for Civil Maps.

Meanwhile, Alphabet and Fiat Chrysler have announced a partnership to jointly test autonomous technology in minivans, and Alphabet is opening a 53,000 square foot self-driving car development center near Detroit in Novi, MI.

Finally, it seems like the "Big Three" have the backing of "Big Government" - in Michigan at least. In December, Governor Rick Snyder signed four bills to regulate the development and sales of autonomous vehicles, making it the first state to do so. Ironically, this news was announced days before San Francisco shut down Uber's self-driving service.

Predicting the Future

Due to the limited scope of this article, we chose to focus only on Detroit as an emerging hub of innovation. That said, our research has identified several additional geographies with the potential for exponential growth including Baltimore, Pittsburgh and the former "Rust Belt".

Furthermore, while we've tried to use data to identify cities that have the potential for progress, it's helpful to remember that these are, at best, guesstimates plagued by numerous uncertainties.

As such, we'd love to hear your thoughts as well:

Are we completely missing some additional element -a 'secret sauce' held by Silicon Valley - that will continue its dominance in all things well into the future?

How will the media, finance and energy clusters in Los Angeles, New York and Houston play into all of this? Can they overcome their high relatively cost of living?

Can the relationship between IoT and industry revitalize the former "rust belt"?

Are there other "hidden gems" that we've missed? For example: could the research triangle dominate healthcare? Who will win the agricultural race, Silicon Prairie or Stockton? Could Madison, WI solve the water problem?

Would love to hear your thoughts!

Tory Green is a Principal at Tiller Partners, a Los Angeles-based VC (www.tillerpartnersllc.com). Special thanks to Csaba Konkoly for advice, input and guidance and Trevar Kolodny for in-depth research and analysis.

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