First published in the Financial Times on 25th February 2014.
It may well be the most overvalued purchase of all time. But you cannot fault the audacity
I have just spent a week in California. As ever, it was an inspirational trip. There is something about the light, the space and the people that generates exciting ideas. It is no coincidence that the acquisition of WhatsApp, possibly the most extraordinary deal of our time, was hatched on the west coast. Anything feels possible there – both great concepts and bad dreams.
From Aldous Huxley to Hunter S Thompson to John Steinbeck, great writers have tried to describe the allure and potential of California. Commencing with the gold rush of the mid-19th century, followed by the invention of Hollywood, the development of the aviation industry by Donald Douglas, and the computing revolutions of the past few decades, California is where the extremists, inventors and financiers go to seek opportunity and work their magic.
It remains a place of the future, of Manifest Destiny, where the ambitious and sometimes the broken travel to reinvent themselves. I was told it was full of America’s crazies because they can’t escape any further west – they’ve hit the Pacific. But when critics from the east coast make remarks like that, you know it is tinged with resentment – because some of those eccentrics become groundbreaking innovators and billionaires.
Neither the internet nor venture capital originated in Silicon Valley, but each has been refined and is now effectively headquartered there. After all, Intel, Apple, eBay, Google, Twitter and Facebook are all based in the Bay area. The near $3bn profit to Sequoia Capital from WhatsApp – a 50-fold return on the overall investment – will help to restore the reputation of venture capital as an asset class, which is so important for the advance of technology in general.
The concentration of talent and money in the Santa Clara region is an unbeatable combination that acts as an irresistible magnet, drawing adventurers who want to change the world and make a fortune. For example, Jan Koum, the key architect of WhatsApp, came from Ukraine – but made his billions in California.
Of course, there are plenty who don’t strike it big. But that doesn’t stop the flow of hopefuls. Clever immigrants from all over the world come to study in educational hothouses such as Stanford, with the aim of doing a start-up when they graduate.
Perhaps the epitome of California’s pioneering spirit is Elon Musk, the South African-born co-founder and CEO of both rocket business SpaceX and electric car company Tesla Motors. He is even trying to build a Hyperloop – a high-speed link between Los Angeles and San Francisco. Each of his businesses is located in the state. He is the classic migrant tycoon, willing to think boldly and take enormous risks at the edge of technology. I doubt he could have attempted his grand visions anywhere else in the world.
Unfortunately California has become an expensive and highly regulated state. Its very success has brought about plenty of Nimbyism and thickets of vested interests. Lawyers and litigation are an existential threat to its brilliant formula of freedom and experimentation.
There is a constant battle between the Californian free-market advocates – such as Ronald Reagan – and those who push for more laws and bigger government. I know entrepreneurs who have fled inland to states such as Arizona or Nevada, where they enjoy lower taxes, cheaper property and less bureaucracy. But they still lack California’s networks, capital and pulling power.
Not many films are made in the Golden State these days but it still acts as the prime concentration of head offices for the principal entertainment industries, including television, music and movies. Taken together, they remain enormously valuable exports for the US. The agents, producers, directors, writers and performers who create the content mostly still live and work in California. Once more, the network effect and the quality of life are vital ingredients.
Last week Facebook was prepared to pay a higher price for growth – $19bn – than perhaps ever before in history. It may well be the most overvalued purchase of all time. But you cannot fault the audacity. Time will tell if Facebook’s Mark Zuckerberg, Mr Musk and their Californian cohorts are right or not, but I wouldn’t bet against ’em.