November 8, 2018

Is Innovation Leaving Silicon Valley?

Commentary
Martin Kelly

Silicon Valley is known around the world as the center for technology innovation. Many different groups have tried to create their own version (Silicon Alley in Manhattan, for eg) however none have succeeded…so far.

Here is how Wikipedia introduces The Valley: 

Silicon Valley, in the southern San Francisco Bay Area of California, is home to many start-up and global technology companies. Apple, Facebook and Google are among the most prominent. It’s also the site of technology-focused institutions centered around Palo Alto's Stanford University. 

While factual, we are not sure this really captures the energy and levels of activity, investment and disruption for this famous local. I have been visiting the Valley since the mid 2000’s. But today, the mood is very sombre almost as bad as the global financial crisis. 

The Economist recently led with a story about Peak Valley- the short version is that a combination of factors including domination of tech giants, rising cost of living and restrictions on immigration mean the valley is not what it used to be. Given that San Francisco and the Bay Area are now more expensive than NYC, is the Valley still the go to location and ecosystem for innovation?

Innovation needs an Ecosystem

Our media focuses on the story of the individual entrepreneur. Steve Jobs, Elizabeth Holmes, Mark Zuckerberg, et al. Indeed Zuckerberg famously left the prestige of Boston’s Harvard to move to the Bay Area to scale Facebook. Innovation is, however, bigger than one person and requires an ecosystem like the valley to thrive. It requires employees who are excited to follow a dream. It requires investors who will fund daring ideas. It requires customers who are willing to take a chance on an upstart. And this is what make the valley special – a belief in the ability of a small number of people to change the world or put a dent in the universe.  Add to this the experience of founders, lawyers, investors who have done it before and know how to walk the high wire and you have something special and hard to replicate.

Healthcare is Different and Hard

An ecosystem for healthcare is more complex - not only do you need entrepreneurs, investors, lawyers – you also need hospitals, patients, insurers and many others.

Perhaps it’s because the US healthcare is so fragmented and every new discrete digital health solution makes the consumer’s world a little more complex .

Despite  VC investment of now close to $10B annually, digital health solutions are still not widely adopted by consumers.  Of the 300k+ health apps less than 50 have scale (e.g. over 10M users).  Even though nearly 9 out of 10 people in the U.S. are online, and nearly  8 of 10 own a smartphone. We are yet to find the Netflix of healthcare.

When you dig into it a little deeper, it starts to become clearer that there are other innovation hubs worth exploring. The Valley has always been the lead for pure tech while Boston and the East Coast have always been a hub for research in life-sciences. Move beyond the obvious and you’ll find that places like Nashville and Louisville have a depth of healthcare services experience.  

Biggie vs. Tupac - Beyond the Valley

Digital Health activity has always been more geographically distributed than tech. While SF based RockHealth and Health2.0 were arguably the initial catalysts of the movement, there were always hubs in Boston, Chicago and NYC (in the US alone). This partially reflects that even if tech and VC is anchored in the Bay Area – healthcare, research and pharma are on the east coast.

Where is the center for digital health innovation today: the perception

So, we asked some Twitterati for their input:  

Maybe this result reflects the international nature of community that responded, but it is interesting to see that 40% of respondents thought international beats the bay area hands down.  Also interesting that SF is slightly ahead of east coast but only slightly. So, we thought we would compare this to some real data for the first time.

Where is digital health today : the evidence

Tracking innovation and comparing ecosystems is complex.  For the purpose of this post, we’ll focus on investment as a proxy for innovation. The standard yardstick is VC investment. And while the amount of money flowing in is not the same as the amount of innovation flowing out, we do not have a better initial guide to mapping levels of innovation. For the very first time we are able to show the number of digital health investments since 2000. This is based on data from the new HealthXL platform which collects and cleans data from multiple clinical and commercial stores. So, data shows that the Bay Area still leads the way, East Coast is not far behind. Data and perception (see above) seem to be mismatched. Outside the USA, London is ahead of the game, giving the likes of Chicago a run for its money.

Total Digital Health Investment Data by City: HealthXL Platform

However, what is more interesting is what has happening in the last couple of years. In 2010, 12.3% of all investments in digital health happened in Silicon Valley. There were none in Bangalore. Jump forward to 2014, and SV is up to 16.5%, with Bangalore at 0.35%. Now look at 2017 - the Valley has dropped to 14.7%, indicating it truly has peaked, and Banglore is on an upward trajectory of 1.4%, quadrupling their amount of investments. Behold, a new Silicon Valley may have emerged! While we are yet to see a direct competitor to the Valley, the combined power of these new innovation hubs is beginning to give SV a run for its money.


Beyond the American Dream

Fred Wilson, a famous VC has said ”What is happening outside of the US, particularly in Asia, is amazing and there are many new sectors that are just emerging now that will drive innovation in new and exciting directions.” Silicon valley continues to have a depth of talent and capital. However, the network effects of talent and capital in the bay area can lead to both group-think and disruption.

We are seeing innovation everywhere. Healthcare is complex and no one group has all the answers.  Rather, innovation requires creating a fertile environment for different groups to engage around specific local problems. This isn’t about the the decline of the Valley per say, but the relative rise of everywhere else. During the 60’s Detroit was the centre of innovation focused on automobiles. At the time it was hard to see how anyone could challenge this powerhouse but  anyone who has visited the MotorCity after the 1980’s knows that change was very disruptive and absolute.

We focused on capital as a proxy for innovation in this blog. For a longer analysis of what makes a great ecosystem, it is worth exploring factors like talent, strong pool of innovators, local capital, killer events, great universities, etc. Let us know if you are interested in diving deeper.