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The demand-driven success of the American tech industry
Part 1: Why America Wins in the World of Bits
In The Diff, Byrne Hobart makes the following point:
Startup clusters don’t just happen in software: in Japan, there’s a growing number of [startups] in the materials and chemicals industries. Part of what creates a startup cluster is when there’s a big customer, or category of customers, that can be accessed by smaller ones. Silicon valley started out with a heavy defense slant, but eventually got plugged into the consumer economy. In Japan, the high value-added industrial export sector is relatively larger, so it’s a better category for new companies to sell into.
This makes me wonder whether the success of the American tech industry has actually been demand-driven. Even in the early days of the PC, the US had a large community of techie consumer hobbyists eager to spend money on a Mac 128K or IBM PS/2. This community also was happy to give feedback, and magazines like BYTE and PCMag also represented the “voice of the customer,” enabling and forcing PC makers to respond to consumer desires and complaints. In contrast, while Japan was a leading market the latest electronic hardware, neither Japan nor Europe had such a large number of early PC adopters.
This seems true for a lot of tech growth areas. In the early Internet-era, websites were generally able to extract more ad revenue (per impression and per click) from America than elsewhere, which meant the customer base of a web startup was concentrated in the US. Much of the demand for crypto coins and web3 products has come from libertarians, also a disproportionately-American population. The demand for enterprise software, SaaS, and cloud computing is disproportionately from tech startups which are setting up their tech stack and operations from a clean slate, and tech startups are also disproportionately American. And even big, established American companies (many of them grown-up-startups themselves) are disproportionately more open to trying out new enterprise systems.
Obviously, the US has also done well on the supply-side for tech startups (both producing founders and attracting immigrants who then become founders). But I think America’s lead as a market for new tech is an underappreciated aspect of our success.
Part 2: How to Win in the World of Bits — or Atoms
The uniqueness of the American tech market — large and profitable yet highly-competitive — suggests a non-intuitive path for foreign tech startups. If you’re a German government official or VC, it’s natural to think that the right initial niche for the Berlin tech ecosystem is to focus on meeting the unique needs and desires of German tech users, which Silicon Valley companies might tend to ignore. But if what really makes America special is that American customers are living in the future, you need to instead impose export discipline on your portfolio companies.
The preceding analysis offers an alternate explanation not only for why America wins at tech, but also for why tech wins in America. Peter Thiel has famously argued that innovators focus too much on the world of bits and not enough on the world of atoms, and that over-regulation further suppresses the supply of innovations in the world of atoms. But what if instead our problem is one of demand rather than supply?
Buying and selling in the world of bits is relatively depersonalized. Tech users and tech companies are low-loyalty: the only thing that matters is, “How much have you done for me lately?” Meanwhile, purchasing decision-makers in the world of defense, manufacturing, and infrastructure are heavily influenced by loyalty to longstanding suppliers and by personal relationships. They do not demand the greatest possible product at the best possible price, regardless of insider status. These sectors lack outsiders with new ideas and technical founders without glad-handing skills for a simple reason: such innovators are unwanted!
This also suggests a remedy for American founders in the world of atoms: go west! The most demanding, futuristic infrastructure customers are in Asia, so if you can make it there, you can make it anywhere — maybe even in New York. This is not patriotic advice, but product-market fit is a matter of survival for startups; you should compromise on market rather than on building a product you’re proud of.
The supply of innovation is driven by the existence of demand that is capable of choosing exit. A market consisting of customers willing and able to exit their existing relationships in favor of innovators will obtain the innovative products they desire, while simultaneously supporting a startup ecosystem. Aspiring innovators ought to follow the same path: they should exit and choose the customer base which demands excellence and innovation.