What is Seattle good at?

The Startup Genome report that came out a few weeks ago — ranking Seattle #4 among global innovation hubs — was both a good thing and a bad thing for the Pacific Northwest innovation ecosystem.

Good, because it shined a light on some of the core strengths in our regional innovation market.

Bad, because it artificially “flattened” what’s still a huge gap between the world’s leading innovation market — Silicon Valley — and everywhere else.

The hard truth is that the Pacific Northwest is still 20-30 years away from having the kind of down-to-the-roots innovation culture that the Bay Area enjoys today. We have a huge lead over most other global innovation centers, and our community is rallying around innovation with more commitment and focus than I’ve ever seen here before, but we have decades of work ahead of us.

How can we get to the future faster? By playing to our strengths.

Every innovation market competes globally with every other for access to the fundamental building blocks of innovation: talent, capital and attention. The leading innovation hubs around the world — those 20 markets ranked by the Startup Genome report — have each found unique ways to attract and retain an “unfair” share of the world’s innovation resources.

But if anyone in the other 19 ranked cities (Seattle included) thinks their goal is to “beat” Silicon Valley, they’ve already lost.

The Bay Area is the “reference design” for an innovation hub — an aspirational vision of what a fully integrated ecosystem looks like at maturity.

The challenge for every secondary market is to understand on what specific vectors of innovation it can play for keeps. In macroeconomic terms, we each need to define what comparative advantage we intend to use our basis for differentiation and “trade” in the global innovation economy.

Where to begin?

Fundamental innovation capacity in any discipline only emerges over time. It takes multiple generations of startups in that discipline, with at least a few scaling to success, to create the human capital and financial wealth that can then be recycled by the next generation of startups. Each new layer in an ecosystem is built upon the innovations, talent and entrepreneurial wealth of the prior generation.

To know what Seattle is good at today you have to look backward and understand how + where breakout success was created in the past.

Seattle matters today as an innovation hub because individual entrepreneurs chose to build their companies here decades ago. Those few companies formed the bedrock of five major vectors of excellence in our local technology ecosystem:

1.  Aerospace / Defense 

It’s easy to overlook Boeing’s foundational role in Seattle’s current software-centric innovation culture, but the roots of our tech community were laid down by a great wave of mechanical, structural and electrical engineers who moved to Seattle during the World War II defense buildup and stayed on to help Boeing build its commercial aviation and defense aerospace businesses.

“The Lazy B” hasn’t played a leadership role in the entrepreneurial ecosystem for many years, but don’t be surprised if the Maker Movement and its growing passion for physical manufacturing opens the door to renewed engagement with Boeing’s deep and highly skilled pool of engineering talent.

• Enterprise / ProductivityIn 1975, two Seattle geeks and high school buddies — Bill Gates and Paul Allen — dropped out of college to hack up an operating system for the Altair 8800. Microsoft, the company they founded to commercialize their work, went on to become the most profitable software company ever, using its PC operating system monopoly as a lever to spawn a massive global ecosystem of enterprise IT and office productivity applications and vendors.

  The rise of the Web and open source software brought an end to Microsoft’s technology leadership, but the company’s global installed base of enterprise customers and vendors continues to spew cash, funding a huge array of unprofitable lines of business that collectively draw thousands of gifted scientists and developers from around the world to the Pacific Northwest each year.

  For good and for bad, Microsoft’s enterprise / platform DNA and massive wealth creation form the core of Seattle’s entrepreneurial ecosystem, giving the region a natural edge as a place to found a build an enterprise software startup.

• eCommerceIn 1994, just as looming antitrust litigation and competing innovations were chipping away at Microsoft’s dominance, Seattle was incredibly lucky to be chosen by Jeff Bezos as the home for his new online bookstore, Amazon.com.

  Thanks to Bezos’ vision and leadership, 18 years later Amazon.com not only dominates online retail but also powers a huge chunk of the broader internet economy via its Amazon Web Services platform. Like Microsoft before it, Amazon is also leveraging its financial and market power to pursue hugely ambitious new efforts in consumer electronics, media and publishing, online advertising, and more.

  In aggregate, Amazon’s ambitions are now drawing thousands of talented technologists to Seattle across an astoundingly broad range of technical and innovation disciplines. This recruiting wave is the talent pool from which our next generation of founder/entrepreneurs will spring.

  Best of all from the perspective of the broader Seattle ecosystem, Amazon has made a huge commitment to building its business in the heart of the city. The company just completed a billion-dollar real estate deal to acquire its South Lake Union campus from Paul Allen’s Vulcan Capital, and is planning to add three 37-story office towers on adjacent blocks just north of downtown. By locating thousands of skilled tech workers in the city instead of the outer ring suburbs (as Microsoft did), Amazon is single-handedly creating the kind of urban density that spawns accelerated rates of innovation and new venture formation.

• MobileSince 2007, Apple’s iOS ecosystem and Google’s competing Android effort have put the Bay Area at the center of the smartphone revolution. But North America’s mobile communications business was largely created in the Pacific Northwest, and the DNA of those mobile pioneers is deeply baked in to the regional culture.

  Craig McCaw was the first to spot the incredible lifetime value economics of the cellular phone business and tapped Mike Milken’s junk bond expertise to quickly amass mobile licenses for most of the top US MSAs. His McCaw Cellular became the largest mobile operator in the US and was acquired by AT&T in 1994 to form the kernel of what is now AT&T Wireless.

  Around the same time that Craig and his brothers were snapping up licenses under the McCaw banner, another Northwest wireless entrepreneur — John Stanton — was assembling a similar portfolio under his Western Wireless brand. In 1999, Stanton spun off his urban MSAs into a new company called Voicestream, which was acquired in 2001 by Deutsche Telekom and rebranded as T-Mobile, now the 4th-largest US mobile operator.

  Thousands of talented people moved to the Seattle area to help build these companies, and stayed on to create their own startups around the mobile ecosystem. In 2004 Taiwanese handset giant HTC set up its Americas headquarters office across the freeway from T-Mobile’s HQ campus, adding smartphone device skills to to the mix. And despite long odds, Microsoft continues to dump billions into its struggling Windows Phone division in an effort to avoid disruption in their core enterprise business by the smartphone + tablet juggernauts.

  Collectively, these efforts have seeded the Pacific Northwest with a deep and multi-generational talent pool of mobile expertise, plus a rich vein of angel investors whose wealth was produced by bold moves that helped create the modern mobile era.

• GamingLast but not least, the Pacific Northwest has maintained a persistent leadership role in the casual gaming industry through several technology generations.

  Japanese casual games pioneer Nintendo first established American operations in New York in 1980, but two years later moved their US headquarters to Redmond (the same Seattle suburb where Microsoft is located), bringing the first wave of digital gaming talent to the region.

  In 1996, as arcade gaming gave way to in-home console and PC games, Microsoft veterans Gabe Newell and Mike Harrington created Valve, publishers of the hugely popular Half-Life series and operators of Steam, a social distribution network. Together, these businesses generate hundreds of millions of dollars in annual revenue for this still-private company.

  In 2000, three partners founded PopCap Games in Seattle, growing their casual gaming business over the next decade to $100M+ in annual revenues before selling to publishing giant Electronic Arts in 2011 for $1.3 billion.

  Also in 2000, Microsoft unveiled the first version of its hugely successful XBox gaming console — wich has become the company’s most successful product line outside the core enterprise productivity business, selling tens of millions of units worldwide and supporting a huge ecosystem of entertainment titles.

  And in 2002, Paul Thelen — formerly manager of the casual games business within Seattle’s Real Networks — founded BigFish Games, a privately-held casual game studio and publisher that now employs over 600 people at its office on the Seattle waterfront.

  There are dozens more small but fast-growing game companies in Seattle that — in ways lage and small — spring from the same deep well of gaming talent, knowhow and capital built up here over the past 30 years.

Thanks to prior generations of innovators, the Pacific Northwest has the ability *today* to drive global innovation on any of the five vectors outlined above.  We’ve also shown the capacity to merge these disciplines to create new kinds of innovation — like Avalara’s hugely profitable enterprise SaaS business managing sales tax complexity for thousands of online retailers.

Just because we’re strong in these areas doesn’t mean that we can’t foster world-class innovation in other domains — Microsoft and Amazon alone have picked so many fights on so many fronts that nearly every aspect of digital business has found its way into the local innovation gene pool.

But if I had to guess where the next billion dollar company in the Northwest was going to emerge, it would be along one of these five vectors.

And we aren’t standing still as an innovation ecosystem. There are at least two emergent vectors of innovation in which the Pacific Northwest is already playing a leadership role:

1. CloudAmazon Web Services began as an outgrowth of Amazon’s core retail business, but it has quickly become the gold standard for Infrastructure-as-a-Service (IaaS) and the bellwether of a massive global shift from on-premise enterprise datacenters to virtualized or “cloud” computing infrastructure.

   Other huge companies — including Google, HP, IBM, Rackspace, Microsoft and EMC — are also targeting this opportunity, and Amazon’s leadership is being challenged on many fronts. But the foundation has been laid for another massive wave of technology innovation and many of the key players are here in the Pacific Northwest.

2. Big DataAs software-based systems come to dominate both the consumer and enterprise economies, the next big opportunity for software value creation is in sifting through the massive data exhausts of these systems to identify patterns that indicate either risk or opportunity — and to spot those patterns sooner than competitors.

   There is no clear regional leader for this category of innovation. The Intelligence community near Washington DC has been a heavy investor in the field, and the financial services business in New York, New Jersey and Connecticut is increasingly reliant on predictive analytics to drive trading strategies and manage risk, making the Tri-State area another hotbed of big data innovation.

   In Seattle, Big Data innovation has flowed primarily from our native strength in enterprise IT. Local big data visualization company Tableau Software has built a $100M business helping commercial customers spot patterns in large and complex datasets since 2003. More recent local entrants like Spacecurve and Simply Measured are scaling quickly by applying similar techniques to new high velocity / high volume datasets like those produced by mobile devices and social media.