A few days ago I heard a talk by Paul Saffo (Institute for the Future) on the boom/bust cycle of Silicon Valley and how it all relates to innovation. Here’s a quick (and rough) summary, mostly taken from the notes I jotted into my Treo:

“We’ve never understood how The Valley works.” The conventional wisdom is that success comes from good management, right mix of capital and technology, etc. But that’s not it.

Silicon Valley is not built on success, it’s built on failures. Our best innovations come rising out of the ashes of our previous disasters. We need failures and large-scale wipe-outs like a forest needs fires to get rid of the undergrowth. In brief, Silicon Valley’s success is built on bad management.

Example: Why did the Web take off here, and not in Switzerland where it was invented? Because we’d just had a wipe-out in interactive TV. We had just trained an entire generation of C++ programmers in the subtleties of interactive graphics, and then laid them off so they had nothing to do.

“Our core competence in Silicon Valley is managerial incompetence.” &mdash bad management is the key to our vital boom-bust cycle. Furthermore, the whole point of good management is to kill stuff that isn’t relevant, and that kills innovation. “Well-run companies kill ideas. Poor management allows weeds to grow. Around here, weeds grow to become very valuable.”

So how do we survive in spite of our generally bad management? “we substitute velocity for management… that is a very rational act” given the uncertainty in the new technology sectors. Microsoft is the exception that proves the rule: “they aren’t a technology company at all, they are a company that happens to sell technology… they’ve never had an original idea in their life.” Microsoft would never have survived in the Valley, because the culture wouldn’t have allowed it. In their first down-cycle, all their engineers would have left for a different company. Up in Seattle the culture is different — there’s a lot more company loyalty. Silicon Valley is a place that eats its old. We’ve no respect for our elders… that’s how we work.

In all this is the question of innovation. Innovation isn’t rational — most companies and most ideas fail. “Innovation is extra-logical… economists can’t put their finger on it.” The culture can’t let failure be lethal (as it is in France) or no one will dare attempt anything. But it also can’t have no consequence, as is the case with what’s called “interpraneurism” within large companies. Innovation is very hard in large companies — it can be done, but it takes large amounts of stress to make it happen. Successful entrepreneurs have a balance between an altruistic “change the world for the better” angel on one shoulder and a “get rich” devil on the other. The culture in Silicon Valley lucked into having the right mix.

So why do we still innovate out here and not just rest on our laurels? Why do millionaires out here keep feeding their gains back into the system? For some reason, we seem to be a strange attractor for would-be world-changers. Saffo’s fear: will we start to fear change now? Will we finally decide we like what we have and refuse to tear down the old empires, like the Venetians did after their peak in the 1500s?

Final advice: disrespect your elders, remember that innovations extra-logical, and be willing to tear down the old empires.