While this is  a very good question, I find the “Berkeley is liberal thus toxic to business” line a little tiring. The same reasoning would lead you to believe that the “Bay Area is liberal thus toxic to business”, yet we have one of the strongest regional economies in the US. San Francisco is hardly a liaise faire utopia, yet computer and biotech companies continue to make decisions to locate in SF as opposed to presumably more “business friendly” cities nearby like San Jose. Wadhwa’s assertion is even more thin when you wonder why a supposed anti-business environment would entice graduates to leave the city. Graduates are not all business owners — most are probably employees and I find it hard to believe they relocate based on a city’s business policies as opposed to schools, quality of life, easy commute, nightlife, etc.
I live in Berkeley and we have a very robust local economy, from what I can tell. The San Pablo corridor continues to add new, successful businesses, and we already have several great neighborhoods with thriving local business — Gourmet Ghetto, 4th Street, Telegraph, Downtown (yes, downtown), 1/3 of Solano Street.
To me, the simpler explanation is a bunch of tech firms are already in SF, so that’s where everybody locates. This happens in many industries.  Add to that a young workforce who would generally prefer to live in SF. 

So which is it?

That’s not a good question. Wadhwa’s two statements are not mutually exclusive. It is entirely possible for Berkeley to have “the culture, the risk takers and the brains” and yet still have an atmosphere which is “toxic” to business.

I’ve lived here for 12 years and I have been working at internet startups for most of that time. I have spoken to CEOs, VCs, startup founders and workers about this problem. My impression is that Berkeley is a  bedroom community. Berkeley is a nice place to live and there are many smart people who live here (risk takers, etc), but the businesses and employeers tend to be elsewhere due to a variety of factors (Space, rent, proximity to incubators and VCs, etc)

Piffle! If you’re having trouble finding designers, you’re either looking in the wrong places or asking too much for too little. I know several under-employed designers in San Francisco who would be happy to cross the bridge for full-time work in Berkeley.

THIS!  (as the kids these days sometimes say, sorta)

My take is that Berkeley is boring.  Nothing is 24 hour.  There are
basically zero live music venues.  (F&S is great — if you’re old
and want to drop $30 a ticket.)  There are some pubs I love and a few
bars and the food is great.  But a humming mid-20s nightlife scene –
not so much.

(Disclaimer: I work for a startup.  I also live in Berkeley.  I’m also kinda old and boring.)

Do they focus on application design – interaction design, visual design or creative development?

I think it’s worth separately contemplating businesses that revolve around manufacturing from those that are more virtual, like PuppetLabs.    That’s why I cited the iphone dock as suggesting a paradigm for West Berkeley’s latent manufacturing capacity.

Portland’s example in that physical product is inspirational.   Berkeley — in this area of New Manufacturing — should treat it as complementary.   Mutually complementary. 

As a “vision of possibilities” consider:

Suppose Berkeley and plenty of other cities had a greater and better organized capacity for this kind of manufacturing, at least at modest scale.   That’s a market maker.  It helpfully separates design — which can take place anywhere — from manufacturing which can take place in a distributed and decentralized way, closer to demand.

Some guys in Portland invent that dock.  Well, quickly raising over a million bucks on Kickstarter is certainly one way to do it but I question just how repeatable that exact scenario will be.   In a sustained market, perhaps they’d invent it in Portland and do some small-run test marketing in Portland, Berkeley, and elsewhere.  Portland plans –> Berkeley Factory –> Berkeley store.  And it cuts both ways…. Berkeley plans –> Portland Factory –> …..   Then you have regions doing value-added manufacturing and innovators not being tied to one physical market.    As a side effect, regions that host local manufacturing capacity become more economically resilient: import raw materials, export ideas and finished goods.   We’re pretty much doing that already with the manufacturing component segregated to far away developing countries but, as the iPhone dock example shows, new manufacturing technology can and that segregation.

There are trade-offs, of course.  Distributed and decentralized manufacturing has many advantages but also presents new challenging trade-offs in how we handle logistics, quality control, and markets for so-called intellectual property.  It’s not trivially easy, I admit.  It’s definitely harder than pointing up Berkeley hills and saying “they’ll come up with something, let’s just build them some buildings so we’ll be ready.”

You seem to me (with the puppetlabs example) to be mostly pointing at the labor issue:  If you want a geographically compact source of labor talent, then you need affordable and good quality living possibilities, along with a “critical mass” of economic opportunity. 

Absolutely.  I can’t prove it but my own belief is that some of the best moves that Berkeley could make if it really wants to be a start-up hub include encouraging late night entertainment and eating venues, some serious rethinking of the ambitions and priorities of the school district, and more thoughtful forms of housing development.   Oh, plus more venture money — chicken and egg.