Will the silicon valley face a down turn? How can we avoid it?

A few days back I was going through an article that summarized a round table event held by venture capitalists for silicon valley entrepreneurs and start-ups.
The VC’s emphasized on the following points:
-Don’t Panic
The big problem with the financial crisis is how long it will last, said John Doerr of Kleiner Perkins Caufield & Byers.
“There’s been a really big change in the world and I don’t quite understand it,” said Mr Doerr, who is something of a rock star in the VC world having invested in companies such as Google, Amazon and Netscape.
-Burn rate
The forum also compared events in 2008 with the dotcom crash of 2000-2001.At that time angel investor Ron Conway had 224 companies in his portfolio. Of those, 70% or 164 went out of business. The successes included Google, PayPal and Ask Jeeves.
“There’s been a really big change in the world and I don’t quite understand it,” said Mr Doerr, the VC world having invested in  Google, Amazon and Netscape.
Everyone stopped investing in 2000. The average burn rate on all our companies was about $500,000 – $750,000  a month.Today that burn rate has dropped to around $250,000  a month. So some believe Silicon Valley will be able to ride things out.
-Go big
Not all the entrepreneurs at the conference had faith in the VC community’s claim it would still be doing deals. “The VC’s are lying when they say they’re open for business,” said Jason Calacanis, founder of the Mahalo .
In contrast to the caution Mr Levchin advocated shooting for the moon. “Go big or go home,”
As few urged start ups to do all they can to survive the next 18-24 months of tough times, some warned entrepreneurs to remember what drove them to start their own business in the first place.
My question is that we all know silicon valley is not the epicenter of the crisis but will it be pulled in to the whirlpool and if yes how can we save it?


  • Frank Feather

    It cannot be avoided, because both consumers and businesses are slowing, postponing or stopping buying hardware and software.
    Intel warned yesterday. Applied Materials is laying people off. Both see “no upturn for at least a year” they said. The electronic retailers are seeing huge drops in sales volume. Even Cisco is seeing a severe slowdown for the next few quarters. The examples are everywhere.
    You will also see a shake-out in the sector, with companies like Yahoo vanishing, and a major shake-out in the Web 2.0 space which is like the dot-com bubble in terms of the number of start-ups — 90% of them with feeble “me-too” products.
    We are going through a period of “creative destruction”. It is not a matter of saving anything, but of letting it happen. The deadwood and the ineffective need to be pruned out, so that the new growth can shoot through. The tech sector will be the strongest sector after the debacle is complete.

  • Kumar S

    The only way this can be avoided is if the economy picks up(cliche no doubt but true!). Economics 101 tells us that people spend money when they either have it or are comfortable with the return(s) they will get. Right now, neither of these will apply. Offshoring/Outsourcing (I think the politically correct phrase is Right-Sourcing! Go figure!!) is also dwindling because of the outrageous rates being asked for small-medium projects. I have had resumes of people who used to work for $70-80/hour who are now ready to do it for 25-30/hour!! Silicon Valley will become a part of the whirl-pool and it will survive, but how many people will we lose in this whirlpool is something that may take a while to answer.

  • Alex Voytov

    I think, you catch the market and the VC tendancy we see for a while so far. But as a general picture, you cover the whole market, not a specific companies. I think, we still have some technologies, people call ‘hot’ ones. They are not going to dissapier even in today turbulent time. I mean, energy savings, like a technology to boot up a PC for a few seconds or alternative fuel technologies will grow even in today ‘burning’ rate. The VC even today have to invest into it. From the development perspective a new skill combination is requested to implement such things. I mean, just SW or just HW skills are not enough to implement tight control of the alternative fuel guadget or etc by the SW. The SW engineer has to be an expert in control to develop code to control the HW to boot up a PC for e few seconds, for instance.
    I expect to see new kind of high tech will start to grow now and the VC will support ones. Only selected company, using pure SW or pure HW technologies could survive these days.
    Ali, feel free to contact me in person, if you have an interest to details I just touched 🙂 in my answer
    My 2 cents,

  • Chue Moua

    Hi Ali, with the economy slowing, there’s a chain of reaction from consumers, retails, housing market, hardware, software, automarket, financial, unemployment, everything in general = budget cuts across the board.
    The Silicon Valley has held it pretty strong vs. other parts of the world. In a world of success, there’s needs to be failures and we’ll definitely start to see new emerging markets, investments pouring into new technology, and we’ll continue to see dominant players in all verticals.
    Many people are excited of this downturn and majority are discussed by it, but it opens opportunities.
    1. Undervalued stocks, continuing to plunge making it a cheap buy for long term investors.
    2. Housing market: First time buyers are now excited of this opportunity to acquire a house that used to be a million for half the price. Getting more land for the buck!
    3. Technology: many say, start your venture when the economy is slow and by the time it picks up, you’re venture will be ready for full throttle.
    4. Opens technology opportunities for every change we all go through! Gas is too high, hybrid! Energy problem, solar!
    I believe that the Silicon Valley will ride out and everybody is dependent upon it. There’s too much money to go around in SV.

  • Zulkifly Jamaludin

    It unavoidable to every software & hardware company . Perhaps they should re-look into how to re invest their products to the customers needs with a cheaper cost . They have to come out with the fresh ideas how to boose up their business by simply understand the markets situations better .
    Cost cutting measure might be one of the key to control your products input and at the same time more study could be done in time to come to enchanches your products creativity and affordibility to the recent economic crisis .

  • Duane Morgan

    The issue is risk and ability to absorb that risk. The larger the firm the more ability it has to withstand the magnitude, and longevity of the downturn.
    Silicon Valley as an industry is one known as an “idea” hub. Ideas won’t stop, but the ability to act on them may. It won’t be a time to act as hastily. Lenders won’t be able to gamble as freely. But technology, innovation, and progress will not halt because of it.
    Every business with a sound business plan should have contingencies for an economic downturn. The garage-startup will be back, but it won’t be tomorrow. Large companies will tighten their belts. Smaller companies will survive if the have structured their model soundly. Some simply won’t; Survival of the fittest. And startups will have to be extremely solid before entrance, unless perhaps they can become a holly owned subsidiary or something to that effect.
    In brief, affected, yes. Slowed in entrants and revenue, by its own rocket-fueled previous speeds, yes. It will survive and endure, because at Silicon Valley’s epicenter is problem-solving solutions, and no ideas. That need won’t go away.

  • Geoff Feldman

    There is cash somewhere and the people who have it will look for ways to invest it. However, things are in a big state of flux right now. It’s clear the economy has further to fall. It’s also not clear how the new administration will play its hands in practical terms. I think people with cash are waiting to see what happens and will for at least six months. Traditionally the first 100 days of a new Presidential administration are dramatic. For example, for every theory that Obama is a socialist, there is a thatcherite style conservative endorsing him. How will he restructure the financial system? What will new regulations be? A big part of Obama’s support base is trade unions, this may affect some decisions. I personally think he will be more conservative than many expect him to be but he will favor US Job development in his decisions.
    With the downturn, there is a huge supply of unemployed workers in the US. I think unemployment rates will go into double digits before all this is over. This drives down labor costs and investors will be looking to take advantage of this. Microsoft and Apple both started in a similarly soft period of the American economy and their first products were produced essentially for “Sweat equity” with little or no payroll. Investors will be looking for these kinds of opportunities.
    You are right, Silicon Valley is not the epicenter of the crisis. The crisis is nation wide and of course world wide too. The valley as a cultural construct will ride things out. At the end of the day, it runs on the brain pool surrounding Standford, but it is an area that lives on leverage. There will be mass casualties and some companies as well as players will not be there when the dust settles. Similar things are true for other software markets but we tend to be more fiscally conservative in the Northeast and so I think we can be a bit tougher over all. At the same time, there are a lot of IT workers furloughed in relationship to the banking failures.

  • Bob Garrett

    ship all the illegal H1b visa folks back home
    then hire americans
    ive heard that there is a crack down planned starting Feb/08
    by the CIS
    on both companies that knowning hire illegal h1b visa holders
    and h1b visa holders here illegally
    by the Obama team to spur US employment
    and enforce immigration laws

  • Subhas C Biswas

    Save money (cash) to the extent of six month earning equivalent.
    Stop wasting money.
    Keep searching for other job and education or training options.

  • Charles Viau

    Silicon Valley stands a bigger chance of slipping into the Pacific abyss than it does being destroyed by our latest fiasco. This is the financial version of the DotCom crash. A pyramid scheme in which all of us that have < 1$m net worth or going to pay for again. SV is where all the great hardware ideas come from anyway. It will always be there unless the Earth has other plans.

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