Trouble Finally Spreads To Silicon Valley: What Happens Now?
Posted Oct 09, 2008 03:41pm EDT by Sarah Lacy in Investing, Internet, Media, Telecom, Venture Capital, M and A, IPOs, Recession
Related: yhoo, msft, ^IXIC, goog
Silicon Valley has spent much of 2008 watching other cities and sectors experience wrenching pain. Comparatively, we just weren’t feeling it here. And for a place that went through such a brutal economic reckoning eight years ago, that was almost more unsettling, invoking the fear that the anvil was going to drop any moment…
Well, it finally has. Yes, the credit crisis and recession have rippled out to the Valley—impacting our world in many ways:
Public companies: Many public technology companies have the advantage of plenty of cash and little debt. But they have the disadvantage of Wall Street pressure to slash costs fast when revenues slow. Plus, sinking stocks hit the morale of employees especially hard, as much of their compensation is paid in stock.
Innovation: Expect public companies to move slower and be less aggressive with new products.
Employment: Expect hiring freezes at best, and thousands of layoffs. Hewlett-Packard has already announced cuts, associated with its EDS purchase, eBay announced a 10% reduction Monday, and Yahoo is widely expected to follow suit as soon as next month. Will Google—a company that’s over-hired in the view of many—follow suit?
Startups: It seems the purse strings have officially tightened in the Valley, and everyone from Sequoia Capital to famed angel investor Ron Conway is telling their companies to raise as much as they can, hoard cash, and find a quick and dirty revenue model.
Innovation: Parodoxically, it will improve, as most true advancements seem to happen in down markets. There are always entrepreneurs and investors willing to fund great new ideas.
Employment: Many startups will fail. But this is part of the natural cycle of Silicon Valley, credit crisis or not.
Venture Capital: Venture capital is really the only part of the Silicon Valley ecosystem that didn’t experience a shakeout after the 2000 crash. I think that’s about to change, as I wrote about in my BusinessWeek column today. Money managers kept pouring money into venture firms after the crash because it’s considered a long-term, high-return play. VC’s 10-year returns have handily outperformed other investments, thanks to the outrageous gains of 1999 and early 2000. Since then, though, there have only been two years of decent returns, from fourth quarter 2005 to fourth quarter 2007. And now that 1999 and 2000 are close to getting kicked out of the 10-year index— i.e. just when the industry really needs a couple good years — fortunes have fallen dramatically.
The risk? Venture firms barely outperform the broader markets. Venture capital is a very slow moving, long-term business. This correction is still a few years off, and will take a few years to work through the cycle. So unlike ramifications of the credit crisis that hit public companies or startups, the immediate impact isn’t there. But make no mistake—when the lifeblood of the Valley is at risk, the impact will felt. |
