New VC Funding vs. Jobs
November 19, 2004
prudentbear.com
Kevin Murtaugh is publisher of the website View from Silicon Valley which provides insights from people who live and work in the world's technology heartland.
"Everybody" knows Silicon Valley needs more jobs to really be considered in a recovery. "Everybody" also "knows" start-ups will lead an employment recovery. Start-ups grow faster and need a higher concentration of engineering talent to get off the ground. "Everybody" is waiting for next phase of start-ups to start growing-- and hiring.
For insight into start-up activity, we like to study VC figures and 3Q04 VC funding statistics were just released. And what do you know, the statistics are being taken as evidence of a Silicon Valley recovery:
US VC Investment ($M)*
2000 $106,028
2001 $38,064
2002 $3,661
2003 $10,528
YTD04 $11,249 ($14,998 projected total)
(For purposed of this discussion, let's just ignore 2004's run rate is 85% less than Y2K figures.)
Another source, VentureOne(**), shows 3Q04 US VC investments were actually down -15.8% from 2Q04 and down slightly year-over-year. Even so, $15B in new VC investments YTD04 will be more than 2002 and 2003 combined. Not exactly chopped liver.
Building on a table started April, 2004(***), here are quarterly figures for total US VC technology investments, breaking out Silicon Valley Technology and Silicon Valley Total investment:
USTech SVTech USTot SVTech% SVTot SV%
2Q03 2631 1129 4564 24.7% 1686 36.9%
3Q03 2316 909 4766 19.1% 1519 31.9%
4Q03 2702 1252 5179 24.2% 1949 37.6%
1Q04 2826 1271 5415 23.5% 1942 35.9%
2Q04 3238 1358 5419 25.1% 2014 39.1%
3Q04 2504 1167 4561 25.6% 1539 33.7%
Going back to 1998:
SVTech USTotal %
1998 3852 17927 21.5%
1999 11454 49513 23.1%
2000 21682 94508 22.9%
2001 8591 36080 23.8%
2002 5312 21751 24.4%
2003 4460 18738 23.8%
2004 5062# 20527# 24.7%
Average 23.5% (23.3% dollar-weighted)
#- annualized
Contrary to earlier assertions, Silicon Valley and Silicon Valley tech companies do not appear to be losing share in US VC funding. If anything, Silicon Valley technology companies appear to be gaining share in US VC funding.
Yay team! Happy days are here again!! The Silicon Valley economy can't help but come back with all this VC money is pouring in. Start ups will inevitably start to ratchet up local employment. If we can just hang on, the jobs will start popping up!!!
But wait a minute... Unfortunately, there are some fatal flaws in this argument. When Silicon Valley firms received billions of dollars in new VC funds in the late-90's and into 2000 and 2001, they ran out and hired talent locally.
Job statistics for Santa Clara county over those same years are:
Jan-1998 919,200 --
Jan-1999 914,700 -4,500
Jan-2000 948,800 +34,100
Jan-2001 994,200 +45,600
Jan-2002 886,900 -107,300
Jan-2003 828,700 -58,200
Jan-2004 812,900 -15,800
Jul-2004 823,100 +10,200
Oct-2004 825,100 +2,000
Overlooking the down years after the bubble, where are all the new jobs today? With a VC funding rate +14.5% above the 1998 rate, Silicon Valley still down -94,100 jobs?!? We have nearly 100,000 fewer jobs than before the boom??
The most obvious reason is a 2004 VC dollar and a 1998 VC dollar are not spent the same way. It seems inescapable that 2004 VC dollars are increasingly funding new jobs overseas.
As stunning as the jobs numbers were at first glance, closer inspection discovers even worse news.
1) several VC's are on record saying the reported numbers under-represent their actual spending. They claim more companies are being funded but are opting to stay in "stealth mode." (So as not to alert the competition to what they are doing.) These companies have new VC money but are not included in the stats. VC's would have us believe this is a new phenomenon even though I clearly remember numerous sales calls on start ups during the boom where they engineers refused to explain what they were working on or their business model. (Memo to VCs: If an idea can be copied this easily, it won't stay unique in the marketplace for long.)
1A) the same VC bragging how smart his start-ups were for staying in stealth mode also explained these companies "already know who they want." He projects a typical start-up's first 100 employees are all hired without advertising or recruiting. Maybe it's just me who is clueless but I don't think this tenet of strategy is well understood by those hoping to catch on with start up.
2) using January 1998, 2001 and 2004 total jobs in Santa Clara county, compared to current:
1998 2001 2004 Oct'04 Since'98
Educational Services 23,500 25,100 26,600 27,600 +3,200
Health Services 59,000 62,000 65,900 66,000 +7,000
County Government 14,400 15,900 16,700 16,300 +1,900
City Government 13,000 13,900 14,400 14,800 +1,800
(The same data shows financial services and real estate net out to almost zero growth since 1998. If people laid off from Silicon Valley manufacturing, engineering and marketing jobs are fleeing into real estate and mortgages, they are waiting until after they move out of Silicon Valley...)
Normalizing for the boom, private industry is down -108,000 jobs since January, 1998. These fewer private employees are funding an extra 14,000 jobs not subject to the discipline of profit and loss statements. (One report showed October, 2004 alone had a net of +~5,200 of these jobs.) Said another way, employment in fields which are tax-payer funded and/or subsidized has risen from 12% of jobs in the county to nearly 15%.
Conclusion: VC funding levels are up and will exceed 1998 levels. Even so, private industry jobs are down roughly -108,000 over the same time period. I don't think "everybody" has thought through the implications of these numbers...
Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. |
