Silicon Valley’s take on the downgrade

Vivek Wadhwa
Contributor, Innovations August 12, 2011

The S&P downgrade has sent Wall Street on a roller coaster, but how have the markets’ massive up-and-down swings impacted the global tech epicenter in California? It’s a question I’ve been asked repeatedly over the last few days. I spoke to many very smart people in Silicon Valley — from big tech companies, venture capitalists, and entrepreneurs — and what follows is some of what they had to say. 

First, let’s address the big technology companies that provide most of the economic lift to the Valley. These multibillion-dollar global behemoths, such as Cisco Systems, Hewlett Packard, and Oracle have powered much of the Valley’s growth during the past four decades. The people who run these tech titans are bracing for another recession. Tech spending had been in recovery mode, but customers won’t buy more PCs, networking equipment or database software if they see their sales and revenues stagnating.

Vivek Wadhwa is a fellow at Rock Center for Corporate Governance at Stanford University, director of research at Center for Entrepreneurship and Research Commercialization at Duke, and distinguished fellow at Singularity University. His past appointments include Harvard Law School, University of California Berkeley, and Emory University. View Archive

This refusal-to-buy goes not only for the U.S. but also for the rest of the globe, where growth seems to be leveling out in many of the fast-growing countries. A global slowdown, depending on its severity, will likely result in more tech layoffs and more economic pain for the Bay Area and the West Coast — where tech represents a disproportionate share of the economy. But not all tech titans are worried. Apple and Google both continue to grow smartly, driven by phenomenally popular smart phones and, in the case of Google, by companies’ ongoing shift away from traditional advertising toward digital ads. But, by and large, big tech sees big stock market losses as reflective of weakening global confidence. And that translates into weakened demand for tech products across the board.

Venture capitalists, the apex predators of Silicon Valley, are far more worried than the tech titans. The economic meltdown after the fall of Lehman Bros. decimated the venture capital industry, with many well-known funds holding onto underwater portfolios and thousands of venture capital jobs vanishing into thin air. Mark Suster, a venture capitalist and respected blogger, painted an ugly picture when he wrote about what was likely going on in Monday morning meetings at venture capital funds around the world. In his view, the venture capital bull market is ending and inflated venture capital portfolios, filled with social media and game startups, will lose value quickly. The IPO window that briefly opened for LinkedIn, Pandora and Zillow, among other Web startups, will slam shut, according to Suster. And VCs will remove their horns, resign themselves to an environment of tough fundraising, and focus efforts on their most promising companies.

All of this will barely make a dent in the consciousness of Silicon Valley’s native tribe of eternal optimists — the tech entrepreneurs. Eric Ries, a respected tech guru, blogged that we are entering a “winter” cycle for startup businesses. He says this is a good thing because those with true grit, with passion for their pursuit, with tenacity to build lean, profitable businesses through creative means will survive and thrive even as sources of funding dry up, valuations shrink, and they dig in for the long haul.

Ries is right. A bout of winter could be a good thing. The Valley is overrun with “me-too” social media startups, many of which have received substantial funding in the hope that they will become the next Facebook or Twitter. The bursting of the social media bubble, when it happens, will inevitably force a reassessment of the value of companies in that realm. I predict that hundreds of these companies will go out of business. 

This is precisely the cycle of creative destruction — of bubble inflation and then popping — that has fueled the innovation economy of Silicon Valley. From the rubble of these companies and business models will emerge newer, better ways of doing business and creating value. This bubble bursting will also diminish the corps of investment bankers and others who feed of the frenzy and get rich while providing little value in return. And that’s another good thing, as entrepreneurs will focus less on financing and fundraising and more on profitability.

History has shown, time and again, that a bad economy is a good time to launch a business, since the lean times embed a lean, scrappy business DNA into a company. Great companies like Johnson & Johnson, Caterpillar, McDonald’s, and Walt Disney were born in recessions — and sometimes even depressions. So were tech giants like Adobe, Intel, Compaq, Sun, and Microsoft. Nothing can stop innovation in Silicon Valley. Wall Street troubles, the political problems in Washington, and the staggering global economy will just make it easier for driven entrepreneurs to ignore the noise and focus on the innovation at the heart of their company and, over time, nurse the economy back to health.

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