Silicon Valley, the IPO drought, and the culture of innovation.
Is the sun setting on the spirit of the Hewlett-Packard garage?
Yesterday I got to talk a bit with San Jose Mercury News columnist Chris O’Brien about the state of the IPO market and what it means for the culture of innovation in Silicon Valley. He used a couple of quotes from our conversation in this article:
. . . The number of public companies in Silicon Valley fell for the eighth consecutive year in 2008, to 261. Forget the inflated dot-com peak of 417 in 2000. It’s also below the 315 the valley had in 1994, when the Mercury News started keeping track.
This is no longer a simple correction following a period of excess. This is now an unmistakable trend that represents the end of an era defined by a grand partnership between Silicon Valley and Wall Street. That alliance fueled a model for funding innovation that became the envy of the world. And now we have to come up with a new one. . . .
The column is well worth a read, and I’m glad I got to talk with O’Brien about his take on the situation in Silicon Valley. Although I’ve never lived there, I feel a connection to the place because I covered the microchip business during my first few years on the Hoover’s staff, and in fact back then I read O’Brien’s newspaper more than any other.
We were talking because O’Brien had read our IPO Scorecard for the first quarter of 2009 — which was, predictably, dismal. Sure, things are bad all over when it comes to IPOs (as we’ve discussed here plenty of times before), but O’Brien has an interesting take on why things are so bad for Silicon Valley.
My sense is that we’re seeing a winnowing period for both IPOs and the venture-capital firms that back them. Over time, the best of both types of company should do fine, but O’Brien is probably right that there’s a fundamental shift underway in the calculus that governed the relationship between Silicon Valley and Wall Street. When he and I were talking about it, I pointed out that the level of IPO activity we’ve come to see as normal has really only been going since the 1990s; now that I think of it, the modern venture-capital business isn’t much older.
What we’ve seen over the past couple of years tells me that the good VCs are willing to put high demands on their startups — nothing arcane, mind you, but the VCs are focused on funding companies with compelling technology, tight operations, and solid financial discipline. The probity of both VCs and startups should give them more flexibility in both the timetables and the avenues they choose for “exit events,” whether that means IPOs, acquisitions by the Ciscos of the world, or other financing options.
Regardless of what the future holds for the VC business for the IPO market (reasonable assumption: more pain before the good times return), I’m confident that something will fuel the process of innovation in American business — and the business of the world.
Hewlett and Packard joined forces in 1938, before the war effort had pulled the United States out of the Depression. They didn’t go public until 1957, but in the meantime they created a lot of value by bringing high-quality electronic equipment to market. Their gear was used for everything from Disney pictures to that same war effort.
The downturn we’re living through is bad, but it’s not as bad as the 1930s, and it seems to me that the force of entrepreneurialism is still strong in the world. Some of it happens within large corporations. Some happens along classic venture-backed lines. Some is bootstrapped.
However it comes to pass, ingenuity will out. The sun may set, but it rises again.
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Photo of the garage where Mr. Hewlett and Mr. Packard started their business by Peter Kaminski, used under a Creative Commons license.
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Yep. Granted, I’ve probably never lived in such a chaotic economic downturn (lived in Silicon Valley my entire life), but we’ve definitely weathered bad times before. And, something new and better always rises from the ashes :-)
[...] about what I wrote the other day about the connection between the IPO market and the startup culture of Silicon Valley, I wonder [...]
What we’re witnessing is a dramatic cycle within human history and we’re in for great correction until 2024. Business failures are happening for many reasons and those who have harmed others due to their greed, desire to control, or manipulate will be held accountable for their actions. Great change is upon the world and there will be much pain and heartache until our new global economic system is born. It took us over 100 years to get into this mess we’re in so it will not take 24 hours to get out of it.
[...] Silicon Valley, the IPO drought, and the culture of innovation. [...]
It’s not surprising to see diminishing innovation in the US and more specifically Silicon Valley. When you have technology CEO’s such as Carly Fiorina telling US technology workers “There is no job that is America’s God-given right anymore. We have to compete for jobs as a nation.” and then they offshore the roles that build out the concepts is ludicris. It’s short sighted business acumen such as this that has led to the economic conditions across the US. As people buy foreign vehicles then wonder why they don’t have a job? Offshore tech jobs and wonder what happened to innovation? You have to wonder where their heads are. It doesn’t take a rocket scientist to realize that we have done this to ourselves based on social perceptions and greed. Serving the shareholder proven to be a farce as CEOs get huge bonuses as they fleece the investor. How is it that we can’t see the obvious for how we got here?
Just a note, Richard: many foreign-brand automobiles sold in the United States are built by Americans in U.S. factories.
Yes, that is true, but the revenues are not necessarily reinvested here in the US. Those funds go to those foreign business units. The key to my message is that we need to invest in ourselves. Spending trillions on a war in a foreign country will have limited long term return on investment, whereas investing those funds in our own infrastructure developing technologies to mitigate those foreign resources we have interest in would have far longer lasting returns to us for OUR efforts. Globalization has taken place too quickly without standards and common, considerate understandings.
We are bleeding money, jobs, and inspiration.
You make some good points, Richard. I would add this, though: we have to make sure that we don’t swing over to protectionism. We *benefit* from globalization in many ways, and we’re going to continue to rely on some considerable level of foreign resources & trade for the foreseeable future. But I agree with you that we can be sensible about how *much* we rely on it, and *how* we steward those relationships.
[...] one candidate, here’s another) who will come through this period stronger than ever. And, as I’ve suggested before, if the VC business collapses — and its own practitioners say that it’s [...]
This is the first that I have seen such bad times in economics, the financial crises has really hit hard with so many people, and I have to agree with the comment that was made by Tim Walker, we do all rely on globalization in so way or another.
Excellent post.