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Silicon Valley’s Jobless Unplug From Tech aka Where Has All the Innovation Gone?

August 3rd, 2009 | 1 Comment | Posted in Private Equity, Product Management, Venture Capital

The Wall Street Journal’s Pui-Wing Tam reports in last week’s Journal that the unemployment rate in Silicon Valley has “soared, surpassing the state average in May. By June, the area’s unadjusted unemployment rate was 11.8%, worse than California’s 11.6% and the national rate of 9.7%, according to the latest figures from California’s Employment Development Department. The rate of job losses was particularly steep in sectors such as semiconductor manufacturing, where employment dropped more than 13% in June from a year earlier.”  Pui-Wing provides some additional insights into the numbers:

“Some out-of-work techies such as Bill Palleschi are now reorienting themselves to take advantage of that growth. Mr. Palleschi, 64 years old, lost his job as an engineering-services manager at a semiconductor-equipment maker in January. In April, he joined ProMatch and decided to shift into clean energy.

“With all the offshoring in the tech industry, I want to look for a job in an area that’s growing,” says Mr. Palleschi. After attending some career workshops at ProMatch, he says he better understands the credentials he needs to get into clean-energy companies and plans to refocus his résumé to highlight those skills.

For other Silicon Valley jobless workers, remaining in tech is often the first choice. Fred Slone, executive director of the San Mateo Workforce Investment Board, a jobs organization in San Mateo, Calif., says most unemployed techies his group sees want to stick with what they know. But with tech hiring so slow, some have little choice but to broaden their horizons, he says.”

As a long time student of the tech marketplace I find it a little puzzling as to why the startup space has not taken off in this recession.  Unlike the last great Tech recession that started with the bursting of the Internet Bubble and extending through the 9/11 tragedy the ingredients and conditions to launch capital light software or SaaS startups have never been better.  Open Source software has replaced the need for expensive infrastructure software like database management systems, web application servers, content management systems, etc.  There rarely has been a time in the market when so many qualified software professionals (engineers, marketeers, sales people, customer service, and even accountants) have been available.  Finally, cloud-based data center solutions are cheap, reliable, and pervasive.  Additionally, the wave of social technologies has introduced one of those rare inflection moments in the tech marketplace – just as relational database management systems did in the 1980s, client-server technologies did in the 1990’s, and the Internet did in the early years of this century.

The lack of venture funding may certainly be one contributor to this situation.  As the National Venture Capital Association has reported, venture capital investments have dropped to 1997 levels in the second quarter of 2009.  In Q2 2009 there were 612 deals with a total value of $3,674,427,000.  The same period in 1997 yielded 720 deals valued at $3,593,006,400.  The 2009 numbers are barely 50% of what happened in Q2 2007, the last full quarter before the current recession began kicking in when the VC industry did 1,051 deals valued at $7,376,535,700.  Exits are down dramatically as well.  For all intents and purposes software and SaaS IPOs are non-existent and the M&A market is severely contracted due to the inability for financial sponsors to use debt as part of their acquisition currency.  There were only two software IPOs and 13 ventured backed M&A deals in the second quarter.  Perhaps Marc Andreessen is right.  To quote Marc from the launch of his new venture capital firm Andreessen-Horowitz:

“The problem is that there aren’t valuable companies being formed. And there never have been,” Andreessen continues. There are, he says, on average 15 tech companies launched a year that will ultimately do $100 million a year in revenues, and these companies are responsible for 97 percent of the returns in the venture industry overall. “There just aren’t that many great founders.”

Where has all the innovation gone?  Is the 20 year run of venture funded innovation in Silicon Valley over?  Is all we can look forward to just finding out how Twitter is going to finally monetize their business?  Or is the most sophisticated piece of technology we’re going to see in the next couple of years iPhone apps?

I admit that I am as much of a part of the problem right now instead of being part of the solution.  I could choose to continue to execute the strategies I have for the past 15 years – basically rolling up mature technology businesses, restructuring them to high profitability, and providing private equity investors with 3x returns using leveraged dividends.  As I have learned many times, however, you cannot cut your way to growth.  I can readily sense the market opportunities that exist and understand that the resources required to support a viable, capital-light startup are there and cheaper than ever.  My goal for the rest of 2009 is to seek out and engage folks who share my frustrations and see if we can find a way to leverage the strengths of my consolidation background and marry it to one or more growth ideas and create a hybrid technology company that is not only sizable, profitable, but growing.

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One Response to “Silicon Valley’s Jobless Unplug From Tech aka Where Has All the Innovation Gone?”

  1. Eric Says:

    I agree that on one hand the environment is perfect for the launch of capital-light start-ups and there is quite a bit of near- obvious opportunity; however, a few things transpire against this:

    * The demand for investment, or at least the perceived demand for investment, is at a decades low point. Safe investments have proven anything but safe, and there is a sense that any valuations may be lower in the future, no mater how good the enterprise’s fundamentals and outlook.

    * Along these same lines, cash is king more than ever; even growth firms seem to value their cash on hand more than their killer technology in the labs now.

    * There is a sense that the depth of this economic dip will not only create new winners and losers in the marketplace, but that predicting what the marketplace will look like, and what it will demand over the next 5 years, is impossible. There could be seismic shifts that unseat everyone’s best laid plans.

    Of course this uncertainty is opportunity as well, but it’s a bit like trying to play jazz in very difficult circumstances. You’ve got this amazing emerging idea for a solo coming to mind, but you sense the bass player and drummer are about to launch into their own solos giving you nothing solid to work against. Meanwhile the patrons have been walking out of the joint in droves in response to the air sirens going off across the city. Making great music in those circumstances is certainly possible, but success and whether anyone will hear it is less certain than ever.

    Still, there is so much opportunity in these dynamics, it seems any entrepreneur awake could not help feel a buzz.

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