Silicon Valley Panic – The Valley is Upside Down

I am seeing tons of panic here in Silicon Valley.  Just a few weeks after the Sequoia memo (great PR for Sequoia capital – wondering what Kleiner Perkins is thinking right now), the valley is upside down.

It’s crazy and it’s changing everything around the startup process.  The memo from Sequoia has thrown everything into gridlock and yet the VCs are sitting on billions of cash under management.

I think that this is the best time for a startup.  In fact the gloom and doom has reached an all time high.  Everyone is saying survive and fight another day or “How to Survive in Silicon Valley”.  This mindset is an indictment of the state of panic.

Instead the title should be “How to Thrive” – Playing it safe never was Silicon Valley’s greatest strength.   Has the Valley lost it’s way?

Author: John

Entrepreneur living in Palo Alto California and the Founder of SiliconANGLE Media

11 thoughts on “Silicon Valley Panic – The Valley is Upside Down”

  1. Reminds me of 2002 – the VCs can’t keep their powder dry forever. The longer they sit on it, the bigger each deal has to be as the time for the fund decreases.

    It is a great time to get something started as there are good tech resources looking for work – provided you have the cash to get it rolling.

  2. It’s nature taking its’ course here. I find that there are more opportunities now then 1 yr ago. The signal is increasing and the noise is falling fast.

    I don’t see this financial crisis as bad as the dotcom bust. The epicenter of the dotcom bust was silicon valley. This time around silicon valley isn’t the problem…it’s a global problem.

    For me living in the center of this panic I can clearly see everything being recast…everything is upside down, teams are in flux, talent is flowing, and so is the money. The issue is no one wants to take a risk.. and that might just be the biggest problem.

    I was talking to a big venture firm on Friday and other entrepreneurs all week… there is a big group of folks who are not afraid of this market …

    Dave: you’re point is right on… the glass is half full if you have guts.

  3. “and yet the VCs are sitting on billions of cash under management.”. That’s the key phrase in your post. Are there good ways to deploy that much money in Valley start-ups? Nope. Good ideas don’t need 10s of millions let alone billions. It’ll soon be time for VCs as well as their portfolio companies to shrink.

  4. ” … VCs are sitting on billions of cash …” John, I have seen a variation of this same statement touted as the source of optimism for struggling entrepreneurs. The reality is that when a particular VC raises $400M (say), they don’t have $400M sitting in the bank. Instead, what they have are commitments from their limited partners for that amount over five plus years. Typically in the beginning the VC’s make a capital “call” so that they receive a small portion of the money and put it in the bank, in order to make some initial investments and to pay their management fee (typically 2% of the $400M per year every year whether they make any investment or not, and if they in fact make investment, whether the investment turns out to be profitable or not). Now of course the 2% is just for expenses (including salaries, country club dues and jet fuel) and the real payoff is on the additional 20% carried interest when the investment turns out to make money. The point is that there is no real incentive to make any investment in a down market like this. The VC’s don’t want to and the limited partners don’t want to. The VC’s will make their 2% no matter what and the limited partners would prefer to have the money sitting in THEIR bank accounts (as opposed to the VC back accounts). This “Chinese” standoff can last for a long time. In the end, free market capitalism will dictate but in the meantime, they can just live off the 2% as long as every other VC’s are doing the same, since their performance is ultimately measured against that of their peers.

  5. Denny,
    I was talking to a Limited Partner of a fund and he mentioned that they now have incentive clauses that will require a new fund to put some of that money to work and until that time they can’t draw down on the mgt fees.

    As you pointed out the dollar amounts are relative to the age of the fund. If a fund was established in say april 2008 for 750million then that means that fund is new and a % of it has to go to investments and some allocated for followon etc…

    My point is that the VCs are telling the limited investors that tech is dead and put the money in clean tech or something green. why because the limited investors read the papers and think tech is dead so the VCs move to another sector bubble. Some are arguing that they should focus their money on tech to really build value and not abandon it for “optics”.

  6. John, by the way, I fully agree with your article. And thanks for posting it. I think it is wrong for anyone to ignore the reality and not prepare for the slowdown but it is also wrong to think that the world is coming to an end. I think there is a fundamental difference between the recession that is unfolding now and the one that you and I have survived seven years ago. The last one was a correction on over-supply and this one will be a (long and potentially much more painful) correction on under-demand. We always end up having to pay for the sins of spending beyond our means, the last one because companies were spending beyond their means and this one because normal Americans have been spending beyond our means. From an entrepreneur perspective, it almost makes no difference. Now is time to build, we will come out richer on the other end (I know I will). Thanks again.

  7. Denny,
    You and I see the same thing. I just wanted to add to your comment that money is there but the macro factors make it irrelevant because it is what it is – a tough time.

    I hope to keep the dialog going because perspectives like yours are valuable to young entrepreneurs who haven’t lived through a major down cycle. I know that I want to share my experiences with all. Surviving the last depression was difficult but the opportunities are there.

    To all the entrepreneurs out there teams are forming and things are being recast. Great time to get out there if you have the risk profile to “roll with it”. There are active investors out there especially zero stage and early seed. That is the opportunity that is developing.

  8. The thing which seems crazy to me in thinking in particular about early stage investors is that you have to assume that it will take 3 years to an exit… so now is a GREAT time to do early stage investing, we have to assume that 3 years from now the markets will be functional again. Geesh – if we can’t assume that just give all the money in the funds back to the limited partners!

  9. Thanks Ted for commenting. You know from personal experience and for folks who don’t know Ted – Ted is an entrepreneur who built a company on the last cycle and sold it (yes that’s an exit). He runs the conversation group in SF – doing social media thinking and executing for top marketers. Money needs to invest somewhere.

    What kills me is the VCs move money to other sectors like cleantech right after closing basically a tech fund. That is a PR move why because when the Limiteds call they can’t answer the question of when the market will come back.

    I think we’ll see career entrepreneurs do well because the noise level is failing and the signal level is rising. Opportunity recognition is easier both for entrepreneur and investors (assuming they both are good at what they do). Plus talent is available and less cocky about their prospects and that puts things into perspective.

    Thanks Ted

    I wrote about the problem of no exit market and the affect on the VC – portfolio back up…

    http://furrier.org/2008/07/01/problem-with-vcs-their-back-teeth-are-floating-portfolio-backlog-and-gridlock-an-opportunity-for-vcs/

    and then commenting on the sequoia memo

    http://furrier.org/2008/10/10/new-movie-in-silicon-valley-now-playing-scared-straight-profitable/

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