Silicon Valley in Trouble? I Don’t Think So – A New Model Will Arrive

Comparing Silicon Valley to Detroit is ridiculous, but Dan Lyons does bring up a big issue worth discussing – innovation problem. Silicon Valley is not setup for long term research in a way that made it what it is today. We are seeing institutional research vaporize in front of our eyes. Checking around it’s apparent that there is very little core and applied research going on. If there is research it is controlled by short term horizons like business profits and venture capital horizons. I’ve said before that we need a new approach.

I posted about this before about a new venture development paradigm that will emerge soon – one based upon open principles and collaboration.

Here is a snip of my post from last year – Silicon Valley – The Rebooting Meritocracy

Silicon Valley is a special place for entrepreneurship, and it continues to be. The issue is not that there is a wrench in the machine, but that the machine is broken. It’s rebooting.

One thing I love about Silicon Valley is that there are no handouts. It’s the ultimate entrepreneurial meritocracy. Change happens and it happens both from the bottom up (entrepreneurs) and the top down (capital market). The question is which force is driving the change.

Redistribution of wealth is upon us. The entrepreneurs and investors that move on this current market opportunity will capture the proverbial “chips on the table”. As an entrepreneur, I love this market. Opportunities are everywhere. Unlike the dot com bust, this tech (entrepreneurial) market never really crashed. Everywhere I look I see discounts and new opportunities. Smart money will move around, but in select places. Is the market scary? If you’re an incumbent it sure is scary.

Silicon Valley Web 2.0 is hurting, but not for the obvious reasons. A bigger force is at play here – massive redistribution of wealth is taking place. Some are scared, and some are welcoming the opportunity of possibly acquiring the wealth “on the table”. I think that Facebook and Twitter are great examples of what might be possible. Facebook will become the next Google. The only thing holding them up is that the ‘new revenue’ model that is soon to arrive at the “station”. When that “train” arrives (and it will) Facebook will say Goodbye to all the naysayers.

Research & Development Void?

The bigger picture is more long term and that’s all about research and development. Judy Estrin recently came out to talk about something really important – the innovation gap. Let me translate her thesis – we are screwed if we don’t have steady research unencumbered by short term agendas. Think how important institutions like Stanford, MIT, and SRI have been to Silicon Valley and entrepreneurship. Without these deep research institutions we would not have many innovations that created wealth – hello Ethernet; hello Apple; hello Cisco; hello Google, ..etc.

The lack of institutional research leaves a void in the Silicon Valley ecosystem. John Markoff postulates in his book “What the Dormouse Said” that the culture and research of the 60s drove the PC revolution. The question now is what revolution are we developing and where is the research? Will we miss the next important energy, medical, or tech breakthrough? Where is our modern day moonshot mandate?

Even top HP executives agree with me.  At HP, the concern reaches the very highest levels of the company. Shane Robison, HP’s chief strategy and technology officer, says he’d like to see the following: a permanent research-and-development tax credit, which would encourage tech companies to do more basic science research, which in turn would benefit everyone, not just the company that conducts the research; more government funding for basic science research; more spending on education; and changes in immigration laws to help foreign-born students who study in the United States to stay in this country afterward. “The technology industry is one of the crown jewels of our country,” Robison says. “It’s the one industry where we stand head and shoulders above the rest of the world. We need to protect that.”

Recession Startups: Great Post On Innovation and Entrepreneurship – No Vacation for Entrepreneurs

I love this post from David Hornik.  I guess that I have an addiction because I love starting companies – I can’t help myself.  His real message is simple – many entrepreneur friends are starting companies in this market. Personally, I think that doing startups is like taking a vacation each startup is like a good journey.

The post is worth of a full posting here on Furrier.org.  Thanks David for a great post.

By the end of 2008, Venture Capital had been officially declared dead. Startups were laying people off so fast that even TechCrunch couldn’t manage to keep up. University Endowments and Foundations, the source of the “capital” in Venture Capital, were hemorrhaging so badly from their public company investments that many long-time believers in “alternative assets” declared a moratorium on Venture Capital. And the IPO market was a distant memory. Good times!

Welcome 2009. The public markets remain closed. Venture investors and the investors in venture investors remain “challenged.” Follow on financings have become increasingly difficult, in some instances impossible. And, while there may well be light at the end of the tunnel, it would appear that we haven’t gotten far enough down the tunnel yet to see that light.

So why am I optimistic about investing in 2009? Because entrepreneurship is an addiction, it isn’t a choice. Great entrepreneurs aren’t driven to create companies because it is easy, or because capital is plentiful, or because the public markets are swallowing anything the venture community will throw at them. Great entrepreneurs start companies because they can’t help themselves. They see a problem or a solution or white space or an opportunity and they have to do something about it.

Innovation doesn’t take a vacation during an economic downturn. Innovation is a constant. While the resources an entrepreneur may be able to bring to bear on a problem may vary with the economic climate, the desire — the need — to innovate never goes away. And Venture Capital is the fuel of that innovation. [1]

So I remain excited about the companies that will be started in 2009. There will be great companies started during this economic crisis. Some of them will be born out of the crisis itself. Others will simply be born during the crisis. But, rest assured, there will be important tech companies hatched in the next year or two. And I am certainly hoping to fund them.

Some of you reading this will say to yourselves “starting companies today is so inexpensive that we don’t need no stinkin’ VCs.” More power to you. I don’t mean to suggest that innovation will die without Venture Capital. There are many great ideas that can come to fruition without a meaningfully-large capital infusion. My hat is off to the 37 Signals and Smugmugs of this world. But for those ideas that require investment ahead of revenue to reach their full potential, Venture Capital remains an important resource for company building.

New Venture Capital Model Is Coming? Limited Partner Investors Seeking New Avenues

NOTE:  Visit the siliconANGLE blog for a community of bloggers on Social Web and Technology Opinion and Analysis.  THANKS

Is this financial market mess going to put the nail in the venture community? Today’s Venture capital has been struggling for sometime with ony a few small hits and very handful of big returns. The problem is that entrepreneurship is stuck because of venture capital. We need to modernize the venture capital business so entrepreneurs can get busy. I am seeing more early stage creative development then in years past. The entrepreneurial process will never die but it will evolve. These are the pains that we are seeing now with startups. The capital markets are a mess and with no liquidity market today’s venture capital firms are spinning their wheels. The good news is that capital markets are efficient and will work around the bottleneck we are seeing. This NYTimes story is an early indicator that big money will find new homes.

NYTimes has a very interesting story…

Investors in venture capital and private equity funds who want out are discovering that their stakes are worth less than they paid for them.

As returns on venture capital investments sour and investors’ wealth deteriorates, some of these investors — the universities, foundations and pension funds known as limited partners — have been unloading their stakes in the funds. When they decide they can no longer supply the money they had previously committed, they sell their stakes at a discount to what is known as a secondary firm.

In the second half of 2008, as more limited partners tried to sell their stakes, the price they could get for those stakes fell to 61 cents for every dollar of face value, according to a report from Cogent Partners, an investment bank for institutions looking to sell their holdings on the secondary market. That is down from 84.7 cents on the dollar in the first half of the year and a 4 percent premium in 2007.

A stake in an early stage venture capital fund that has already been fully invested, for example, would be worth 10 to 30 cents on the dollar, Mr. Gull said. “It would have relatively young portfolio companies, some number of them will need additional capital so the fund will get diluted and there are not going to be any exits for some number of years.

A 40 percent loss is no different than investments in the public markets, Mr. Gull noted, and investors would prefer to have the cash. They think, “It’s a sure thing that I can redeploy in some other activity I think has a larger chance for return,” he said.

Mr. Gull said he could not predict when pricing would improve, but his firm is betting that it will not see any meaningful returns from private equity and venture funds until late 2010.

New Reality: Silicon Valley Wealth Machine – The Rebooting Meritocracy

Businessweek has a post about Silicon Valley wealth machine. Silicon Valley is going through another downturn. It’s the second major downturn in less than 10yrs. I’ve been on the ground for all of those years. It’s down, but not completely ‘out’.

Silicon Valley is a special place for entrepreneurship, and it continues to be. The issue is not that there is a wrench in the machine, but that the machine is broken. It’s rebooting.

One thing I love about Silicon Valley is that there are no handouts. It’s the ultimate entrepreneurial meritocracy. Change happens and it happens both from the bottom up (entrepreneurs) and the top down (capital market). The question is which force is driving the change.

Redistribution of wealth is upon us. The entrepreneurs and investors that move on this current market opportunity will capture the proverbial “chips on the table”. As an entrepreneur, I love this market. Opportunities are everywhere. Unlike the dot com bust, this tech (entrepreneurial) market never really crashed. Everywhere I look I see discounts and new opportunities. Smart money will move around, but in select places. Is the market scary? If you’re an incumbent it sure is scary.

Silicon Valley Web 2.0 is hurting, but not for the obvious reasons. A bigger force is at play here – massive redistribution of wealth is taking place. Some are scared, and some are welcoming the opportunity of possibly acquiring the wealth “on the table”. I think that Facebook and Twitter are great examples of what might be possible. Facebook will become the next Google. The only thing holding them up is that the ‘new revenue’ model that is soon to arrive at the “station”. When that “train” arrives (and it will) Facebook will say Goodbye to all the naysayers.

Research & Development Void?

The bigger picture is more long term and that’s all about research and development. Judy Estrin recently came out to talk about something really important – the innovation gap. Let me translate her thesis – we are screwed if we don’t have steady research unencumbered by short term agendas. Think how important institutions like Stanford, MIT, and SRI have been to Silicon Valley and entrepreneurship. Without these deep research institutions we would not have many innovations that created wealth – hello Ethernet; hello Apple; hello Cisco; hello Google, ..etc.

The lack of institutional research leaves a void in the Silicon Valley ecosystem. John Markoff postulates in his book “What the Dormouse Said” that the culture and research of the 60s drove the PC revolution. The question now is what revolution are we developing and where is the research? Will we miss the next important energy, medical, or tech breakthrough? Where is our modern day moonshot mandate?

How will it play out? The future is unwritten.

Update: The Wall Street Journal has a great perspective on how regulation is hurting entrepreneurship. Add the lack of research mentioned above and the opinion is complete.

Experimentation is Key to Success in Today’s Venture Climate

Scott Berkun wrote a great post about experimentation and asks if you’re doing it in your company.

Recently, there has been a ton of talk about venture problems and what makes the best venture architecture (bootstrap or venture backed). Putting all that nonsense aside for a minute I want to talk about experimentation. In emerging markets where there are more unknowns then knowns (and no great use case scenarios) you need to run experiments to get information.

Some venture investors confuse this tactic with the founders overall business vision, strategy, plan, and metrics.

Get information and requirements to reduce your risk for the investment in a new venture. This is independent of the financing strategy of bootstrap or venture capital. I love talking to entrepreneurs who have long range plans then run experiments to get more clear information.

Scott writes: “One of the most tragic things I hear in management circles is this:

“I want to make a breakthrough happen. I really really do. But I don’t want to take any risks. How do I do that?”

If I’m honest, and say “Well that’s nice. It’s just, you see, well, it’s fundamentally impossible.” They walk away in search of another author dude who’s willing to pretend it isn’t.

The principle at work here is knowledge capture: if an innovation is something new, or something you haven’t done yet, you have to capture the knowledge and skills needed to do it. An experiment is one of the few ways to capture knowledge you don’t have. If there are no experiments, you are repeating yourself, and can’t possibly be putting new ideas into practice.”

For all entrepreneurs and strategic managers Scott Berkun’s article is an important read. I would add that if you raise venture capital make sure you’re venture partner (the guy/gal AND the firm) are crystal clear on difference between your vision/plan and experiments.

Some venture guys might confuse your experiments with what your venture vision is. When you have confused venture guys there is no good outcome – trust me.

“Apples and Googles” More Like “Apples and Pears” – Bad News for Enterpreneurs? Where’s the Halfway House –

All the talk about companies being sold, founders getting ousted, and ventures failing or being killed by VCs. This seems to be the trend in Silicon Valley and around the world. The captial markets are a mess. The Wall Street Journal has a story on it today in a post called “Who’s going to fund the next Steve Jobs?”. James Freeman really nails this story and highlights very accurately the ugly trend being witnessed by many entrepreneurs out there right now. This is a big problem with serious economic implications.

This post hits home with me because I’m an entrepreneur living in this market with four kids and it ain’t pretty. The capital markets are in the tiolet and founders around the world are working hard to find no buyers of their ideas or products. It’s a bootstrapping market. The entreprenerial market isn’t broken or starved for good ideas and needed innovation. Instead the ecosystem is stuck in the sand. Incubators are clearly seeing the action and see the need for innovation. Some bright lights are shining out there like Y Combinator among others, but overall it’s pretty dark.

What does this mean?
Bad news for entrepreneurs short term and bad news for innovation long term. M&A doesn’t yield innovation. Passionate and skilled entrepreneurs need the runway to make their visions happen. Lack of exit stunts the available growth capital needed for those next big ‘Apples and Googles”. Big ventures take 3-5 years to develop. Problem today is that capital isn’t founder friendly. Founders getting ousted after one year doesn’t make innovation happen. I’m seeing more founders on the street then ever before. There needs to be a new financial model or new incubator model (or halfway house) for founders and entrepreneurs. Y Combinator calls it a startup for startups.

Big problem is that initial public offerings of young companies had become rare. Venture-backed IPOs in 2005 and 2006 were far below the levels of the early 1990s, never mind the boom years that followed. A recovery in the early months of 2007 still didn’t push IPO numbers anywhere close to the number of young companies being acquired by bigger, more established firms.

Love this passage from James Freeman of the WSJ. “This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?”

“Of course we can’t run these experiments. What we do know is that entrepreneurial drive, combined with venture investors’ money and experience, plus access to the public markets, equaled a tech revolution and an industry that is the envy of the world. That model may be collapsing.”

“True, investment in U.S. venture funds is holding up well despite the market downturn, with investors pouring $9 billion into this asset class in the second quarter. But over the long term, venture investments have to result in a healthy number of home-run IPOs to justify the risks and offset the inevitable failures. The industry cannot continue raising the money to fund American innovation if its returns trail the stock market indexes, as they did for the five-year period through 2007.”

“Some have ascribed the broken venture model to the “cheap revolution,” meaning that, thanks to earlier innovations, the tools to create new tech products are so cheap that entrepreneurs don’t even need funding from venture capitalists. That’s great, but we’re not seeing a flood of IPOs of young companies built without venture money, nor the creation of lots of privately held global powerhouses. By and large, founders of Internet startups are not creating companies with the dream of conquering the world, but rather with the intention of selling to Google, eBay, Yahoo or Microsoft.”

“Our society should be encouraging these entrepreneurs to dream big. Instead, they’re looking for the exit before they have to deal with the burdens of our public markets.”

“An acquisition generally means that the founders move on, see projects they championed get axed, and watch old colleagues get fired. How many company founders would aspire to conduct a sale of the business instead of a public offering, absent some bizarre and unnatural conditions in the market?”

Of course I’m biased but founders and entrepreneurs need to be in charge. Never fire the founder in a changing market.

Note: Steve Jobs was ousted by his investors (Venrock Associates) only to come back and change the world a second time. Can you imagine August Capital firing Bill Gates. Good venture capitalists understand the long term value of entrepreneurship not just the quick flip.

Zuckerberg Opportunity Part II – Silicon Valley Legacy at Risk?

The NY Times is doing a followup piece to my post called The Zuckerberg Opporunity. They are following up on my first post and story called The Zuckerberg Opportunity. The Zuckerberg Opportunity was a followup on the story on the big story that I have been tracking on Microsoft buying Facebook. The NY Times goes deeper into the deal side dynamics of the Zuckerberg Opportunity. (Note: I’m glad to see the NY TImes run with my original piece – it needs deeper analysis and more detailed reporting – thanks Steven)

NY Times DealBook has a great followup post to my post Zuckerberg Opportunity. The professor Steven Davidoff pens a detailed post around some of the tactical challenges around the Zuckerberg Opportunity.

What’s interesting here is how Silicon Valley and the VC community will respond to this. Silicon Valley has been an environment where the VCs have always maintained a balance between the ‘greed’ part of their job with the ‘unwritten’ rule of maintaining the legacy of Silicon Valley.

Lately, we have been seeing an environment lately where VCs really don’t care about screwing entrepreneurs over for a quick buck or shutting ventures down over political internal VC partnership fighting. If this trend of not building great sustainable companies continues then the legacy of Silicon Valley will be at risk.

I love Silicon Valley for what it has been famous for – innovation and the celebration of entrepreneurship. An enviroinment that rewards innovation, entrepreneurs, and entrepreneurship will create great companies and yield great profits for investors.

If Silicon Valley becomes known as a place not friendly to entrepreneurs and quick rich VC plans, then the legacy of Silicon Valley is at risk.