Is it Finally Time to Short Silicon Valley?

December 18, 2020 | BlogBlog

People have speculated about the demise of Silicon Valley as the center of high-tech startup and investing universe for a long time. So far, they’ve been wrong. Northern California’s share of U.S. venture capital investment last year was pretty much what it was way back when I left the Valley thirty years back: roughly 50%.

The reasons for predicting the Valley’s decline today are pretty much the same as they’ve always been. The business climate is lousy; taxes are high; housing and other prices are off-the-charts; and the traffic is terrible. But the tech and entrepreneurial talent base and related infrastructure is unequaled, as is the entrepreneurial culture. (The weather is pretty good, too.)  So far, the unparalleled concentration of talent and other resources have carried the day.

This time, though, I think the naysayers are on to something. This time will be different. Sort of. I think.

Today’s predictions of Silicon Valley’s demise are more convincing than past forecasts for several reasons. The first – and easily the most important – is that for the first time there are alternative places that can boast of, if not comparable, at least “in the same conversation” concentrations of talent, infrastructure, culture, and access to capital. Austin, for example, boasts a breadth and depth of talent, established tech companies, and research dollars that, while still well short of Silicon Valley circa 2020 is nonetheless competitive with Silicon Valley circa 1990. And the history of Silicon Valley itself suggests that Austin’s inventory of assets is “good enough” to build a significant hub of high-tech entrepreneurship and investment.

There are a couple of secondary factors in play, as well. First, the Pandemic – in classic fix it or feature it fashion – has accelerated the recognition that today’s virtual work technology, from video-conferencing to more prosaic aspects of data-sharing/collaborating and security, is much improved from even a decade back. Not yet interchangeable with “live” work environments and tools, but close enough to make their cost-saving implications a game-tying if not game-winning factor for a lot of established and emerging businesses.

There’s also the fact that while California, and all the more so Northern California, has long been a national “leader” in taxes, regulation, cost-of-living, congestion and socioeconomic turmoil, it’s only been building on its lead over the last several decades. Naysayers have cried wolf a number of times in the past, but this time, I think, the wolf just might be at the door, if not quite through it yet.

The empirical evidence of the Valley’s pending (relative) decline is mostly anecdotal. Some big-time tech players are moving out; some venture funds are going office-less (see for example Storm Ventures); and while Silicon Valley’s share of venture dollars is so-far holding up, its share of venture deals has been shrinking for some time now. A well-regarded tech news/commentary player has gone so far as to predict that Silicon Valley’s share of venture capital deals (as opposed to dollars) will for the first time fall below 20% in 2021. Sure, the average Silicon Valley startup probably grades out better in terms of team experience/networks than the average non-Valley deal, and thus merits a higher valuation. But the high cost of Bay-Area talent is part of the equation, as well.

So, my bet is that this time the sky really is falling on Silicon Valley. Still, it’s got an awful long way to drop before the region falls from “the” center of the high risk/reward entrepreneurship and investing universe to just “a” center of that universe. It’s more like Detroit circa 1970, at this point, than Detroit circa 2020. But if you’re really taking the long view, just as the handwriting was on the wall re Detroit at the dawn of the ‘70s, so, I think, it is on the wall (next to the video-conference screen) in Silicon Valley at the dawn of the ‘20s.

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