The chips are in . . .
Another bleak sector is in the semiconductor equipment markets. The financial crisis and recession coincides with over-production in memory chips and the natural boom and bust cycles of the chip industry. Mark Osborne, editor in chief of Fabtech, a large UK based magazine covering the chip production industry, tells me he is hearing of huge cuts in capital expenditure by chip makers.
Also, with tough capital markets, it is going to be difficult for chipmakers to raise the capital to build multi-billion dollar fabs. Mark Osborne says that most will try to refit their existing fabs--if they have the money.
In Web 2.0 sectors, times will be tough. A lot of the web 2.0 companies have business models based on advertising. Online advertising is going to be hit hard by the recession. A weeding out of the many similar Web 2.0 companies is an easy prediction to make. Again, PR companies will feel the hits here.
Accelerating media death spiral . . .
Media companies are already fighting the massive disruption caused by Internet 2.0 and the fragmentation of the industry. With advertising being hit, this disruption will be accelerated.
Newer media companies are in a better position because of lower costs of operation but even they will be affected. Online advertising was already a poor source of revenues, so many have moved to hosting conferences and mini-trade shows. Conferences and trade shows will be affected as companies reduce spending on outside services and events.
Things look bleak but things won't be as bleak in Silicon Valley as they will elsewhere. Here is why:
- Silicon Valley lives in the future not in the now. The economy of Silicon Valley is based on big bets made on the future and not on the present. While what happens today does have an effect on investment psychology, it is the future expected returns that rule the roost.
- There is still a lot of money in VC funds. Raising new funds is a problem but Elke Heiss, over at Sterling Communications points out that there is still a lot of money waiting to be put to good use, her VC contacts say they are continuing to invest in good ideas and good teams. The Sequoia RIP powerpoint presentation is considered overkill in some VC circles.
- Startups have time horizons of two to five years out--the economy will be completely different by then. It's the same as hunting for ducks, you shoot ahead of the ducks not where they are now. You want to be ready to go when the economy gets better and that means that VC investments will continue as before, with the same goals.
- Micro-capital. It takes less capital than ever to fund a startup.
- Smart people. Silicon Valley has access to the best public university, Berkeley, and the best private university, Stanford.
- Downturns birth innovation. Innovation is about many things but its core quality is about creating technologies that are far better and far cheaper than doing things the old way. In tough economies tough decisions are made and changing to more efficient and productive technologies has a greater urgency.
- Diversity. San Jose has the most diverse population in the US. And Silicon Valley has the most diverse economy in the US. It is more than tech, it is bio-tech, green technologies, and clean energy industries. Diversity is the best protection to any economic recession.
Silicon Valley knows how to deal with downturns. We've been here many times before.
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