There's something nasty lurking beyond the horizon - notes on life in Silicon Valley

It feels as if our economic version of Hurricane Katrina is building up energy, just off the coast of Silicon Valley. There is a definite feeling of something huge and nasty lurking just over the horizon. It's an ominous feeling highlighted by the fact that we are enjoying a gorgeous Indian summer. There's a feeling of a calm before the storm. Life seems to be going on as normal. Yes, the morning traffic seems a tad lighter but the restaurants, especially in San Francisco, are still buzzing. Clearly, we haven't yet been hit by the effects of the financial crisis, or the wider global economic recession. Will we be somewhat sheltered from the storm? Will our version of the economic hurricane Katrina come smashing into us with a bulls eye hit? Or will it be a glancing blow? In my travels I've been asking about how the economy and the financial crisis is affecting people and their companies. In the PR industry, companies tell me they continue to close big deals, and while there has been some churn, it is nothing out of the ordinary. Among startups and VCs, people seem to be tightening their belts, but then again, most startups already operate lean and mean, there isn't a whole lot more tightening to be done. Capital efficiency has been drummed into startups by the VCs, who have forced them to outsource as much development as they can to India, China, and dozens of other countries. This means that startups will likely cut outside services, such as PR, and cut back on conferences and trade shows. And they will likely turn to homegrown PR activities and utilize their personal social graphs. Out PR the recession . . . Every PR blogger out there continues to advise companies about the need to invest more in PR during tough times. While I agree with many of their arguments, it is always easier to cut outside services than it is to cut the jobs of people who have been in the trenches with you through many a long night. PR agency retainers start at about $20K per month and can run typically at $40K and above. That pays for several salaries.

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.

Web two-point-oh-oh!

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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Please see:

OMG: The derivatives bubble = $190K per person on planet

How will Silicon Valley startups be affected by a downturn?

IBM considering financing IT project partners because of banking crisis

Go West young IT worker!

Ballmer says MSFT not immune to financial crisis

- Survey: Bosses are keeping staff in the dark on financial crisis

- We've been here before - boom and bust in Silicon Valley

- VCs to Startups: Cut Your Burn Rate by 25 % Now!

- The Largest Risk in Silicon Valley is Taking No Risk - Why the Economic Downturn Will Spawn Hundreds of Startups