The silicon state of mind

"Has Silicon Valley lost its monopoly over global tech?

S ILICON VALLEY feels like a college reunion these days. As covid-19 restrictions are lifted across America, tech-bros (and the occasional tech-gal) who have not met in person in ages are high-fiving each other all over the place. Firms from Alphabet to Zynga are urging workers back to the office. Venture capitalists are flocking back from second homes by Lake Tahoe or ranches in Wyoming. Foreigners, who during the pandemic became a rarer sight in San Francisco than unicorns, can again be spotted south of Market Street, a popular pasture for startups valued at $1bn or more.

The people look the same. Yet the place feels different. Your guest columnist, who is heading to Berlin after spending a total of 12 years, including all of the pandemic, in San Francisco over the past three decades, suspects that many returnees will feel like strangers in a strange land. Not because everyone seems suddenly obsessed with the decentralised "web3" (which they are) or because the valley has peaked (which it hasn't). Silicon Valley has changed, and not just as a result of the pandemic.

When this stand-in Schumpeter moved there in the mid-1990s, even some top venture capitalists drove lumbering clunkers. Now a zippy Tesla is de rigueur (with a Ferrari often sitting in the garage). Similarly, the hub's business metabolism, which few places could match to begin with, has sped up. In the pandemic job-hopping became even more rampant and rapid. Many firms offer six-figure cash bonuses and pay rises of 25% to retain talent. Promising startups can raise money in days rather than weeks. Last year more than 17,000 venture-capital (VC) deals were cut in America, 40% more than in 2020, according to PitchBook, a data provider.

All that money pouring into a limited number of deals helped raise late-stage startups' median valuation to $115m in 2021, nearly double the level in 2020. Outside investors, including hedge funds such as Tiger Global and Coatue Management that used to invest mainly in public markets, have piled in. These newcomers bring a new philosophy, in which a firm's performance and its fit in the overall portfolio trump conventional VC considerations such as knowing the founder or understanding the industry.

Valuations may already have suffered as a result of rising interest rates. But the cash will not disappear. Non-traditional investors, from private-equity firms to family offices, keep coming. And money isn't the only accelerant. Tech itself has chivvied things along, too. Zoom makes it easier for people to interview for a new job and for entrepreneurs to pitch to potential investors. In the words of Mike Volpi of Index Ventures, a VC firm, "This has created a much more efficient market."

It has also created a much more global one. In the late 1990s Silicon Valley's startup uniform of washed-out T-shirt, shorts and hairy legs was (thankfully) confined to the Bay Area. Today's less off-putting Silicon Valley look--untucked shirt, khaki trousers, white trainers--is the fashion choice of founders everywhere. Less sartorially, whereas as a few years ago a base in the valley was still a must for ambitious entrepreneurs, engineers and investors, now they no longer have to be physically present to get access to capital, talent and know-how. Established tech firms, too, are expanding their geographical footprint. Many are building offices in such places as Austin and New York. A few, including Hewlett Packard Enterprise and Oracle, have relocated their headquarters to Texas. The Brookings Institution, a think-tank, recently estimated that 31% of tech jobs are now offered in "superstar metro areas" such as Silicon Valley, down from 36% before the pandemic.

VCs, for their part, have learned they do not need to drive to a startup or smell the founder to make a lucrative deal. Sequoia, a VC stalwart, no longer requires live in-person pitches from entrepreneurs and is perfectly happy with pre-recorded video presentations. More of Sequoia's fellow VCs on Sand Hill Road, the historic centre of VC-dom in Palo Alto, are eyeing Europe. Venture investments across the Atlantic have shot up from less than $40bn in 2019 to more than $93bn last year--pulling nearly equal with Silicon Valley, according to CBInsights, another data provider. Sequoia--king of the Sand Hill, having wrested the crown from Kleiner Perkins, the dotcom-era lord--recently opened offices in London. Other VC firms are planning European outposts. Plenty already have Asian ones.

The Bay Area has lost its "geographical monopoly" in tech, sums up Phil Libin, a serial entrepreneur who runs mmhmm, a video-conferencing firm (whose investors include Sequoia). Mr Libin himself now lives in Bentonville, Arkansas, better known as the home of Walmart than as a tech hub.

Some of this dispersion may slow or even reverse. As covid-19 fades into endemicity, even Zoom-hardened venture capitalists would rather interrogate a startup founder over a bottle of a Napa cabernet than over a video call. They may also become more discerning about where to put their capital now that it is becoming costlier. This could favour nearby startups on which it is easier to keep an eye.

The valley reforged

Will all this make Silicon Valley more parochial, and less relevant? Don't bet on it. It is true that the next trillion-dollar company may not come from Silicon Valley, the place, as most of the current crop have done. But the odds are that it will emerge from Silicon Valley, the mindset. Its high-octane venture capitalism and, increasingly, its capitalists and capital have infused technology scenes from Stockholm to Shanghai and São Paulo. That may be bad news for landlords in San Francisco, second-rate entrepreneurs in Mountain View and other rent-seekers who took advantage of the Bay Area's initial geographical monopoly. For everyone else, be it tech workers south of Market who can at last afford a flat nearby or innovators in Mumbai able to tap Silicon Valley money and expertise, it is a boon." [1]

1. "The silicon state of mind; Schumpeter." The Economist, 19 Mar. 2022, p. 59(US).