Why Silicon Valley Never Dies

Silicon Valley is once again on a roll, fueled by its peculiar combination of naked Gold-Rush greed, California optimism and Bay Area anarchy.
Posted December 8, 2010

Mike Elgan

Mike Elgan

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The leading indicator of the health of Silicon Valley – how bad the traffic is – tells me that the Valley is back -- big time.

This wasn't supposed to happen. According to Larry Ellison, Dave Troy, Jordan DiPietro, Judy Estrin and many others, who have declared the end of Silicon Valley over the years, the age of rampant innovation and free-flowing capital are supposed to be long gone.

But if that's true, why does it suddenly take an hour to make a 15-mile commute at rush hour?

Boom or Bubble?

Everybody's talking about the new tech bubble. While some embrace the bubble theory (the growth will end in a crash), others believe in the boom theory (the growth will moderate over time), there's no question that there's a lot of money flying around in Silicon Valley.

Fueled by rumors of a failed $6 billion acquisition of Groupon by Google, as well as the ripeness of privately-held social giants like Facebook and Twitter for IPO or acquisition, the bubble chatter is focused on the big deals by the biggest companies.

But all these high-visibility cases involve non-acquisitions – companies that have refused, failed or otherwise opted out of acquisition – which are the opposite of what is actually fueling the boom.

The real cause is a newish phenomenon whereby startups pursue acquisition as a strategy far more than before.

What's New?

Here's what's going on. The pace of innovation continues to accelerate. This makes it more difficult for the big companies to compete with new technology. Big companies are bogged down by silos, politics and bureaucratic processes that make nimble flexibility very difficult. So they buy.

Meanwhile when the recession hit and large companies faced sudden reductions in revenue, they found it necessary to cut spending to make their numbers. Naturally, they slashed research and development budgets.

Now that revenue is picking up again, they find themselves with cash but lacking new technology. So they take their cash and buy technology in the form of a small-company acquisition.

The shift at larger companies from developing to buying new technology has triggered a shift in the strategies of both startups and venture capitalists.

The traditional objective of startups was to grow the technology and business and infrastructure to the point where the company could be self-sustaining, profitable and publicly traded -- not necessarily in that order. That was the old vision, and there are still some companies trying to do this.

The new objective is simply to develop the next killer technology, service or business model while remaining "agnostic" about how money will be made. In other words, acquisition has been legitimized as the most likely way to monetize an idea for the inventors.

That actually lowers the risk for VCs. The reason is that, unlike before, a company doesn't need to excel at all aspects of the business in order for them to recoup their investment. All they need is the right technology, which usually comes with the kind of people.

Who cares if they don't know how to run a business, can't sell or have some other failing? The cash rich tech giants don't care about any of this.

As a result of this lower risk, and higher likelihood of monetization, investing in tech startups has become more appealing. And so the money is really flowing and valuations are through the roof.

There are other benefits to big companies to buying, rather than developing, new technology. Acquisition provides more control. Instead of being stuck with whatever approach is developed internally, big companies can just go shopping for the best one -- or the one that's already been proved in the market.

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Tags: developers, Silicon Valley, venture capital, start-up, VC

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