Why Silicon Valley Never Dies: Page 2

Posted December 8, 2010

Mike Elgan

Mike Elgan

(Page 2 of 2)

This new ability of companies to choose proven technologies -- those that have already demonstrated ability to acquire customers, partners and revenue -- is further driving up the price of acquisitions. Google, for example, spent $700 million to buy ITA Software, and $182 million for the social gaming company Slide.com. Google spent $1.1 billion on acquisitions in the first half of 2010, and has purchased more than 25 companies this year alone.

Another source of the surge in VC investment is the same kind of transition that fueled previous bubbles. For example, the Great Bubble of the late 1990s was fueled by a massive process of putting stuff online that used to be brick-and-mortar. The Mini Bubble of a few years ago was fueled by a partial transition from a 1.0 Web to a 2.0 – where companies that derived value from the actions of users, rather than the companies themselves – received a lot of attention.

And now, of course, the Web is being remade again in not one but two ways: into Social this, social that, social everything -- and also into mobile this, mobile that, mobile everything.

These tectonic shifts always involve booms or bubbles because not only do new products have to be created, old products have to be made new as well.

As with previous bubbles, a huge amount of bad investment -- what VCs call "dumb money" -- involve "me-too" investors who are dumping money into companies that compete with already-proven technology like location-based services.

Another aspect that's making Wall Street crazy is the absurdly high valuations of Silicon Valley's Big Two -- Google and Apple, each of which is trading at well over 20 times earnings.

Whatever. These are the crazy events -- the good, the bad and the absurdly overvalued -- that happen when Silicon Valley is doing what Silicon Valley does.

The reason Silicon Valley always rises again, and the reason big government investment abroad fails to replicate its success, is that the innovation that happens here isn't well understood.

So I'll say it as plainly as I can.

Silicon Valley Invents Re-invention

It's not something you can predict, replicate or kill. The peculiar combination of naked Gold-Rush greed, California optimism and Bay Area anarchy attracts a particular kind of engineering immigrant by the thousands. Together, this cultural mix spontaneously invents the future in garages, coffee joints and in the generic office parks that dominate the Valley floor -- no matter what that future is.

The ability to re-invent the future requires not only love for the new, which is universal, but contempt for the old, which is rare. The idea that gets ridiculed in most tech centers around the world is the one that is so new that people have trouble imaging it. In Silicon Valley, the worst idea is the one that has succeeded in the past.

So when bubbles burst, and everyone proclaims the end of Silicon Valley, ignore them. It means only that Silicon Valley is done with that future, and is already back in the garage inventing the next one.

I just wish they'd invent a way to end traffic jams.

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

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