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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 Estrinand 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 Twitterfor 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.
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.
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.