Where are the hot start-ups?

June 22, 2005

View from Silicon Valley- Where are the hot start-ups?

Every week there is a new pronouncement citing this or that slight change in a local statistic as evidence the Silicon Valley economy is "recovering." One week it's commercial real estate vacancies, then it's employment or VC funding followed, of course, by the strength in house prices.

The ultimate nirvana of indicators remains "hot new start-up companies." Surely all of the statistical improvement are due to, and/or will soon lead to, a vast proliferation of hot, new start-up companies, at least a few of which are destined to be the next Intel or Cisco or Google.

Just for run, let's address these one-by-one:

Commercial real estate: As a by-product of the huge amount of commercial real estate going up for sale (10% of Silicon Valley's market is on the block), sellers are disclosing 33% to 40% vacancy rates. Others are touting buildings as 100% leased for several years, even though they are only 50% occupied. (Think about that for a minute.) We also observe commercial real estate asking prices are down from the sales prices of even two years ago.

Employment: California changed their benchmark for employment and erased the "old" Santa Clara County-only numbers from their web site. (We snagged a copy.)The new benchmark shows our y-o-y labor force is down (-2.6K) while job figures are up slightly +9.9K (+1.3%). The "old" benchmark continues to show a y-o-y decline of -18.3K residents employed (-2.25%) with a +2.0% jobs increase. Not exactly an avalanche of new job prospects...

VC funding: Global VC spending reportedly is up but, outside of a +7% blip in 2004, Silicon Valley, or "Bay Area," VC funding continues to slide. According to VentureOne, the "Bay Area" VC spending figures are:

Total IT IT Share

1998: $5.6B $3.9B 70%

1999: $18.4B $11.5B 63%

2000: $33.2B $21.7B 65%

2001: $11.5B $8.6B 75%

2002: $7.5B $5.3B 71%

2003: $6.6B $4.5B 68%

2004: $7.1B $4.8B 68%

2005: $6.3B $3.6B 57% (1Q05 run-rate)

Not only was 1Q05 Silicon Valley VC investment down, but the share of IT within those funds was lower than any of the past eight (8) years. Time will tell if this is a fluke or an acceleration of IT's five-year decline as a percentage of local VC funding.

House prices: With Silicon Valley commercial real estate down, Santa Clara County employment flat and local VC funding running at a mere 19% of the peak, remind us again why local housing is a sure thing?

Start-ups: Among Silicon Valley cheerleaders' persistent claims of "optimism" or "progress," the most difficult area to quantify is start-ups. Several VC companies are on record as instructing their early-stage start-ups to stay in stealth mode as long as possible. (Perhaps because the ideas of these start ups can easily be copied? What type of sustainable advantages are they investing in?) VC's routinely claim employment in Silicon Valley is stronger than reported due to these stealth start-ups.

One rule of thumb is for a start-up to stay in stealth mode until they reach 100 employees. OK, if there are 100 such stealthy start-ups out there thats-- 10,000 employees. If there are 200 ready to burst onto the public stage that's --20,000 employees. Wow, an impact of +1.2% to 2.4% on employment growth. Even if these companies really exist, is a 1% to 2% spike going to turn the tide around here?!?!?

For a less-biased clue, let's turn to "Silicon Strategies' 60 Emerging Start-ups" as published by EETimes and Silicon Strategies. Three versions of this list have been published so far: April, 2004, October, 2004 and April, 2005.

Scrutinizing the list for "local" companies , the V1.0 list (April. 2004, &) showed only 10 of the 60 start-ups were located in Silicon Valley. Are you kidding? Isn't Silicon Valley the center of the universe for start-ups? Don't we lay claim to 35%+ of global VC money? How could we have less than half that share of the "best" start-ups?

The V2.0 list shows 11 of 60 of hot start-ups were here. Maybe this is progress? Sorry, of the 11, three admit they hire significant portions of their engineers overseas-- to save costs! In a move reminiscent of the boom years, one company was on the V1.0 list as based in Europe but apparently opened a Silicon Valley office and now claims to be based here.

The V3.0 list shows 17 of 60 companies based locally (28%) but four of those are "split" between Silicon Valley and overseas.

Are the VC's still investing locally but their start-ups aren't making the cut? Or are the VC's talking the Silicon Valley talk while their money walks elsewhere? Regardless, what adjective beside "miserable" could be applied to the fact Silicon Valley start-ups represent such a low percentage?

Before anyone sets out to shoot the messengers, EETimes and Silicon Strategies are largely based in Northern California. If they were biased, you might expect such bias to favor local companies. Especially given, the nomination process is driven by readers who can , "nominate their own emerging start-ups for... the 'Silicon Strategies' 60 Emerging Start-ups' list."

As an aside, Europe-based start-ups account for 38%, 43% (plus two more claiming Silicon Valley homes) and 35% (plus three SV splits). Maybe the best and the brightest are no longer coming to Silicon Valley to start up a company? (We already know they don't hire local engineers if they do.)

Conclusion: To paraphrase a local VC, Silicon Valley needs to wake up and smell the coffee. Reputation and financial engineering alone are not enough to create innovative new companies.

Our long-standing observation remains: No current statistics, including the now somewhat less hard-to-disprove claims of heavy local VC funding and "stealth" start-ups, show there is a recovery underway in our local economy. Plan accordingly!