Silicon Valley, California

Is it dawn or dusk in Silicon Valley?

We’re definitely at the end of a cycle.

In the 80-year history of Silicon Valley there have been three major accelerants to the growth of the ecosystem. The first was the flood of research dollars provided by the Department of Defense during the 1960’s and 1970’s, the second was the greenfield internet and the lifting of H-1B visa caps during the 1990’s, and the third was the avalanche of cheap capital from 2010–2022.

All three of those have now run their course. It definitely feels like we’re at the end of an era.

• Last week several large VC firms slashed their targets for new funds by as much as 75%, including Tiger Global, TCV, and Insight Partners.
• Facebook and Twitter increasingly seem like legacy companies, remnants of a previous cycle, stalled for growth.
• In the first quarter of this year, new stock listings in the UAE and China raised more capital than those in the US².

The last point may be the most profound. Silicon Valley has been a big driver of the trend toward globalization, and now globalization is changing the entire landscape for capital, talent, and markets.

Marc Andreessen famously said that “software is eating the world”, but today the threat is that the world will eat Silicon Valley. The defensive moat that the valley once had was the huge concentration of capital and talent in one valley. Today, the talent and the capital is all over the world.

In 2013, Aileen Lee coined the term “unicorn” to describe startups with billion dollar valuations. At the time there were 39 of them in the US, mostly in Silicon Valley. Today there are 302 of them in China, 109 in India, 46 in the UK, 29 in Germany, 22 in Israel,16 in Brazil, and several more in Mexico, Poland, Sweden, Turkey, Estonia, and Lithuania³. Silicon Valley has spread all over the world.

I still see tremendous opportunity here in Silicon Valley. But I do think we run the risk of being just one of many innovation clusters around the world, rather than the primary center of gravity⁴.

The original accelerant in the Silicon Valley ecosystem was the government spending that created tremendous strategic innovation in this one valley. When I grew up here, key technology innovation often came out of research labs like SRI in Menlo Park and IBM Almaden Labs, driven by government funding. NASA’s deep research lab operating in Mountain View developed advanced supercomputing technology. The first website in North America was built by SLAC, a government-funded Stanford-affiliated research lab. Even Marc Andreessen’s development of the web browser was a government-funded project. The list goes on.

But the winds have shifted, and today’s leading innovation seldom comes from government-funded labs (in fact, some of today’s Silicon Valley leaders are vehemently anti-government).

Meanwhile, other nations have gone all-in on public sector programs to foster the sort of factors that originally created Silicon Valley. The Israeli government runs incubators that fund 85% of early-stage startups. India has their Startup India Action Plan which has spawned thousands of new tech startups. And the Chinese government, of course, has been very successful in supporting and guiding startup innovation. “Capitalist tools in socialist hands”, as leader Deng Xiaoping put it.

We’ve had a multi-decade run of success that made Silicon Valley the #1 global choice for investors and the #1 global choice for talent. When you put the world’s top talent and smartest capital together in one valley, amazing things happen.

But we’re in a new era now. Russia and China are aggressively challenging the world order, and India is now officially the largest country on the planet. Silicon Valley is at the end of a great bull run, and what we do next will determine whether we continue to be the world’s dominant innovation ecosystem, or an also-ran.

I’m not nearly smart enough to know for sure how Silicon Valley retains it leadership position in the next chapter. But three things seem exceptionally clear to me:

• The fact that the next generation of talent can’t afford to buy a house here is an existential threat to the ecosystem. Regional planning commissions need to go all-in on helping to solve this, or we’re doomed to just be a nice community for old rich people.
• In the 1960’s, as Silicon Valley blossomed, the Federal government invested 2% of GDP in research and development — today it’s less than half that. Bold public-private programs like the recent CHIPS Act can be a part of doubling-down on the strategic innovation that made us global leaders.
• Founders and investors need to reset expectations. The conditions of 2010–2022 aren’t coming back, and your competitors now are increasingly likely to be in a different country, operating more efficiently than you are. We need to get back to building real companies that solve real problems, using capital efficiently. Investing hundreds of millions to create an audio app that no one uses, or a pizza robot that makes bad pizza, or a wi-fi juicer for your kitchen, is not the way to maintain our position as global leaders in transformative innovation that matters⁵.

I’ve lived in Silicon Valley my whole life. I was a CEO during the dot-com crash of 2000, and I founded another company during the Great Recession of 2008. Down cycles are sobering, but there are always good times ahead.

The transformative innovations that have come out of this valley over the past 80 years have genuinely changed the world for the better. Your life expectancy has been dramatically improved because of the catheters developed by Dr. Fogerty, the recombinant DNA technology developed by Genentech, the surgical systems developed by Intuitive, and the drug discovery led by Gilead. Fundamental Silicon Valley innovation is inside the phone in your pocket, the computer on your desk, the TV in your living room, and probably even the car that you drive.

But here’s the most transformative thing of all: the democratizing of access to global knowledge. Because of 80 years worth of innovations created in Silicon Valley, all put together, today any individual in the world has access to all the information in the world, via a device that fits in the palm of their hand.

But now we’re entering a new chapter. I’d love to hear your thoughts. Hit me on LinkedIn.

1. This post was adapted from my weekly email for entrepreneurs and innovators.
2. Big hat tip to Rob Jesudason whose excellent opinion piece in The Information got me thinking about this whole topic, and I “borrowed” a couple of his points here.
3. Data from CB Insights. Your mileage may vary.
4. To be sure, Silicon Valley still has many powerful differentiating features including the universities, the weather, the entrepreneurial culture, a well-established risk capital ecosystem, and endless delicious taquerias.
5. Let’s not discuss the fact that some of the Titans of Sand Hill Road provided billions to finance Elon Musk’s purchase of Twitter, a notorious place where innovation goes to die.