Small business startup funding in Silicon Valley has slowed down significantly, closing off liquidity and the cash flow spigot. Entrepreneurs are down one significant lifeline.
As a small business owner and one who used to work at Silicon Valley startups, I am particularly curious and constantly mindful about how our general region is faring during this downturn.
Silicon Valley Without Small Business Startup Funding
It’s always a nice option that many would-be entrepreneurs entertain: they toy with the idea of acquiring venture capital as seed money for their fledgling businesses. Anyone who’s young (usually), with a bright, innovative business idea, a lot of energy and enthusiasm, and the ability to spin a good story has a reasonable chance of winning a golden ticket from Sand Hill road.
But as Silicon Valley is mired deeper in economic recession, it has become painfully clear that venture capital is no longer going to be anyone’s parachute for a good long while. Just to put things in perspective, there has only been ONE IPO produced by this region for the entire 2008 (ArcSight, a systems security firm), as compared to the 28 IPO launches a year that was experienced over the last two decades. The Silicon Valley lottery is over for now.
Adios, Venture Capital!
What this means is that many new businesses now need to survive entirely on their own fuel, by their own merit and left to their own devices — you know, your standard blood, sweat and tears, along with a much greater acceptance of risk. The risk can no longer be transferred to someone else, but must in fact be borne by aspiring entrepreneurs themselves.
So what do we do in the face of tightened purse strings? For many business owners and startup founders, there are always the contingency plans, right? Keeping the day job while supporting the clandestine startup. Multi-tasking. Freelancing. Contracting. Consulting. Networking, just in case an angel investor swoops down and lends a guiding hand.
In our case (as among the self-employed), we’re riding the choppy waves on a flimsy boat that’s surprisingly sturdier than we first thought. It helps to be open-minded about what can be done. And it also helps that we’ve taken steps to wrestle our expenses down. We continue to downsize and cut costs, and our efforts are seeing results. Things are showing some promise — maybe in a year or two more, we’ll be where we want to be.
At any rate, this recession is teaching us something — to be less complacent, more productive, more resourceful… and to learn to get by with much less.
So how are businesses coping with the recession in your local area?
Now while the Valley goes quiet, hopefully only temporarily, the chatter on the web heightens, with people continuing to use this avenue to share their financial stories and tips to the world.
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{ 11 comments… read them below or add one }
Multi-tasking. Freelancing. Contracting. Consulting. Networking,
you hit it on the head with that, for me, trying to find as many streams of income to compensate for the outgoing, and hopefully it won’t last more than a year or two, that would be quite manageable
In light of the recession, we are looking for opportunities and taking advantage of the weak position of our competition. For example, we have increased our marketing budget and are buying 5x as much ads for the same cost as a year ago because of the drop in ad sales.
The reduction in ‘easy money’ is making it much harder for new startups to compete with us or under price our products by trying to sell below their costs to gain customers until they get enough customers to support their business. This process of borrowing money to buy customer is done. Free products used to bait customers are done. Reduced competition means higher prices (inflation) and fewer options for customers.
But, these are not all bad things. This is just how capitalism works. Only the strong will survive. This is a good thing as it will help to education the next generation of the value of hard work.
The industry is going to have to adjust. No longer can you hope for millions from a VC, but more privately funded companies will appear and will be more aggressive with their marketing tactics to try to reach their audience. They will have to be more efficient and you will see companies come from no where, that aren’t stocked with top execs making huge salaries.
I wonder if a correlation between venture capital drying up and better availability of qualified employees exists. So many times, you read about companies having a hard time finding great candidates for jobs as start-ups take them away with stock offerings and great perks like google.
I’m not so sure I agree with Curt’s “only the strong survive” philosophy. Strong what? Strong ideas? Many of them have died out without funding, simply because they weren’t far enough along in the process or didn’t have a dynamic figurehead and were piloted by eggheads that were brilliant, but not socially savvy. To suggest that VC money gets distributed according to perfect strength seems blatantly false.
But as the article points out astutely, hard times do force us to be more nimble and to smarten up our own operations. Necessity is the mother of invention and I’m really impressed at some of the inventive and brilliant things that small startups are doing to stay alive in lean times, without compromising their product offerings. Kudos to the scrappy.
The Passive Dad – there is certainly a very strong correlation. Last year my company tried for months to get a software engineer with some very specific talents. It took us months and months and several candidates turned down our offer. Since venture financing dried up we have been flooded with highly qualified candidates. We can now take our pick…
I also want to add that good companies are still getting funded in Silicon Valley. Even in the middle of all this financial mess, our company raised a sizable investment round from new VC funds. It’s not that VC’s are not investing at all – they are just being more picky. MUCH more picky.
A sign of the times.
People are more cautious who they give their money to, if at all, during these tough times.
It’s important to keep in mind that even if VCs are cutting back how much they invest, they’re still investing — you still have billions of dollars pouring into Silicon Valley every year, looking for good ideas. And the scarcity of IPOs isn’t as bad as it sounds, either. The problem isn’t that an IPO doesn’t work. The problem is that VCs are more patient than the average equity investor, so they put a higher price on these stocks. In the late 90’s, the opposite was true.
Living near Detroit, it’s tough enough hearing our region’s endless tales of economic woe…but more and more locations seem to be singing similar songs these days.
As a writer, I’m excited about a lot of the new possibilities I see online for those of us willing to learn new media, networking and ways of doing things…and I hope the investment of my own time and energy today will pay off by putting me in the best position to take advantage of more lucrative opportunities -when- the economy improves.
1. This is not static; initially, SV practices will be used as models
2. The Chinese and Indians do not put fences around models; they use whatever they can to best advantage. I am British so I do not subscribe to SV as the only model; 10% of European VC money is situated within 10 miles of Cambridge University — do they know something? I also read about the humbling of the British in Singapore when the Japanese used bicycles to invade Malaysia! Once financial markets mature (recover and mature), the Asians will use hybrid models as their experience dictates.
3. Such differences as exist are not the reflections of immaturity; that is close to a static model. Who says that have to mature along SV lines? Is not the collaboration between VC and Government Support Agencies counter SV practice and is it not essential to provide a liquidity catalyst for Singapore, a model viable model for other Asian centers?
Lian Pheng, Managing Partner, Gingko Capital (lianpheng@gingkovc.com) has widely published on top-tier journals and publications on insider secrets to fund-raising from venture capitalists, entrepreneurial finance and startup valuations.
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