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Silicon Valley Navigates Changing Economic Landscape

October 9, 2008 at 6:30 PM EDT
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While manufacturing has taken a noticeable hit during the recent financial upheaval, the technology sectors of Silicon Valley have fared better -- while acknowledging that the future economic picture is anything but clear. Spencer Michels reports.
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SPENCER MICHELS, NewsHour Correspondent: Twenty-two stories above San Francisco Bay, in a conference room of the venture capital firm Crosslink, a software entrepreneur is pleading his case for financing in troubled times to a couple of the firm’s partners.

VENTURE CAPITALIST: And what are the milestones that you think you could achieve? In what time frame? How long would the $1.5 million last? What are the milestones you could achieve?

ASHOK NARASIMHAN, Startup CEO: I would say the $1.5 million would last — I’m going to be a little conservative, because I always know that things don’t quite work the way you expect them to — nine months.

SPENCER MICHELS: Ashok Narasimhan’s new venture, called Cinch, is an online service for businesses to reward customer loyalty. He has been through economic downturns before and survived. And he thinks he, and Silicon Valley — which has been a major growth engine for the American economy — will survive the turmoil on Wall Street.

ASHOK NARASIMHAN: But the good news is that it doesn’t translate into the doom-and-gloom scenario that is there in the general economy. That’s my belief.

But I’m not a venture capitalist. But from an entrepreneur’s point of view, I’m not hitting the panic button.

SPENCER MICHELS: While the venture capitalists Narasimhan is asking for money are being more careful than before, Peter Rip, a general partner, sees some bright spots for the tech sector.

PETER RIP, Venture Capitalist: It’s the sector where the U.S. is still — still has an advantage on a worldwide basis. So, in the short term, yes, everyone’s boat is going down in the water, but, ultimately, the growth sectors tend to recover faster.

Venture capital still available

SPENCER MICHELS: Still, Narasimhan, like many in Silicon Valley, fears some consequences, including a slowdown in business and a possible drying up of credit.

ASHOK NARASIMHAN: It's not that people are not going to invest; it's they're going to be more selective about where they invest. I've heard some guys kind of still in a paralysis mode. It'll probably take them another couple of weeks and two more partner meetings to figure out, you know, where their heads are really at.

SPENCER MICHELS: Venture capital, unlike bank credit, has not dried up, says Peter Rip, because it comes from wealthy individuals and large institutions, like pension funds. The National Venture Capital Association reports only a small drop-off in venture investments last quarter.

Even so, Rip predicts V.C. money will become scarce for older, mature companies.

PETER RIP: Where we're looking for new investments is typically in very early-stage companies that have a gestation period that will grow for many years and don't need revenue in 2009. By the time the recovery happens, they'll be intercepting a booming economy.

SPENCER MICHELS: So what happens to the companies that aren't in that category, late-stage companies that you probably don't want to invest in right now? What's going to happen?

PETER RIP: They evaporate. It's a boom and bust cycle.

SPENCER MICHELS: The concept that the gloomy economic news may not hit Silicon Valley hard is fairly widespread. Despite drops in high-tech stocks, that's still what many Valley spokesmen are saying publicly.

JON FISHER, University of San Francisco: I think they're delusional.

SPENCER MICHELS: Jon Fisher, who has run three of his own startups, sees big trouble ahead. He now teaches business at the University of San Francisco.

JON FISHER: I don't think Silicon Valley is insulated. I think, fundamentally, the way that Silicon Valley has traditionally made money, in the form of selling stock to the public in an initial public offering, or in the form of companies merging, has changed due to a lack of access to capital.

For example, in last quarter, there wasn't a single venture capital-led initial public offering.

SPENCER MICHELS: Even with financing from venture capitalists, Fisher says Silicon Valley still depends on credit.

JON FISHER: In the lifecycle of a startup company, credit, in the form of debt financing to buy equipment, to sometimes meet payroll -- whatever the circumstance may be -- plays a critical role. All of these businesses -- startup, venture capital, Silicon Valley alike -- need access to credit to survive.

Optimism still present, for now

SPENCER MICHELS: Still, Fisher's pessimism is the minority view among Silicon Valley entrepreneurs, whose optimism is legendary. Every two weeks, at 8:30 a.m., a couple of dozen young high-tech CEOs and start-up company founders gather in downtown San Francisco to exchange ideas and to listen to a speaker.

This time it was Adeo Ressi, a veteran player in the high-tech world, who operates the Web site TheFunded.

ADEO RESSI, Founder, TheFunded.com: The reality is, it doesn't affect the startup world today that much. The economic meltdown is a result of banks over-leveraging their various equity positions. A lot of corrective measures have been put in place that won't allow that overheating to happen again.

SPENCER MICHELS: Ressi sees the rest of the economy's troubles as a chance for new companies to make money.

ADEO RESSI: There are tons and tons and tons of potential new business opportunities that were closed to startups, you know, as little as, you know, three weeks ago.

If you're in low-cost goods and services, you're seeking a spike in demand, because people are looking to save money. So other companies are having difficulties for sure, but there are also opportunities in the market.

SPENCER MICHELS: The young CEOs mostly agreed, but many of them have already seen changes. Faisal Cureshi is depending on "angels," individuals who supply very early private money.

FAISAL CURESHI: We were counting on an angel round of funding and had a couple angels lined up. And just in the past couple of weeks, you know, after they committed, they're sort of on the fence, and I think just because of the psychology of a lot of high-net-worth individuals having seen a pretty big decline in their personal assets.

DWIGHT WARDLAW: We need some money to push it to the next level, and that's the money that seems to be going away right now.

SPENCER MICHELS: Still, to be an entrepreneur, you have to have confidence.

WILL ROGERS: You're talking to a bunch of people who are super-optimistic that, in fact, even in an enormous economic downturn, that we're going to somehow make it to the other side.

JARED KOPF: I think, if we can help promote that optimism and if we can sort of spread the calm, we can actually make it possible for the entire market not to freak out as we're all going through this, because we're all in this together.

SPENCER MICHELS: Despite that optimism, one new survey says confidence among venture capitalists is the lowest in four years. And while opinions diverge sharply on how hard Silicon Valley will be hit, most agree that some changes are coming to this dynamic sector of the American economy.

When they will occur and how profound they will be are the topics of tabletop conversation throughout the Valley.