Tech Start-Ups: The Economy's Best Hope

CN Portfolio:

Silicon Valley has never been a place where people throw in the towel. The dot-com crash of 2000 didn't drain the life out of the tech start-up culture -- in fact, it probably helped by injecting a dose of realism and weeding out dumb ideas and pretenders who had no business starting anything. And thank God for that, because in the years after 9/11, technology from start-ups and innovations from existing companies like Apple helped pull the country back to life.

So now, in the wake of the financial crisis, news reports say venture capital investment is falling off - which, at first, looks mighty worrisome. Is investment money going to dry up, leading to a drop in tech start-ups and a dearth of companies to help the U.S. rebound? Not necessarily.

VCs are important to Silicon Valley, but they're not the only source of money for start-ups anymore. The cost of starting a tech company has dropped precipitously, thanks to cheaper/better/faster technology. A company that five years ago cost $1 million to launch now might cost $100,000. And that makes it easier for angel investors -- wealthy individuals -- to fund companies. Marc Andreessen and his business partner Ben Horowitz have been steadily funding about a start-up a month. It's also easier than ever for a few ambitious technologists to pool their own resources and start a tech company on a shoestring.

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Comments

[sculptor]

As a compiler developer writting from the heart of Silicon Valley I say that if the US economy is indeed dependent of Tech Startups to survive then I say we are TOTALLY SCREWED (to put it mildly.)

[KillTheMessenger]

If you are a compiler developer, you are screwed for sure. There are plenty of free products that work quite well. We do not need YAC (yet another compiler).

[sculptor]

It's not quite that simple. Instead of a handfull of comercial compilers that are retargeted to various processors, it's a handfull of free compilers that are retargeted to various processors. True the small system software houses are almost extinct. However, those "free" compilers have a lot of people getting paid by the big companies to contribute to them.

The biggest problem about working on compilers is that places like Puna in India also can also do the retargeting work and the only advanage of being in the valley is that many new processors still originate here. The reason is that it's a big advantage to have your compiler developer available when the processor architecture is designed (if you Google my patents you'll find I'm listed on what became the memory management unit on one of Sun's processors­.)

[Motes]

My concern is that most successful startup companies are making money off limited real value. I still think Google primarily makes all of their money on advertising and effectively selling information on web usage. This is not to say some of their widgets are not useful, but quite honestly a lot of people in many countries can do this. If basically we are just shuffling advertising dollars around then I am concerned on the long term benefits. As many people have already mentioned we actually make very few things here. Nearly all the silicon needed for phones/aut­os/compute­rs... are made in the far east and now the UAE as a reasonable interest with their rock bottom purchase of AMD's manufacturing facilities. Our science and engineering research has been slashed and burned over the last 30 years with most of the succesful professors and programs in engineering focusing on items with short-medium commercial interests as opposed to building a base to allow for a truly new technology to make an impact.

[KillTheMessenger]

What else does one expect in a country where MBAs and lawyers are running the show?

[Rog49Thomas]

What percentage of the population currently have positions in tech related copanies?

This sounds to me like more trickle down voodoo economics

[KillTheMessenger]

"What percentage of the population currently have positions in tech related copanies?"

Depends who you are talking about. US born citizens? Very few. First generation Indian immigrants? Probably a very large fraction.

The problem is home made in the worst public school system in the developed world.

[fleaba]

I'm wondering who is going to buy more tech "stuff" when they don't have money. Unless the product can actually be consumed cheaply and it is something that people must have to live, then cross this off the list. While I agree that computers and the web are part of the success of the grass roots movement for Obama and for people becoming more informed, that could all come crashing down in a cash based economy where people can't afford electricity.


Unless you are producing something related to actual survival then all bets are off.
So the focus should be on food production and not that BMO cr*p they keep shoving at us.
Clean water. Clothing. Shelter. Transportation and infrastructure.
In case you noticed, entertainment is not on this list, nor is unlimited texting or cell phone coverage.
Nor is a movie or 5 inch stiletto heels( effing ridiculous­...). Nor is a crackberry.
How bad does it have to get for consumers to change their spending habits?

[KillTheMessenger]

"Clean water. Clothing. Shelter. Transportation and infrastruc­ture."

Those were the primary goals of the 18th and 19th century. Not to mention that the 18th and 19th century has produced plenty of great entertainment (aka books and paintings) that are still en vogue.

I think you are roughly 150-200 years behind in your model for what society is and should be doing. Having said that, it is obvious that the US is having trouble to provide even those basic necessities to its population. But what do you expect from a country that likes to invest all of its surplus in precision guided ammunition and delivery systems?

[klondiker]

Well, good thing we're investing tons of money in science and math education, to enable young people to become the next generation of tech entreprenuers. Oh wait...

[raskolnikov72]

This is even more important and relevant given Obama's capital gains tax plan:

Barack Obama:
1. I will eliminate capital gains taxes for the small businesses that create the high-wage, high-tech jobs of tomorrow.
2. I will return normal capital gains to the levels they were under Bill Clinton (between 20-28%).

- These things work in tandemn, shunting money out of "paper profits" and into producing actual goods and services through New Business creation.

Now, Barack’s commitment to eliminate capital gains for small businesses does not get the coverage it deserves. I’ll tell you, as someone who has had to raise capital, invest in growth, cut expenses to survive, hire people, lay them off, and navigate the ups and downs of the economy, this is the defining policy position we all should consider. Here’s what logically flows from Obama’s Plan:

1. Entrepreneurs will be more encouraged to create businesses because they will face no (zero, zilch, nada, noneski) taxes on any increase in value of those businesses. None.
2. Venture Capitalists and Private Equity firms will be more encouraged to provide capital to entrepreneurs trying to grow their businesses;
3. A _zero percent_ capital gains rate will make the tradeoffs on giving equity to financiers versus obtaining the capital required to grow businesses much more palatable for entrepreneurs
4. The creation of these businesses will mean new jobs, new cash flows, and new growth in the American economy

[SanityNowPlease]

love it. thanks for a great post. I like the optimism as well. my biz partner and I are seeking small vc money for a BIM s/w startup and the people with the cash are simply paralyzed right now. hopefully they start to see that the american thing to do, the right thing to do is to invest in america again and get little american ventures going. this is a time for opportunity more than it is a time for fear and constriction.

[repugnicansfearme]

Motto should be: Hey! Dude! Let's start a company. Don't buy it. Won't work.

[Obama4Life]

BS, Green Jobs are the future.

[repugnicansfearme]

Agree. Those who spout this crap have forgotten the Tech Bubble. Let's not go back to the 1990's- how about some jobs that matter? Leave the techies to play with their toys, video games, etc.

[raskolnikov72]

"Techies" include "Greenies" under Barack's Cap gains approach .. here is what logically follows:

Barack Obama:
1. I will eliminate capital gains taxes for the small businesses that create the high-wage, high-tech jobs of tomorrow.
2. I will return normal capital gains to the levels they were under Bill Clinton (between 20-28%).

- These things work in tandemn, shunting money out of "paper profits" and into producing actual goods and services through New Business creation.

if I’m Joe Smith or Mommy Warbucks, I’m doing everything I can to get Barack Obama elected because it benefits me. More importantly, my pursuit of my new wind farm development business means that I’m going to uplift many more than myself. I will have to hire truck drivers, construction personnel, construction managers, programmers, site surveyors, electricians, and the list goes one. I’ll also have to buy materials including: American steel, wires, tools, and the like. Disposable income increases, spending increases, the economy recovers and thrives.

Let's say Joe Smith's company is valued at $10MM by Bechtel by year 4 (not unreasonable as a wind turbine costs on average $2MM to build) ...

Under Mr. Obama’s plan, Joe Smith’s $10 Million automatically becomes – well – $10 Million on a 0% capital gains rate. Under McCain's plan: $8.5MM
Now what would Joe Smith do with the extra $1.5 million dollars under an Obama administration?

[NTO08]

The techies were the previous bust in the markets...­been there, done it, over it.

[DC]

Most all tech start ups produce little. Most all fail. The few that do survive and thrive do not produce too many jobs -- at least not in this country.

The US is not a manufacturing based economy -- it is a consumption and services-r­elated-to-­consumptio­n economy.

Too much credit for too long for consumption that did not meet productivity is why the economy is going through an earthquake right now.

While the media and political talking heads on both sides will spin the blame game, It has very little to do with what party legislated what and when.

Politicians give us what we think we want. We wanted cheap credit and to flip houses. The financial services industry wanted the green light to provided this. All of Washington made that possible.

The American public has its own culture of consumption and short term thinking to blame.

It will take a decade or more to recover. Hopefully the dynamics of credit, consumption and production will be in healthy balance once again.

[Viper]

Its not a big deal, if what you invent here is then made in China such that 90% of the rsulting jobs move offshore!

We have invented lots of products .. we just dont make them anymore.. and its the MFG that raises the wealth of a nation and the middleclass.

Regards

[RobinSeattle]

Well, however it manifests itself, we have to start making stuff again and stop sending our value added jobs overseas. Whether that comes from the tech sector or somewhere else, that as well as some bigtime debt reduction has to be done.

[DavePotts]

Scant hope for the economy, maybe. Pushing bits in Silicon Valley isn't unlike pushing paper on Wall Street in terms of REAL value.

Silicon Valley never asked for a bailout though. More power to them.

[BlueZoo]

Point well made and taken!

[mredder4]

Solve a burst bubble with another bubble?

Um, duh?

[vegasobserver]

China has been creating real and lasting wealth for its people for decades now, with a national industrial policy to take jobs from the West and create broadening prosperity and a long-term viable social safety net for its people.

I am NOT praising the Chinese government, which shoots dissidents, stifles opponents on the internet, contributes dramatically to global warming and pollution, etc.

I am saying if we in the West (particularly the US) do not do something SOON to learn from the Chinese, then all bets are off, and the present crisis is just a prelude to our long-term impoverishment.

Chinese industry relies on economies of scale, or rather "reverse economies of scale". One manufacturing plant provides, say, 5000 decent-paying (for China) jobs.

What does one tech startup provide? I've seen them, I've worked in them, and a typical tech startup might provide 6-10 good paying jobs, they might get a round of VC financing and then expand to, say, 100 jobs, and then either enthusiasm for their trendy, flash-in-the-pan product dissolves, in which case all the jobs disappear within, say, 2 years after the company was founded, OR they get bought out by Google or Microsoft, in which case most of the 100 jobs are either absorbed by the bigger company, or disappear.

So the net production of jobs, over, say 5 years with the tech startup might be 5, while the net in China from a manufacturing business remains 5000.

[Viper]

And yet eventhough China treats people like that and requires a 50% interest in all companies ( thats a very high corp tax rate)... American companies flock there! But Mccain wants a 25% tax rate here! LOL..

McBush tax cuts went to building new shiney plants in China for $1 per day wages and then 4.5 million MFG jobs followed from U.S. and the first jobless recovery was born. our plants close and rust away along with our bridges, roads and dams.


China charges us a 22.5% tarriff and we charge them a 2.5% tarrif... boy are we dumb!


Regards

[DC]

We can stop buying cheap STUFF

[vegasobserver]

Continuation of my post....

What does it matter if the college students of America can use a new "video discovery" site that becomes all the rage for a few months, to share kooky videos of themselves in their dorm rooms, if there will be few good REAL jobs waiting for them when they graduate?

Too many "tech startups" are just toying with the same information, entertainment, news, social networking, etc., but unless they actually BUILD A REAL PRODUCT that (1) can be used in the real world, (2) people really want to buy, and (3) creates a tangible benefit or actual wealth, this sector will NOT save the economy, but just act as another sponge to soak up excess capital and pour it into a blind pit.

[LibRS]

you echoed some of my thoughts.

[vegasobserver]

As someone who has worked for tech startups, I can say that they provide a rather scant hope for the economy. True, they may be the only pulse left in the economy right now, and they do provide a certain number of jobs (mainly in places like Silicon Valley and Seattle), but tech startups most certainly cannot be relied upon to truly revive the American economy.

The realization is hitting people, and will soon hit the media, that 90% of tech startups do not produce anything of lasting value. Most startups tinkering with the internet do not create real wealth, but simply shuffle around existing information and entertainment.

For instance, what does a new social network do, except provide a new means for an underemployed population to communicate? What does it matter if I can go on imeem.com and share my favorite music with all my friends, if both I and my friends are unemployed because the country's manufacturing base (and all the attendant industries and spillover jobs) has been systematically decimated over the years?

What does it matter if I can use a new "widget" invented by some Silicon Valley startup, to plan my calendar and meetings, if I have no meetings because I'm unemployed, because most of the good jobs with good salaries have been shipped overseas in our decades-long rush to globalization?