Silicon Valley Takes Off Its Blinders

It's taken a long time, but Silicon Valley has finally taken off its blinders and recognized that there are other tech clusters out there. Today, nearly every venture capital firm along the famed Sand Hill Road is in China, India -- or both. Bring up the topic of Asia tech today in the Valley, and it's no longer a conversation stopper.

It's with good reason that Valley investors are no longer in denial. Chinese and Indian startups offer venture investors an opportunity to cash in big. Over the past four years, 14 Chinese tech startups have gone public with market valuations of more than $1 billion on the NYSE, NASDAQ and the Hong Kong Stock Exchange. That compares with 11 tech startups in the same league from the U.S. India, meanwhile, is coming up fast, with recent bull runs and acquisitions of its Internet and mobile communications startups.

Venture capitalists may be optimists but they look at hard numbers to gauge where to place bets. An analysis recently shared with me by a top-tier venture firm made this telling point: it takes 12 times more dollars and five times more deals to generate the same investment returns from U.S. startups as it does with China startups.

Talk of Asia tech is no longer a turn-off in the Valley for another key reason -- China and other Asian upstart nations are emerging as innovation powerhouses. Consider that China moved to 6th in the world in 2008 - up from 10th place just three years ago -- for the number of new patents applications, with a Chinese company, Huawei Technologies, in the lead spot last year among all corporations globally. Moreover, India too is in the running, and already ranks third among developing countries on the patent scale.

So it's little wonder that these two giant Asian economies also capture the bulk of venture capital investment in Asia. In fact, China weighed in with 41 percent of the $23 billion that venture capitalists invested in the region last year, while India captured 38 percent.

Now I'm not saying that Asia has a lock on future innovation. Far from it. In fact, the U.S. still reigns as the biggest patent force in the world -- with about one-third of all new patent applications. And the U.S. remains the biggest venture investment market globally, too - with nearly $29 billion invested in startups businesses in 2008.

But as innovation goes global, the U.S. lead is being chipped away. Suddenly, the talk is about whether Silicon Valley still has "legs." Sure it does, but America's share of global investment has slipped to 68 percent of $42 billion in 2008, from 71 percent in 2005.

The venture capital business in the U.S. now faces a low point. Investment returns have dropped by 58 percent, as few startups go public or get acquired in the tough economy. Venture firms are downsizing, and the industry is in meltdown as fewer players can raise new funds - with their own investment backers such as the giant pension funds struggling with massive declines in net assets.

The silver lining of this downturn is that it's a good to invest. Microsoft and Apple came out of the mid-1970s recession, and major new tech brands will emerge from this bleak period too. Just don't be too surprised to see some of tomorrow's new brands developing from China and India.
China and India already have passed the copycat stage -- where Chinese and Indian versions of eBay, Google, Monster, Yahoo, Amazon, Travelocity, Facebook and MySpace were launched. China's trading site Alibaba and the $3,000-priced Tata Nano car are but two examples of Asian brands that have global impact. Now, investors from Silicon Valley are looking not just to the U.S. tech hotspots but also China and India to generate the next double-digit investment returns -- from clean tech and biotech to new types of 'killer aps' on mobile phones.

The stakes are high. Just consider this one fact alone: superstar startups Microsoft, Apple, Google and Starbucks created 10 million jobs for the U.S. economy. Today, technology from China and India is an engine of their own nation's growth -- one more indication of a shift in economic power to the east.

Follow Rebecca Fannin on Twitter: www.twitter.com/rfannin

Comments

[sonoffestus]

|Oophs.........we threw the baby out with the bath water! It's not just tech. All our industries will continue to be challenged on the innovation front. Wait till eastern manufacturers start developing their own brands. Good design, products and savey marketing will compete directly with the long established western brands. It will take some time but the writing is on the wall.

What many folks fail to understand is that outsourcing is more than leaving to find "cheap " labour. Much of the move is to target the worlds future consumer markets. It makes sense to locate your manufacturing in places like China and India because that is where the largest and strongest consumer demand will be found. The US is in for a 8 to 15 year period where you will see depressed wages, a declining standard of living and reduced consumer demand.You will also experience the greatest social dislocation since the Civil War. Why locate here and have to ship your product half way around the globe when you can be there?

Corporate leaders are not stupid people. They know where the future lies. There settting up shop where the money is at the same time protecting their wealth creators. The new world order will be very different everybody needs to get used to it. It will not be your parent's world, but then, it never is.

[BARRISTER]

Greedy American Corporations have dug their own grave. In search of vulgar profits they have outsourced and offshored every conceivable element of their businesses and 'in so doing they have destroyed the American Middle Class - and therefore America - while transferring technology to the far East. They have rendered themselves, and in the process America, irrelevant and, axiomatically, redundant.

[harry greb]

Corporate America, through treasonous trade deals and the abuse of the H1-B visa has successfully "off shored" American innovation. No intelligent person wants a software engineers' job. 60 hour weeks at 40 hour salaries? No pension, 2nd rate medical, zero job security? Cops, nurses and government employees do a lot better with less education and less stress.

[drymartini1]

A lot of H1-Bs are foreign students who went to US universities here and are working in US companies, contributing to US economy (i am assuming you know difference between H1 and L1).

These students have more education than your average american. so stop complaining. And most of these tech companies pay these h1-b at par with american employees. Our company has tons of h1-b and a lot of them are my friends (i am one too). Most of them get paid well enough to buy houses, live a comfortable lifestyle (nothing ostentatious, but well enough).

[harry greb]

Wrong. Most H1-B visa holders were not students here, rather they were more cheaply educated in India and brought in by large, multinational corporations specifically to depress wages. Hence the failure of high tech wages to maintain parity with union or government work, as well as the huge reserve of unemployed American technical workers. The fact that you are paid "on par" with American workers speaks to this fact. As far as having "more education than your average American", don't flatter yourself. You are employed soley because you're less expensive, can be forced to work uncompensated overtime, can be deported anytime you refuse to comply with demands, and serve as a backlog of "scab labor" should Americans attempt to unionize.

[EinChicago]

Oh look. Another highly original column in which Ms. Fanning states (again) that China is the absolute bestest ever place in the whole world for innovation and tech (with little to no support, as always).

*yawn*

Even the best song gets tired after being played the 1,000,0000th time...especially with no support for the claims made in it.


Here's a valid specualtion though; with tech from China, how much lead paint and other dnagerous products could they cram into teh housing?

[drymartini1]

the author makes no such claim. she in fact concedes that US is the leading patent applicant in the world, far ahead of india and china.

she is just saying that there are a lot of high ROI opportunities in India and china thats all. Capital is mobile, so venture capitalists are investing in those 2 countries looking for high returns.

thats all.