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Looking Forward to the Real Silicon Valley

06/26/2015 09:56 am ET | Updated Jun 26, 2016

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I am one of those people who doesn't like bubbles. Right now, we're experiencing a bubble in Silicon Valley with funny money driving weird, unproductive behavior.

Some people want this party to go on.

I don't.

Francisco Dao has written a poorly analyzed post on VentureBeat titled "What will happen to Silicon Valley when demographics strangle the global economy":

One of the things the author, Peter Zeihan, explains is how the size of the Baby Boomer generation has provided a flood of capital into the global economy, and as they retire and begin to draw money out of the system, capital will become much more scarce. In short, we are at the tail end of a large (Boomer) working and investing population that is about to be replaced by a much smaller (Generation X) working and investing population, and that shift will result in a global capital crunch.

If he's right, then venture capital as we know it is about to be a thing of the past. As the massive pool of global investment capital dwindles, venture capital as an industry will also shrink as firms find it much harder to raise funds. When the belt-tightening trickles down through the entire ecosystem, what does the rest of Silicon Valley look like without all the easy money sloshing around? Can the Valley even survive? Let's consider what a cash-starved Silicon Valley might look like.

Francisco goes on to explain how fund sizes will shrink, number of second-tier venture funds will shrink, number of angel investors will shrink.

Well, the trouble is, all those NEED TO SHRINK.

The large funds, including first-tier ones, are the ones pumping up the funny money game. They want the fat management fees. This needs to rationalize.

There are way too many second-tier funds in the business, and they bid up valuations to unsustainable levels to win deals, confusing naive entrepreneurs. This needs to rationalize.

Too many angel investors are funding too many seed-stage companies who should be bootstrapping, not chasing venture capital. [Read: Why 70k+ Angel Financings Is A Problem] Many of these companies can be successful, profitable niche businesses with $5M, $10M, even $50M revenues. But not venture scale companies. Not billion dollar unicorns.

Venture capital is a cottage industry. Too much money in the system is not helpful.

Most entrepreneurs should be bootstrapping.

Of Francisco's conclusions below, some are correct:

Now let's think about what this means for the broader ecosystem of Silicon Valley:

  • Less investment money means fewer startups. Unless tech entrepreneurs figure out how to bootstrap their way to success, this is simple math.
  • Fewer funded companies means fewer jobs.
  • Surviving venture capital firms will likely expect profitability to come sooner and be less willing to wait for a liquidity event. This means smaller and shorter term bets.
Unlike other parts of the country whose various industries are largely self-sustaining based on actual profit, much of Silicon Valley is artificially supported by venture capital money. When that money goes away, as it did in 2000-2001, the entire region collapses almost overnight.

Entrepreneurs in Silicon Valley and elsewhere are rapidly learning the virtues of bootstrapping. If the angel investment frenzy rationalizes, this trend will accelerate. It is a healthy outcome.

Fewer funded companies means fewer jobs is a correct conclusion. The positive: the insane talent war will rationalize, giving more stability to the good companies.

I don't see a collapse in Silicon Valley at all due to a decrease in venture capital availability. Even though there were 70k+ angel investments in 2013, the number of venture investments per year remained constant at 1000. So, angels already have difficulty getting their investments funded by the VCs. We don't need a demographic shift for that correction to kick in.

If anything, I recall what happened in the early 2000s. Under the radar, companies like Salesforce.com, Workday, ServiceNow, and Tableau were being hatched and developed. All of those are now massive, legitimate success stories. Cloud Computing was birthed and nurtured in a climate of scarcity, not abundance. Even Social Media was birthed and nurtured in the same climate of scarcity.

Typically, in Silicon Valley, when bubbles burst, the gold diggers go away. The REAL entrepreneurs continue to work.

Silicon Valley's sustainability rests on the wings of those REAL entrepreneurs.

Not the gold diggers.

Photo credit: Arild Finne Nybø/Flickr.com.