Has Silicon Valley Lost Its Edge?

by Tony D'Altorio

Has Silicon Valley Lost Its Edge?

by Tony D'Altorio, Investment U Research

Thursday, March 3, 2011

U.S. technology innovation has relied on venture capital dollars for the last 50 years. That relationship resulted in it - and Silicon Valley - becoming the ones to beat.

Yet last year, only $12.3 billion of new money found its way into venture capital funds, less than half of that in 2008. As private equity amounts retreat, many American start-up financiers see a historic contraction ahead for the industry.

Part of that blame falls on U.S. venture capitalists, who now hunt elsewhere for big ideas. Many of them have their eyes on China for clean technology and other new platforms.

VantagePoint, one of the biggest Silicon Valley investors in that field, launched a $100 million fund for emerging clean technology in China last year. This made it one of the largest investment vehicles of its kind.

Some venture capital firms chose that route because of the legislative environment at home. It's simply not as conducive to backing local companies as it used to be.

But that's hardly the only reason why they're taking their business elsewhere...

Facebook Isn't Such a Great Sign of American Innovation After All

When Facebook received a $50 billion valuation in private financing in January, it looked like business as usual for the Silicon Valley. But to some industry veterans, such showy success stories say little about U.S. technological competitiveness.

If anything, it may mask a deeper malaise that threatens America's system of innovation.

Just ask John Seely Brown, who used to head up the Xerox (NYSE: XRX) Palo Alto Research Center. That was when it was one of the Valley's most renowned corporate research and development laboratories.

Brown thinks U.S. technology investors no longer care about the serious work needed to keep a lead in many advanced industries. He says, "we've lost the will for patient investment," thanks to quick profits from high-flying internet and social networking firms.

American Psyche Bruised

To many, American technological leadership seems almost innate. They see it as the product of ingenuity, a sense of risk-taking and a hunger for the new that could only take root in a country as democratic, socially mobile and close to its pioneer roots as the United States.

Not true, says Michael Moritz, one of Silicon Valley's leading venture capitalists. He believes that thinking is "a clear exposition of the arrogance of empire," and adds that, "the need to succeed is far greater in the emerging markets."

Nor is there any inherent U.S. resource advantage, as information and talent flow freely. "We're not smarter than they are," says Bill Watkins, another Silicon Valley veteran.

  • Certainly, the U.S. lost electronics manufacturing to Asia beginning in the 1980s.
  • Next information technology services shifted to India.
  • And today, in new markets such as green technology, Asia is unfolding as the center.

The aforementioned Mr. Watkins is the CEO of Bridgelux, which leads the promising new LED industry. He sees promising new industries continuing to slip away to Asia...

"We [the U.S.] invented LEDs, but we're losing the business to Asia, and it's the same with solar." For proof, just ask First Solar (Nasdaq: FSLR) about increased competition from China.

Today, the R&D and design work that goes into electronics manufacturing is also moving elsewhere. Applied Materials (Nasdaq: AMAT), for one, shipped its chief technology officer to China last year to be closer to its manufacturing facilities.

There is a close tie between the design and manufacturing of products that characterizes the evolution of new technologies. It becomes difficult when it happens so far away.

And it's why the US is losing what Seely Brown calls, "the capabilities to build serious, complex stuff."

Possible Solutions to the U.S. Technology Slump

There are no easy or simple solutions available to the U.S. or Silicon Valley. But if they really want to reverse the trend back in their favor, they could take some notes from the following ideas:

  • The U.S. education system needs an upgrade and a new emphasis. It doesn't graduate enough science, engineering and technology students to feed national demand for such skills and to keep the country ahead in the global tech race.
  • The United States also needs to decide if it's open for business and willing to compete globally for factories and jobs. Technology companies say costs are higher in the U.S. largely because of a lack of incentives or tax credits easily found elsewhere.
  • Meanwhile, Silicon Valley itself needs to change, focusing on industries of the future, such as renewable energy, that will produce more jobs. It needs less companies like Facebook, which offer leisure-time activities, and more attention to such things as alternatives to oil.

The United States only stands a chance if it begins implementing such changes immediately.

Good investing,

Tony D'Altorio

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