The Allianz Technology Trust makes a virtue of being embedded in Silicon Valley, the heart of technology investing for much of the past forty years. However, companies have started to move away from the Bay Area – Tesla to Austin, Hewlett Packard to Houston, with Uber and Salesforce also putting their buildings up for sale. This has led some to ask whether Silicon Valley’s power may be declining.
The term Silicon Valley was coined in the 1970s. It was used to describe the Bay Area south of San Francisco, which became home to the silicon transistor (a semiconductor made with a silicon base used in a wide range of electronics). Over the next forty years, it became a hub for technology innovation, bringing together intellectual property, capital and a skilled workforce.
An impressive rollcall of major technology companies is headquartered there - Apple, Alphabet, Meta (formerly Facebook), and Netflix, plus hardware companies such as Cisco, Oracle and Intel. AI giant Nvidia is also based there, and it is also home to a raft of next generation technology companies – Uber, Lyft and Airbnb. It is a hub for private equity investors and start-ups. It has brought forth an entire ecosystem for ambitious technology companies.
More recently, the high profile relocation of some major businesses away from Silicon Valley has prompted some hand-wringing. Is the technology hub losing its edge? In December 2021, Elon Musk moved Tesla’s headquarters to Austin, Texas, one of a number of companies moving to the Lone Star State. “If a team has been winning for too long, they tend to get complacent and then they don’t win the championship anymore. California has been winning for too long,” said Mr Musk at the Wall Street Journal CEO Council summit.
The moves have been attributed to a number of factors. High state taxes in California have driven away newly-wealthy entrepreneurs, who want to keep more of their capital. They may also enjoy the lower house prices elsewhere: Silicon Valley has suffered from the well-document Facebook IPO effect on house prices. The company’s float in 2015 put significant wealth in the hands of its employees and inflated housing costs across the region. Menlo Park reported a 42% rise in house prices in just two years.
There have been other, more worrying, problems. The abundance of private equity capital has led to less discernment and due diligence. The scandals of Theranos and WeWork, where founders Elizabeth Holmes and Adam Neumann were heralded as Silicon Valley heroes and raised vast sums, have seen investors worry about a certain group-think among companies and investors that prioritises a good idea over a good business. On a lesser scale, the weak post-IPO performance of companies such as Uber and Lyft has rightly brought Silicon Valley’s role as the midwife of innovative technology into question.
However, Silicon Valley retains certain advantages that make it unique. There are pretenders to its crown across the world, but nowhere else brings together brilliant ideas, with dynamic capital and the right people to bring an idea to fruition. In particular, it is home to capable management teams that know how to scale businesses, skilled engineers, and intellectual property emerging from Stanford University. Many of the companies that are leaving Silicon Valley no longer need capital to grow. For everyone else, it’s easier to go where the cheques are written.
Undoubtedly, there have been problems with too much capital, though that it not unique to Silicon Valley, it is just where much of that excess capital has been directed. Excess capital can always lead to careless decision-making. On ATT, we see huge amounts of exciting and innovative technology, our job is to ensure that it has a viable path to profitability and that the management team is sufficiently talented to bring an idea to life. This is a product of experience and can occasionally get lost in the irrational exuberance around new technology.
Nevertheless, the longer-term effect of these recent scandals on Silicon Valley is likely to be positive. We are already seeing a tightening of requirements for funding. There is no longer capital to support ‘blue sky’ ideas without a robust plan to deliver performance. There has always been a ‘frontier’ mentality to Silicon Valley – that partially explains its success – but there is also the serious desire to make money.
Silicon Valley has always shown itself to be dynamic. While the early businesses were concentrated in Palo Alto and Menlo Park, Salesforce, Uber and Twitter chose to set themselves up in the heart of San Francisco, along with a number of venture capital companies. Increasingly, there is a hub of app designers around Dolores Park and Crissy Field. There are also signs that existing companies are re-committing to Silicon Valley – Apple and Google have recently announced plans to expand in the region. Silicon Valley continues to grow and evolve.
It has spawned imitators. India has Bangalore, which is now the centre of its growing high tech industry. 80% of the world’s IT companies have a presence there and the city accounts for around 40% of all of India’s IT exports. The UK has ‘the Silicon Valley of Europe’ in the Thames Valley, with a similar ecosystem of intellectual property emerging from Cambridge University and an experienced workforce ready to commercialise it. China has its Nanshan District in Shenzhen and Zhongguancun, a technology hub in Haidian District, Beijing.
These technology hubs are exciting and may well be the engine of significant growth and innovation in the coming years. However, none can yet rival Silicon Valley for scale and innovation.
There is no doubt that Silicon Valley has its detractors, but the statistics show its power and reach. According to Crunchbase, the Bay Area is home to 7,894 scaleups – technology companies that have raised more than $1m in funding since inception. It is notable that Silicon Valley currently has around 5x more scale-ups than the ‘startup nation’ Israel, 2.3x more scale-ups than New York, 7x more than Texas and 8x more than Boston/Cambridge. Tech hubs outside the US don’t come close.
Capital to support businesses is still significantly concentrated in Silicon Valley. Around half of the total capital for US technology companies is raised there – over $500bn. This dwarfs the amount raised in Europe ($195.5bn) and even in China. More importantly, it is still growing. Entrepreneurs still view Silicon Valley as the place to raise capital for their technology businesses.
This is certainly a reason to be in Silicon Valley. It is the spot where ideas flourish, where capital is raised and where businesses are built. However, there are other, softer, reasons to be there: investment is an art as well as a science. The buzz around a new company, the enthusiasm of its staff, the networking at a conference. These bring a flavour to our decision-making that cannot be gleaned from numbers alone. They can help us confirm or challenge our thesis about individual companies and guide us to new ideas. This is where being in Silicon Valley has an edge.
The death of Silicon Valley has been overstated. It is still the most fertile source of technology talent and ideas of anywhere on earth. Its rivals do not come close to matching it for scale. It is the home of technology investing and the best spot to find the most compelling opportunities.
