Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Silicon Valley and Wall Street: We're Not Immune - Here's Why

Posted by Tom Foremski - September 16, 2008

Life in Silicon Valley usually chugs along despite wider economic turmoils and seems to exist in its own bubble/cocoon, buoyed by large amounts of venture capital investments. This makes sense because VC investments are typically targeted to coincide with returns based on the economy one to five years out.

Foremski's Take: This time things are different and here are a few reasons why Silicon Valley's large and small companies won't be insulated from the financial crisis in the US and beyond:

-- Wall Street firms are massive buyers of all types of IT equipment.

The financial services sector is typically the largest customer for all types of IT equipment. Wall Street spends billions of dollars on servers, software and specialist systems used for esoteric and highly compute intensive tasks.

Clearly, the news is not good and it must negatively affect sales at Silicon Valley's top companies such as Sun Microsystems (JAVA), Hewlett-Packard, Cisco, and Oracle. What will happen to the IT assets of Lehman, etc? Will all that equipment be dumped into the market and suppress sales of new equipment? That's what happened when the dotcom bubble burst--a massive amount of nearly new servers and network equipment found its way back into markets and hurt sales for several quarters.

The slight silver lining is that the six thousand or so SIlicon Valley startup companies are unlikely be directly affected by IT spending and will benefit through cheaper equipment.

-- Analyst coverage of Silicon Valley Companies and Growth Sectors.

There are a lot of questions that Wall Street analysts should be asking the large IT companies, that is, the few analysts that are left. Fewer analysts means less coverage of Silicon Valley's public companies, and that means fewer "market makers" out there, and that won't help to boost stock prices. That will likely lead to more volatility as the quantity and quality of analyst information declines, and the available stock market information becomes more heavily influenced by bulletin boards and less reliable sources.

-- Raising VC Funds

Investment capital is the lifeblood of Silicon Valley. Will the pension funds now become less tolerant of risk and less willing to fund Silicon Valley startups? That's a very real possibility.

-- IPOs and Exist Strategies

Cashing out startup investments through initial public offerings or through acquisition by another company provides the exit strategies that help create new investment cycles. Current events have put a huge damper on IPOs and on M&A.

With the fall of investment banks, who will package up and market Silicon Valley's IPOs? This will further shrink the tiny IPO market forcing exit strategies to concentrate on acquisitions. But even here, Wall Street investment banks have played a crucial role in structuring and helping to finance acquisitions.

- Angel Investors

Angel investors have become crucial within the SIlicon Valley ecosystem as VC firms have largely moved out of seed-level investing and into later stage deals. The personal wealth of angel investors has been hurt by exposure to hedge funds and also to property markets. This means there will be less capital available to seed the next generations of startups.

-- Foreign Acquisitions

Will better financed overseas corporations feast on US opportunities? A weak dollar and the lack of any other exit strategies will create a bonanza of bargain priced acquisitions of US tech companies.

-- Less VC Money

If we have less VC money that means startups won't have the expansion capital they need. They will fold or have to settle for being acquired at a lower value. Less VC money also means less money for the PR industry, which has been thriving, thanks to Silicon Valley's thousands of startups trying to rise above the noise of each other.

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Please see:

H-P confident of hitting quarter profit target - Yahoo! News

By Eric AuchardTue Sep 16, 3:34 PM ET

SAN FRANCISCO (Reuters) - Hewlett-Packard Co (HPQ.N) is "very confident" it can hit its current quarter profit target, despite currency headwinds and ongoing weakness in its printer business, a top executive said on Tuesday.

SVW:

Out & About: Entrepreneurs Talking About Recession-Are Angel Investors In Trouble?

I ran into James Hong, one of the founders of Hot or Not, a tremendously successful web site. Hot or Not was sold in February to private equity firm Avid Life Media, for a reported $20m. He said fears of the recession were the prime reason Hot or Not was sold. "I'm telling all my friends to either get out now or buckle up for the long term."

"I'm not going to plan my next venture until it is clear what is going on with the economy," he said.

Investment Banking Crisis Will Freeze Silicon Valley M&A Deals

John Fisher, a Silicon Valley entrepreneur who sold his company Bharosa to Oracle last year, says the chilling effect from the fallout from the investment banking sector will severely impact many startups.

"The investment banks broker huge numbers of M&A deals. This crisis means that over the next few quarters there will be many companies caught in the middle, unable to complete M&A deals," says John Fisher.

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