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

Markets Fall: What Will Happen To Silicon Valley Recovery?

Posted by Tom Foremski - August 8, 2011

Turmoil in global financial markets and economies is never good for Silicon Valley despite the fact that the regional economy has its own boom and boost cycles that operate on a different timetable.

Currently, Silicon Valley has been booming, recapturing p the trend that was in place in the second half of 2008 before the financial meltdown, of growing VC investments and jobs. But like that recovery in 2008 which ran smack into an economic crisis, will this recovery again be nipped in the bud?

Maybe. Profits at the large Silicon Valley companies such as Google, Intel, etc are good and projected to be good for the rest of the year.

When it comes to startups, VC investments are at healthy levels and Angels are taking care of the very early, still pivoting, startups.

To a large degree, the current market correction was expected following the large decline in late 2008. All large market corrections are followed by a second correction, and the second one usually signals a longer, but slower period of recovery.

For example, following the crash of 1929, the Dow made a reasonable recovery before it crashed again in 1932, to just 11% of its value in 1929. The Dow returned to its pre-1929 levels in November 1954. That's a long time to wait for your stock portfolio to get back to where it was before the crash.

So will this current financial crisis hurt Silicon Valley's recovery? Yes, but it's not clear to what extent.

Because of the momentum of capital and the scale of current investments, VCs are committed to a greater extent than before, and therefore they can't easily pull back, or out of many investments, because they are expansion investments.

Problems: VC firms currently raising funds are worth watching. Also, Angels, will they be able to continue investing or have they been harmed by the stock market sell-off? It's different for each individual.

Either way, expect a chilling effect on SIlicon Valley until the picture becomes clearer. And prepare for an M&A boom as cash rich Silicon Valley companies make bargain acquisitions.


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