11:39 AM

Schmidt: Don't Bet Against Silicon Valley - Or Its Weather

"Anyone who bets against Silicon Valley is betting against a successful track record of 40 or 50 years," says Eric Schmidt, CEO of Google [GOOG] in an interview with the Wall Street Journal, when asked if Silicon Valley is losing its edge.

You've got the universities. You've also got a very, very effective venture-capital industry, which is very well honed and you have the creations of at least a biotech revolution and a high-tech revolution, and the possibilities of the green revolution being created here.

But despite these advantages, Mr Schmidt believes it all comes down to the weather(!)

When I'm asked about this, and I've been asked this for years, I answer this the same: It is the weather. There's a reason why generations of young people who are willing to challenge assumptions and so forth have ended up in the Bay Area, and the weather is not a small part.

It is a surprising statement. I think the weather is a nice cherry-on-a-cake thing to enjoy. I think people are here for the cake, the layer cake that Mr Schmidt describes. It's not the weather.

If it is about the weather then we should be concerned about innovation centers springing up in Hawaii or Florida.

Here are some additional observations by Mr Schmidt:

Q: A lot of workers in Silicon Valley have been laid off. Do you think they will end up back in the tech sector? Will Google hire them?

A: I don't know about Google.

Q: Many of the industries you have outlined, like biotech and energy, require sustained investment and lots of investment in capital-intensive infrastructure. Does Silicon Valley have the culture to wait for those sort of transformative initiatives to bear fruit?

A: I think it is a mistake to assume that the only interesting businesses are the ones which require no capital like Web-based businesses. I don't see any particular reason why high-cost capital business cannot also be built in the same cauldron as these low-cost ones.

Excellent question but I can see plenty of reasons why capital-intensive businesses won't be "built in the same cauldron as these low-cost ones."

If you take a look at VC funding, there are very few funds willing to invest in businesses that require large amounts of capital. If you add the higher risk of longer periods between exits for many clean-tech/green-tech, pharma, and biotech businesses, even during normal times, that's not going to attract the same type of VC funds that invest in IT software and Web 2.0.

As it is, we don't have enough funding going into Silicon Valley's traditional investments -- that funding certainly isn't going to shift into riskier, longer-term investments in biotech and energy. VC funding is currently very risk averse.

It's surprising that Mr Schmidt didn't mention Google's investments. It is funding several projects in biotech and energy. This includes investments in 23andMe, a biotech startup founded by Anne Wojcicki, the wife of Sergey Brin, co-founder of Google; and investments in solar and wind energy ventures.

Google's investments are expected to make money but they are strategic in nature designed to help seed important new industries -- they are not directly related to its core business.

Google can make such investments without much concern for any concerned shareholders because its founders, and other insiders, own the majority of the voting rights. They own preferred stock with ten times the voting rights of regular shareholders,

Intel Capital also makes a large number of strategic investments but they are all related to its business and are chosen because they will help drive sales of its technologies.