Bloomberg: Silicon Valley Increasingly has Little to do with Silicon

Silicon Valley has very much become a reflection for greater America. While it (Silicon Valley and America) still has a role in manufacturing, increasingly our knowledge / service based economy focuses new ventures on things like social media. So Walmart, World of Warcraft, and Facebook nation it is. Bloomberg has a nice piece on how Silicon Valley nowadays has little to do with the actual silicon its name was based on just some 3-4 decades ago. This is part of my broader concern – I have no doubt the U.S. will continue to innovate and create the high level knowledge jobs here – but 40 years ago the entire ecosystem was built in the U.S., allowing people from every rung of the ladder to participate in the genius of the innovators. Now increasingly while the head of the company is in the U.S., the heart, lungs, legs, and hands are going overseas. Hence job creation will be very top heavy and in a very narrow sliver of society. Which is fine if you are in that sliver, but in theory we need to worry about the whole society if you believe in social balance. If you missed former Intel CEO Andy Grove’s cover story in BusinessWeek last summer on the challenges of this dynamic I’d consider it a must read – essentially he admits he would not (or could not) create Intel in the United States in the modern era. That should scare people. (BW July 2010 – Andy Grove: How America Can Create Jobs) But many of his solutions would be considered ‘socialistic’ in a country where people do not realize every country we are competing against has government and private industry working together.

I cannot stress enough that where the manufacturing is, is where much of the research and development eventually goes – it is already happening. China/Taiwan effectively built a Trojan horse (with the mfg) and now is slowly but surely receiving the higher end jobs as R&D centers are now being built left and right. At current pace we’re going to be a country of administrators and CEOs… and Walmart greeters (but you’ll never take away our Facebook).

Anyhow… via Bloomberg:

Silicon Valley has lost its appetite for silicon. While venture capitalists are pouring money into social networking, e-commerce and online-game companies, investments in chipmakers are close to a 12-year low. And yet semiconductors — made from silicon wafers — provide the brains for everything from computers and mobile phones to nuclear missiles.

At issue is the expense to get a startup off the ground. Chipmakers spend millions developing and testing their designs before they even know if an idea is viable. Those costs have pushed the industry abroad to countries that offer tax incentives and subsidies unmatched in the U.S. Meanwhile, the expense of starting software and Internet companies has actually gone down, thanks to cheap Web-based programs and services.

“There are no lack of ideas, but it’s becoming harder and harder to find investors,” said Ken Lawler, a general partner at Battery Ventures in Menlo Park, California. “It takes too much money and too much time.”

That contrasts with China, whose role as a manufacturing hub for semiconductors is helping it play a bigger role in design and innovation. The country’s worldwide share of chip- related patents is expected to rise to 33 percent this year from 22 percent last year.

“The U.S. has got a lot to be concerned about from a global competitiveness perspective,” said Matt Cown, co-founder of venture capital firm Bridgescale in Menlo Park, who formerly worked in corporate development at Intel Corp.

Venture financing of U.S. semiconductor companies dropped 36 percent through the first three quarters of this year to $894.9 million, down from $1.39 billion in the same period in 2008. Last year, venture capitalists invested a total of $863.8 million in chip companies, the lowest level since 1998. First-time venture investments in chip companies accounted for 1.1 percent of total initial funding this year, the smallest category among 16 industry groups tracked by the NVCA.

Software companies received the highest amount, with 17 percent. In the past two years, venture capitalists and other investors have piled hundreds of millions of dollars into social-networking companies such as Facebook Inc. and Twitter Inc., online-game maker Zynga Game Network Inc. and Web-coupon provider Groupon Inc. Each is valued in the billions.

“Semiconductors aren’t as sexy, you don’t get the valuations, and you don’t get the multiples,” said Manuel Hernandez, chief executive officer of Hercules Technology Growth Capital Inc., a Palo Alto, California-based firm that provides debt financing to startups. (very true – do you think Americans would be stepping on each other to bid up the “Applied Materials of China!” IPO to the moon as they did Youku and Dangdang? Nah!)

The term Silicon Valley was coined in the 1970s and refers to the 50-mile stretch between San Francisco and San Jose, where companies such as National Semiconductor Corp., Intel and Advanced Micro Devices Inc. were using silicon to create computer components. Nowadays, a state-of-the-art chip plant costs more than $4 billion and has a useful life of about five years.

Most companies don’t even consider manufacturing their own products, choosing to outsource to Taiwanese businesses instead. Taiwan surpassed the U.S. in terms of production in 2005 and has been adding to its lead ever since.

“It used to be that we started companies here and we didn’t think about going offshore until we were substantially big,” Banatao, 64, said in an interview at his office in Palo Alto. “At the outset now, as we fund the company, we think about going outside right away.”

Just another reason we need to create paper asset wealth and hope for Fed induced bubbles to be created every 5-7 years … as ‘making stuff’ and now ‘researching stuff’ is increasingly beneath us.

About Mark Hanna 543 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

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