Whether there’s a tech bubble or not is an interesting discussion going on in the blogosphere. (Reading guide is below.)
I fall into the “boom before bubble” pack. Having lived through the 90s’ bubble, there’s no way we’re there yet. That doesn’t mean there won’t be one, but my feeling is we’re skating a razor’s edge off one side of which looms another wave of housing foreclosures and a doom & gloom Sequoia presentation. Investors herding like sheep around darling Silicon Valley startup memes is not in itself bubblicious, it’s SOP. Sheep investing affects supply and demand conditions that result in higher valuations. Good or bad, that doesn’t in itself represent a bubble.
The Internet bubble was about more that overvalued startups. Horowitz and Graham argue other dynamics way better than I can (see links below), but I think it’s important to point out that bubbles dramatically affect the entire economic climate. The bubble was “our” version of 70s inflation. The bubble caused a huge migration of people to the SF Bay Area. Salaries went through the roof (not just for engineering talent.) So did cost of living. In the 90s, the housing bubble was inseparable from the Internet bubble. The buying of lots of different goods became irrational.
And there’s the final point. Frankly, as long as the voices saying we are in a bubble remain as strong as those who say we aren’t, it’s hard to say we are. There’s was very little dissent in the 90s or perhaps more accurately, that dissent was easily drown out by the ignorance of the mainstream media. But that isn’t the case today, either.
The Best Way To Avoid a Bubble
Think globally, act locally. Successful startup ecosystems in Boston, New York, Boulder and a few other cities eases pressure on Silicon Valley prices for EVERYTHING, including startup valuations. Yes there are advantages to investing in startups in large ecosystem like Silicon Valley, including access to partnerships, vast amount of resources and M&A opportunities, but there are pitfalls, too. Strong entrepreneurship exists outside Silicon Valley, as many of the past “big wins” show. Local non-SV ecosystems frequently have strong, yet underemployed resources, lower engineering costs, employees less likely to jump ship, and local environments arguably more attractive that Silicon Valley.
But where’s the money? San Diego’s Avalon Ventures is the only VC with an active fund. Tech Coast Angels, who laughingly claim “lean startup” as a tag, is infamous among entrepreneurs for their six month plan for not investing, rather for any risk-taking activity. Local support organizations like CONNECT server clean tech and life sciences well, but their vanity metrics fail to reveal their inability to attract and help Internet and software entrepreneurs. There are about a dozen San Diego angels on Angel List, most of whom have no San Diego investments.
I have heard similar stories from other startup cities, even the bigger cities that seem to be thriving. There are several problems:
- Many local investors are “old school,” believing they sit in the catbird’s seat and can wait for for entrepreneurs to knock on their doors. (Not going to happen.)
- Many local investors follow the lead of Silicon Valley investors, rather than striking out on their own. (Angel List helps solve this, plus lower $ amounts should increase risk tolerance.)
- Investors don’t know how to connect to local entrepreneurs. (Entrepreneur groups are thriving and investors need not fear being swarmed.)
- Many entrepreneurs don’t know how to connect to local investors. (Entrepreneur groups help with this, too.)
- Some entrepreneurs either ask for money based on ideas or are not building “real” startups. (Why do you think I evangelize the Lean Startup framework?)
The crazy result is local startups going up to Silicon Valley to find funding and then experiencing a tremendous amount of trouble to move there AND local investors investing in Silicon Valley companies. This circumstance not only represents a failure to support San Diego’s economy, but also serves to increase the pressure on the Silicon Valley bubble, er boom.
Please let me know your thoughts on the bubble and local investments in comments.
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Here’s a short guide on bubble opinions:
Yes, there’s a bubble
Steve Blank (post)
Paul Kedrosky (post)
Mike Maples (TechCrunch)
No, there’s no bubble. (Yet.)
Henry Blodget (slides)
Paul Graham (article)
Ben Horowitz (post)
Howard Lindzon (post)
San Diego is in an interesting position. There seems to be a lot of energy in the internet/tech community down here. There is a growing tightness in the job market for software engineers (just about every web developer I know is getting solicited weekly, and contractors are reporting that they are overworked and can’t take on more work). And yet… the startup scene is still quiescent relative to Silicon Valley, Boulder, New York, Seattle, etc.
One problem is the funding, for sure. We’re currently busy pounding the pavement, and I can vouch for the fact that while there is money in San Diego, it is a pain in the ass to find it and organize it.
But another issue seems to be startup-ready developers. I’ve talked with a number of entrepreneurs who are domain experts, have a validated MVP in the form of a signup form or demo, but still are struggling to recruit a technical lead or co-founder. Moving to the valley makes a difference here as well; there are far more engineers ready to take a risk on a startup up there. Are you seeing this as well?
It seems like improvement in either one of these could help break through the inertia in San Diego… more funding would make it easier to hire developers out of bigger companies and into startups, while more risk-taking startup-ready developers would help create the traction that helps startups actually reach funding.
What do you think? Am I imagining the startup developer shortage? Or overplaying how much it would help?
Thanks for the comment, Kevin. (And thanks for blogging about this stuff, too.) The ability to find Engineers in Silicon Valley is a myth. Anchor companies like Google & Facebook and others suck up Engineers as fast the universities can produce them and any leftovers go to the hundreds of well-funded startups. Plus, there’s little long term commitment. After minimal vesting, they jump ship. So, no doubt, San Diego’s lifestyle contributes to more risk-averse Engineering talent. Most are satisfied working for the larger companies and the DOD. (If we had the guts to cut funding for our massive military expenditures, we might free up some resources.) I think the only way to get them out is by providing a safer alternative to “hey, will you build this for equity?” We don’t need CTOs and co-founders, we need engineers and that takes money. Silicon Valley engineers don’t work for just equity either.
So no, you’re not overplaying the necessity, but I’m not sure there’s a shortage. The issue is recruiting them out of big companies and keeping the graduates local. (IMO)
Thanks for the response. Don’t get me wrong… I’m not saying there isn’t an engineer shortage in Silicon Valley. There is… I still am getting recruiting calls & emails from up there despite being almost 2 years in San Diego. But it feels like the culture of working at startups as an engineer is much more embedded there. You go and work at a Google or Facebook for 3 or 4 years, and then you go join or start a start-up. As opposed to moving between massive government contractors plus Qualcomm for most of your career…
That said, I think you may be right that money into the startup eco-system is the way to get this started. The first step towards being ready to be a CTO or co-founder is working as a (paid) engineer at a start-up and getting hooked on the culture and the energy.
I worked at a enterprise start-up in Little Italy as the VP of Engineering, so I’ve met tons of talented and smart engineers in San Diego. I can tell you there is no shortage of engineers – and their network remains pretty tight (MP3.com and SMS.ac, for all its downsides, did well in attracting the right talent). The core raw talent is here.
What’s missing is the ability to harness that engineering talent into startup-engineering talent, and I’m not sure SD has a track record of producing technical leaders (or start-ups) who are able to do that. You can have the world’s best engineer, but if he’s chasing down a rabbit hole on some technical problem no customer cares about… well, you’ve got a problem.
Startups in SD will have to realize that you are not going to get engineering talent for cheap (you’re going to have to offer market value with equity). I’m not sure that Silicon Valley engineers are less risk-averse; there are more companies to jump between, so it seems more frequent. The rockstars tend to get locked down once they find the right company (engineers want to solve problems under supportive management!) I’d postulate the bigger problem SD has is in recognizing good engineering talent, and being able to support (but focus) that talent to achieve the startups’ goals.