Saturday, February 14, 2009

Who will save us now? Not Silicon Valley, apparently, but optimism lingers

So apparently new Treasury Secretary Timothy Geithner is not the superhero the stock market was expecting to rescue us all, banks included, from an economy in a downward spiral. At least, that's the message that the markets telegraphed (broadcast? texted?) following the introduction of the Obama administration's government bank bailout plan, part deux, earlier this week.

Uh oh. Now what? We'll have to look elsewhere for our savior.

Hey, how about Silicon Valley?

The credentials are certainly here. Silicon Valley was a contributor to a good deal of economic growth in times past: microchips in the ‘70s, PCs in the ‘80s, all things Web since then. The innovation engine of Silicon Valley even managed to right itself after that whole dot com bubble fiasco earlier this century.

So, how about this time around? The global economy certainly could use the help. And, aren't we currently in the midst of inventing and working the kinks out of, among other things, this cloud computing thing that should go great in leaner times: a new way to do IT that delivers only the computing power you need without all that capital outlay. (For more on cloud computing in this economy, you can see what the 451 Group, IDC's Al Gillen, and cloud journalist Derrick Harris have to say.) Sounds ideal, right?

Not likely, say a few folks who’ve watched this kind of thing before.

The recession may have arrived too early for cloud computing to help

According to Gartner analyst Mark Raskino, the Great Recession may have arrived just a little too early for cloud computing to have a role in helping us get out of it. "…[C]ompanies looking for a significant new round of IT cost cuts are having to tackle the challenge creatively," Mark wrote in his blog recently. "That makes many of them very interested in cloud ideas. …The problem is that the cloud isn't ready for corporate prime time. …[Vendors] are doing it as fast as they can -- but a lot if it just isn't ready for the mainstream, moderately risk averse centre of the market. Which is a shame." Understatement alert.

Looking beyond just the realm of cloud computing, Fortune's Jessi Hempel chronicled Silicon Valley’s growth-accelerating history in a recent article, and came to a similar conclusion: "Alas, economists and executives believe that this time tech won't lead the country out of its slump."

Deeper problems with Silicon Valley?

Part of the issue is the near-complete evaporation of money that can be borrowed, the fuel for a lot of the innovation in Silicon Valley. That piece of this puzzle wasn't working against us after the dot com bubble burst. It certainly is working against us now. Without fuel and no way off the highway (as in, no IPOs), the trip of an innovative start-up is a lot rougher right now. Even so, some companies (like business-model challenged Twitter) are still able to attract new funding.

Other commentators, like a few highlighted in the December Steve Hamm cover story for BusinessWeek (which I don't think made him too popular with entrepreneurs or even his own staffers in the Valley), question Silicon Valley's innovation more fundamentally, citing "short-term thinking" and "risk-aversion." He quoted Andy Grove, former CEO of Intel, saying that today's start-ups "give us refinements, not breakthroughs." The man who said "only the paranoid survive" now says Silicon Valley doesn't worry enough (unless they're talking about an exit strategy).

Short-term pessimism, but still long-term optimism

Hamm and others acknowledge ups and downs in innovation in the Valley. The region has been one of the greatest examples of creative destruction (whereas Detroit, as discussed on Twitter recently by James Governor, Tim O’Reilly, and others: not so much).

Another business press editor that I had lunch with this week had a couple interesting comments on this whole situation. First off, the situation is indeed dire. "This is the kind of downturn where we come out different as a society," he said. But from that comes good news for Silicon Valley: "Every downturn forces a tech change. This is good news for people in cloud."

So back to the cloud computing move as a potential economic catalyst, then. Even Mark Raskino at Gartner speculates that the current timing misalignment between what cloud computing can do and what the economy needs now (two items that he described as “annoyingly adrift” of each other) might just accelerate the whole market evolution out of necessity.

Bill Coleman, our CEO here at Cassatt, has seen a downturn or two in his career at BEA, Sun, and a couple other places. He (quoted in the Fortune article I mentioned above) is somewhat pessimistic about Silicon Valley's ability to help launch the recovery in the short term, but reiterates his long-term belief that this place understands how to invent things -- and reinvent itself. "I have every confidence in the Valley," he says.

"The very, very early adopters, I believe, are the people who use a downturn to re-engineer themselves," Bill told Quentin Hardy of Forbes in a video interview posted this week. He rattled off Intel, Cisco, Goldman Sachs, and FedEx as examples of companies who have successfully increased investment during previous economic slides, and have been rewarded for it. Investing while everyone else is running for cover means "you get to buy everything at a discount," Bill said. (More tidbits from Bill on managing a business through a downturn turn up here in as well.)

And as for Silicon Valley, specifically? The Fortune article points out that even in economic depths of late 2001, a couple of guys were already working on a start-up to try to make money on Web searches, creating a company in the process, whose name is now no longer a noun, but a verb. Says Jessi, "the moment that conventional wisdom suggests that innovation is dead is probably the perfect time to go peeking inside Palo Alto garages again."

If you're interested in jumping into the discussion about Silicon Valley's reaction to the recession, the Churchill Club is sponsoring a panel at the Stanford Law School on Wednesday, Feb. 18, 2009, featuring Lisa Lambert of Intel Capital, Bill Coleman from Cassatt, and Patricia Sueltz of LogLogic. Joseph Grundfest, co-director of the Rock Center on Corporate Governance and former commissioner of the SEC, is moderating.

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