Silicon Valley is a storied part of the US economy, and even the American dream. It has been the birthplace of numerous world-beating businesses for decades, from Hewlett-Packard and Intel in the twentieth century to Nvidia and Apple today.
What’s made the San Francisco Bay Area so successful?
Its success is built on a fertile network of past successes, supportive venture capital and financing, research innovation, through Stanford University in particular, and a reputation that has enticed hungry entrepreneurs and workers keen to grow businesses and careers.
But on a recent Moneycube visit to the San Francisco Bay Area the mood was more downbeat than one might expect. And some of the pillars of the Bay Area’s past success look to be at risk.
That poses questions for investors – as well as for Ireland Inc. Is it time for investors to look elsewhere for future growth? We saw three key changes while visiting a number of medium-sized international tech businesses.
San Francisco Bay blues?
Several factors appear to be going against the Valley at present.
Firstly, the region’s reputation has taken a knock. Downtown San Francisco has become known for homelessness and drug use. Flagship department stores Macy’s and Nordstrom are closing.
The cost of housing is driving many workers beyond the city – or even the state – borders. City authorities worry that firefighters find local housing so unaffordable there simply aren’t enough of them living close to the city.
What’s more, working from home has become firmly rooted post-pandemic. One business we met has recently moved to a HQ with space for 30 staff, despite a local headcount of more than 150. That will surely harm the cluster effect which has made the Valley so successful in the past.
The return of (some) financial discipline in Silicon Valley
Secondly, finance providers are developing more discipline. The days when founders could raise hundreds of millions of dollars from venture capital firms while playing a video game seem a long time ago.
One business we spoke to, newly acquired by private equity owners, is going through its fourth round of layoffs in the US. Where businesses are expanding, it seems to be focused on regions that are lower-cost than Ireland, such as Romania, the Czech Republic and India.
Others, such as San Francisco-headquartered Twitter/ X, have been radically restructured – around 80% of jobs are said to have been cut. And Silicon Valley Bank, which supported many VC-backed and early-stage businesses through rapid growth, is no more.
The tyranny of AI
The hot story in Silicon Valley, which has powered the recovery of technology stocks after their 2022 sell off, is of course artificial intelligence, or AI.
There seems little doubt AI will create big changes in our lives, replace jobs and create new ones, and generate a lot of economic activity. Only last week, chipmaker Nvidia, which is powering most LLMs, briefly overtook Microsoft to become the world’s largest company.
But there are influential voices pointing out that despite huge spending on AI processing power, artificial intelligence is generating very little revenue for many businesses.
One influential voice, David Cahn at Sequoia Capital, argued last week that the “AI bubble” suggests that $600 billion of sales needs to be found for every year of expenditure on AI at today’s levels. (Admittedly that’s the same Sequoia which, it’s said, invested in FTX in 2021 as its founder played a video game call during a pitch meeting).
Right now, AI investment is generating nothing like that level of sales for those who are ploughing in the development cash. In fact, for many, artificial intelligence is a solution in search of a purpose.
That will change of course. But it a minimum it seems likely there will be many losers as well as winners from the AI revolution.
What’s certain is that the buzz around artificial intelligence is creating massive spending by technology companies – led by Silicon Valley. Only some of them can afford it.
