Wednesday, October 15, 2008

Silicon Valley: Financial Crisis or Opportunity

I just returned from Silicon Valley Bank's Twenty Fifth Anniversary celebration (Silicon Valley Bank is the leading bank for venture capitalists and venture backed companies). It was attended by many venture capitalists and entrepeneurs, so it was a great event to determine the attitude of the Silicon Valley ecosystem to the rapid changes in the last month. Until recently, Silicon Valley had watched the financial meltdown as an observer, but last week the financial crisis reached Silicon Valley. The crisis became very real to Silicon Valley when Sequoia Ventures, one of the most successful venture capital firms, held a meeting for its CEOs announcing that the "Good Times" are over. . They recommended strong measures: cutting expenses very aggressively, raise as much money as possible, establish a heavily commissioned sales structure and become cash flow positive as soon as possible. Further, they suggested that any company without a year of cash in the bank was in trouble.

However, this message of gloom has generated a contrary response from experienced investors such as Alan Patricof, founder of Apax Ventures. . However in a tribute to the respect for Sequoia Ventures and its success, the Sequoia powerpoint has been on the agenda for every Board meeting which I have attended (my friends who are Board members confirm that this discussion is ubiquitous). My experience has been that the Boards have decided that they need to be cautious, but that business will continue. The Sequoia presentation has even generated its own parody.

This view was confirmed by the conversations that I had at the Silicon Valley Bank event. Both venture capitalists and entrepeneurs were modestly optimistic. They believe that the situation is serious, but that the need for innovative products and services will continue. We will all find out in five years, so stay tuned.