The financial crisis hit Silicon Valley hard, but American venture capital and California’s academic talent are combining to ensure the bay area remains the world’s technology hub.
There was one figure that stood out above all the others when I spent two days in back-to-back meetings with companies, analysts and fund managers last week in the San Francisco bay area. Of all the billions of dollars thrown into start-ups by venture capitalists across America, an astonishing 46% of it goes into a few square miles from San Francisco and adjoining Santa Clara county.
Drive south from San Francisco airport and one corporate head office after the next proclaims America’s dominance in technology. On your left, a huge campus for Oracle. On your right, the headquarters of Intel. Further along, there’s a highway named “Google” taking you into the “Googleplex”. Nearby is Palo Alto, home to Facebook, while if you know the way to San Jose, you’ll find Cisco and eBay. Further south, in Cupertino, one of the world’s biggest buildings, a circular, spaceship-like giant, is going up to house, appropriately enough, the world’s largest company, Apple.
China may be the manufacturing hub of the world, but what it makes tomorrow is being designed and engineered today in Silicon Valley. The collection of world-class universities and research institutes in the area – led by Stanford and Berkeley – plus the unique way that American venture capital accesses and monetises academic talent, will ensure that the bay area will remain the world’s technology hub for a generation to come.
Taking me round the bay is Felix Wintle, the manager of Neptune US Opportunities. His fund had a great period from 2007 to 2009, but has slipped in recent years. To his credit he doesn’t try dodging the bullets – yes, he got it wrong on industrials and energy stocks, economically-sensitive stocks that have led the recent rally on Wall Street. Yes, he perhaps shouldn’t have owned as many gold miners as the gold price has weakened, and yes, he should have held more of the tech stocks that have boomed. (Collinson continues below)
We’re joined in America by Robin Geffen, Neptune’s chief executive, James Dowey, an economist and Rebecca Young, the manager of Neptune’s US Income fund. They are here to learn as much as to promote, taking us to companies where they are not invested, but where they might be, or where they may learn insights about the sectors and companies they already hold.
We meet Justin Kistner of Webtrends, a digital analytics consultancy, who talks impressively of the “mega trends” in technology. The first wave was about connecting to the web, which saw the rise of AOL. The second was search, which gave birth to Google. The third is social media, with Facebook moving swiftly to total dominance.
“Facebook probably has two to three years before it reaches its peak, and there’s probably another five years before it is replaced by the next mega trend,” says Kistner. Meanwhile, he says, Google is destined to go the way of Microsoft – cash generative but no longer at the forefront of the internet.
Everyone we meet in Silicon Valley is focused on social media and Facebook. Will Neptune invest in Facebook’s flotation, at what will no doubt be stellar valuations? Wintle gives a cautious yes.
Neptune as a house usually takes a top-down view of economies and sectors, and one reason we’ve been brought to America is the house view that recovery in America is firmly on track, even if growth during the recovery period will be stodgy. Like other commentators, Neptune reckons that recovery from a balance sheet recession can be slow and painful.
California has suffered in the financial crisis almost more than anywhere else in America. Despite hosting the world’s tech giants, the state has an unemployment rate of 11.1%. Is a knowledge-based economy also a jobless one? When General Motors was America’s biggest company, it employed more than 600,000 people. Apple, which went through the $500 billon (£316 billion) market cap level last week, employs just 47,000 in America, Google 24,400, and eBay only 17,700. Income inequality in San Francisco and the bay area is among the worst in a country that is already one of the most unequal in the world.
But at the Milken Institute, an independent think-tank named after one of Wall Street’s most infamous traders, Ross DeVol, an economist, is more optimistic than others about recovery. The financial crisis also hit Silicon Valley hard, as companies deferred major capital expenditure on new technology. But jobs growth in California is running at 2% compared with 1.2% in the rest of the country.
”California has a unique innovation eco-system based around its universities”
“High tech is still the unique engine of the US economy and now we are in the midst of an upcycle,” says DeVol. “California has a unique innovation eco-system based around its universities. Yes, it can be a high-cost state and yes, manu- facturing jobs go offshore, but the engineers are resident here.”
But although Wintle is as impressed as the rest of us by Silicon Valley, his fund is not entirely stuffed with tech. As the recovery takes hold, he likes the consumer discretionary stocks that will benefit. He mentions Comcast, the high-speed internet and cable TV company, as one example. Unlike others, he doesn’t regard it as ex-growth and is impressed by its aggressive stock buy-back programme. He’s also a fan of Victoria’s Secret. No, not the lingerie, but Limited Brands, a holding firm, which has an impressive dividend and buyback policy.
The recovery in the American economy, albeit muted in places, is perhaps a shining beacon for the eurozone, which outside Germany remains mired in recession. California’s subprime disaster led the world into recession, and maybe a turnaround there is a signal of better times ahead for the rest of us.
Patrick Collinson was a guest of Neptune Investment Management. He is the Guardian’s personal finance editor.