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Silicon Valley’s Fragile Ecosystem and the US Economy

 By Igor Sill, Geneva Venture Management

With the US economy continuing to suffer from one of the longest economic downturns since the Great Depression, some countries are enjoying far better economic times and using our ingenuity to fuel it.  Where is that economic fuel coming from, and why aren’t we exploiting it?

The US economic July employment report confirmed that a protracted economic slowdown is hovering over the US and we just can’t seem to shake it off as we have in the past. The most recent gross domestic product (GDP) stats show the economy averaging 2.3% real growth over the past year, precisely the average rate of the last three years.

With the US in its continued sluggish economic quandary, China has moved forward and applied serious economic stimulus policy, Brazil is enjoying expansive growth policies, while Europe is aggressively mapping out much needed structural reforms.

We, in the US, just don’t seem to “get it”. The Economist recently reported that many aspiring new business entrepreneurs are leaving their countries for California’s Silicon Valley.  There are now over 50,000 Germans in Silicon Valley, and an estimated 500 tech start-ups in the San Francisco Bay area with French founders. “Germany and other countries have recently set up state-backed agencies to send enterprising Europeans straight to Silicon Valley, knowing that successful founders often recycle their money, contacts and experience into start-ups back at home” states The Economist.

According to the Global Entrepreneurship Monitor, which compiles comparable data across countries, “early-stage” entrepreneurs in the US made up 7.6%, compared to China’s 14% and Brazil’s 17% of newly formed businesses.

Why is this occurring outside the US and not within it?  China, Russia, Brazil, France, Germany, Israel, Sweden, and even New Zealand are experiencing technology gains, and with it, achieving economic boom.  The epicenter of innovation remains Silicon Valley, but our economic ecosystem is rapidly being depleted.

President Obama recently said: “If you’ve got a business, you didn’t build that. Somebody else made that happen.” Clearly, this doesn’t bode a supportive vote of confidence to our entrepreneurial camp devoted to building businesses in Silicon Valley.

Last year the Obama administration backed Fisker, an innovative cleantech car company that received a $529 million federal government loan guarantee.  Fisker announced that it will be assembling its cars in Finland, stating that it could not find a facility in the United States to assemble its cars.  Really? This announcement on the heels of Vice President Joe Biden’s statement that the Energy Department’s $529 million loan to Fisker was “a bright new path to thousands of American manufacturing jobs.”  Amazing…

Intel’s microprocessor research and manufacturing is now being produced in Bangalore, India and in Israel, no longer in Silicon Valley or Hillsboro, Oregon.  Google, Microsoft, Oracle, Cisco, EMC, Symantec, and Applied Materials have also set up major operations outside Silicon Valley.  Once the lifeblood of Silicon Valley, venture capital investment in innovative growth industries like mobile, cloud computing, open source, security software, IT, medical devices, biotech, alternative energies and cleantech are all finding their way to bolster other countries’ economies. These countries are displacing Silicon Valley’s inflow of capital, employment, jobs, technology edge and its stature as a worldwide leader.  As an example, Israel now has 1,800 active high tech start-ups, all hiring and expanding with a diversified pipeline well poised for continued growth as a venture-backed economy.  Both IBM and Microsoft invested in Israel start-up tech companies in excess of $300 million.  We know of course that in terms of jobs, new entrepreneurial firms have an added advantage, they are less likely than large corporates to outsource a lot of their jobs to low cost providers in Asia.

Why is this happening?  Well, because we are no longer as attractive to investors. The governmental uncertainty and the risks in the US are now greater, and the returns lower.  Our governmental tax policies are no longer conducive to new business formation, sustained employment or capital gains offsets. The mainstay capital flow for new businesses, Venture Capital, is geared to precisely targeting the best possible returns. All of these elements signal venture investor caution.

We are quickly dismantling our country’s growth engine with massive deficits, regulatory job-destroying burdens, increased governmental entitlement programs, major tax increase initiatives, bailouts, export-driven outsourcing, locked up credit, carried interest and capital gains tax uncertainties.

Enacting new business growth policies and capital deployment incentives quickly is the key to ensuring Silicon Valley’s survival, our economy’s rebound and long-term success.

Remember that entrepreneurial innovation remains the driving force behind sustained economic growth, robust employment, new jobs, productivity, GNP and rising incomes.

The author, Igor Sill, is a Venture Capitalist, Angel Investor and VFoFs Investment Advisor.  He earned his Masters from Oxford University’s Said Business School, and is a Merton College fellow. He completed undergraduate work at UC Berkeley,  he is a member of the World Affairs Council, Economic Club of San Francisco, The Royal Economics Society, Federation of American Scientists, Society of Concerned Scientists and the Heritage Foundation. He currently works for Geneva Venture Management in San Francisco, CA.

 

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