The Premature obituary of Silicon Valley: Bias and History
The 2-year period of the pandemic saw the acceleration of startup hubs outside of Silicon Valley. The Bay Area's share of venture deals moved from 41% to 39%, VCs exited the Valley, and founders left. The rise of remote work, COVID-19, and SF dysfunction heralded the end of SF as the center of venture capital.
This view had two issues:
"Future is now bias1" – the belief that the recent past is a good proxy for the future.
A misreading of tech history, generally, and the Bay Area in particular.
Future-is-now bias
The bias is that the current time, or recent events, are a good predictor of what will happen in the future. If COVID-19 forces us to work remotely, the bias is assuming that people will work remotely from now on. Or, if COVID-19 and Bay Area policies prevent people from moving to the Bay, the bias is that people will stop investing in the Bay. Simplification, yes. But...
Tech history, technology diffusion, and Bay Area cycles
The larger issue is the misreading of tech history and what COVID-19 really masked — the late stage of SaaS. SaaS started 20+ years ago when software could be sold as a service, instead of with a license. This, combined with cloud computing, created an entirely new category of software. There were giants, like Salesforce, displacing previous stalwarts, like Oracle.
Innovation (generally) starts in a cluster and then, over time, diffuses to more locations. Capital investments follow this pattern. Railroads started in Great Britain, where the investment was initially concentrated. Then railroad investment shifted to the US, as the US built its railroads. Eventually, railroad investments globalized.
Perez writes about technology revolutions and financial capital in her book. She tracks the growth of technologies like steel, railroads, cars, and information communication technology. What she sees is that, “Revolution clusters irrupts in a particular country, sometimes even in a particular region….There, it is fully deployed; from there, it propagates to other countries”2
SaaS (and other trends) following a similar pattern. Starting in the Bay Area, then moving abroad so that the SaaS applications that manage payroll for Indonesia, Singapore, and Malaysia all receive funding. This diffuses the software tech and the investment dollars.
Silicon Valley Cycles
Silicon Valley has gone through repeated technology cycles: electronics, computers, software, gaming, the Internet, SaaS. Changes in migration and housing prices over time reflect those cycles. A high level (not updated) view of cycles3 in Silicon Valley can be found in Steve Blank’s writing.
Housing Prices, Migrations, and Cycle Timing
Looking, roughly, at housing price data for Silicon Valley, we can see how housing price cycles reflect the different changes in tech waves. Wave changes also happen to correspond with recessions, but generally as one tech wave crests, another forms, housing prices change.
With improved data collection, we can see the impact of tech waves on net migration. During the ‘90s (internet) net migration into Silicon Valley was positive, then it went negative when the bubble burst. In particular, US domestic migration (US citizens leaving SV), went sharply negative.
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As the next week wave(s) grew (social, then SaaS), migration picked back up. During the pandemic people migrated out of San Francisco4 and California. But, during this time period, the next tech cycle wave fomenting.
Generative AI, Silicon Valley, and Lay Offs
In the depths of the pandemic, there was a new innovation taking place - Large Language Models. Since OpenAI unveiled GPT-3 and then ChatGPT, venture funding to AI accelerated. Marking the start of the next wave, and a return to a classic pattern. 50% of AI funding goes to startups in the Bay5, 40%+ of startup funding is to startups in the Bay. San Francisco’s population is rising again, as well.6
Tech’s layoffs, and a slower job market in Silicon Valley, are actually congruent with Perez’s writing as well, “In addition, the changes occurring in the techno-economics sphere imply a huge social cost in loss of jobs and skills as well as in geographic displacement of activities7.” This is reflected in unemployment data in past cycles as well8. History shows up what comes next for the Valley.
Silicon Valley, it’s share of VC, and the Future
Venture Capital started in the US Northeast in the 1940s and came to the West Coast over a decade later. By 1992, about 48% of US venture capital was invested in the West Coast. It seems like that’s been around the same percentage since. A big change is the globalization of venture capital with increases in China and India.
A popular narrative has been the end of Silicon Valley, driven by remote work, and political issues. Instead, COVID-19 punctuated the late stage of SaaS, the birth of Generative AI, and the rejuvenation of Silicon Valley.
https://www.sciencedirect.com/science/article/abs/pii/S0022103119301040
Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Age, page 55, Carlota Perez
https://steveblank.com/secret-history/
https://www.sf.gov/data/san-francisco-population-and-migration
https://www.linkedin.com/posts/peterjameswalker_cartadata-ai-startups-activity-7138950444189368320-X_wD/
https://sfstandard.com/2023/12/19/san-francisco-population-growth-pandemic-demographics/
Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Age, page 88, Carlota Perez
https://jointventure.org/images/stories/pdf/index2022.pdf#:~:text=Silicon%20Valley's%20unemployment%20rate%20%E2%80%94%20which%20peaked%20in%20April%202020%20at%20an&text=since%201970%20(16%20percent);%20the%20remaining%2033%20percent%20either%20have%20no%20party, page 29