Silicon Valley Lost Its Magic Or Not

The January 12, 2009 issue of the BusinessWeek magazine features a thought provoking article titled "Is Silicon Valley Losing Its Magic". It argues that due to changes in the business environment, Silicon Valley companies are losing their ability to innovate. New Web 2.0 companies like Digg and Facebook, although interesting, have not yet created ground-breaking innovation that are in the same class as those created by old-schools companies like Intel, HP and Apple.

The root problem, the author explains, is in the start-up investors. Investment companies are less willing to give out funding to companies that cannot produce revenues in couple years. Back in the days, when Intel was a start-up, it did not have an exit strategy. Today, if companies do not have an exit strategy and go for VC funding, it is guaranteed that they receive no funding.

Since revenue and profit are so important to start-up companies now, they tend to short-cut their innovation and walk away from basic research, which usually takes many years of development. Use Web 2.0 companies as an example, they created social networks for millions of people, but their revenues are based on ads. Financial and economic impact associated with those social networking sites are far less significant comparing to chips and desktop computer businesses.

Talked to few friends in the Valley, we all agree there is a change in the neighborhood. But, the state of the Silicon Valley innovation is not as grimy as the article portraits. I believe the Valley is not dying but evolving. Evolving from a hardware-centric (or Silicon-centric) factory to a software-centric (or Web-centric) laboratory. Hardware innovation underpins our technology development in the past few decades. But, by itself, hardware is not too much useful to the everyday people. We need software.

When hardware innovation, like which created by Intel and HP, reaches a peak, software innovation will become a dominate force in the Silicon Valley -- who needs due-core CPU and 8G memory if there is no application for them. Software innovation brings more everyday people to the business. A paradigm shift to Web 2.0, social networking and virtual assistants marks begins a new Silicon Valley.

On changes in VC expectation. Is it really a bad idea for start-up investors to pushing for profitability? I think not. I believe profitability is the first priority of a start-up. If innovation cannot yield revenue, it's probably a bad business idea. Even if it's not a bad business idea, it's probably not right for the present market. Basic research that does not yield revenue has no place in start-ups.

In summary, I believe the Silicon Valley has not lost its magic. It's evolving, on a path to a new ecosystem of  innovation that is based on software. Only time can tell whether I'm right. But, I have hope.