At the beginning of 2023, Copenhagen Business School published an article featuring visiting professor at CBS Jonathan P. Allen, telling the story of how the tech mecca and start-up ecosystem of Silicon Valley came to be. This article serves as a follow-up, speaking to the current challenges in Silicon Valley in the Summer of 2023.
A bank crash, risk-averse investors, and some cage fight between two tech pioneers: The Silicon Valley 2023 update is looking very different.
In fact, this new edition seems more at odds than ever. Global upheavals such as inflation, war and the spread of misinformation are posing threats to the core features of Silicon Valley. Will the reputable powerhouse maintain its influence?
We spoke to CBS Associate Professor in Finance Rama Seth on the challenges Silicon Valley is facing and whether the Valley needs to sell hubris and hype to take large risks and reward benefits.
A year of decline
The storytelling of Silicon Valley is partly driven by risk-driven capital and unicorn companies. But in the past few years, the craze for investing and appreciation for innovative tech solutions have taken a hit.
In the first quarter of 2023, venture capital funding in the US fell by 25%, the largest decline in venture capital funding since the financial crisis in 2008. By the second quarter of 2023, venture capital deals declined by 20% and the average valuation of tech start-ups has fallen by 50% since 2022 (source: carta.com).
"It's still possible for great companies to raise capital, but it's more difficult for 'good' companies, and nobody's willing to take a chance on the 'bad' ones," says Rama Seth. "I sense a purging is occurring in that regard."
Instead of taking chances on the early-stage tech start-ups, there’s an overall shift in investment strategies. According to Seth, an increased interest in publicly traded companies poses a more stable and established alternative to the speculative risks associated with new start-ups.
“This suggests that investors are looking for ways to get exposure to the tech industry without having to pay the high valuations that are currently being demanded by venture capitalists.”
The drying up of risky capital is severely affecting the Silicon Valley ecosystem. But it’s only one out of a multitude of challenges. The region has been struck by massive layoffs, a 35% increase since 2022 (source: Layoffs.fyi), while also having trouble with retaining talent due to a high cost of living. There’s also been a rise in regulatory scrutiny and other tech hubs such as New York, Boston and London are growing in prominence.
So how did Silicon Valley end up here?