The Bailouts Are Coming But Is The Bay Area Dying On The Vine?February 18, 2009
The $787 billion Stimulus bill (including the restoration of higher conforming loan limits and the inclusion of a modified homebuyer tax credit) has been signed. The President is rolling out a $75 billion plan in an attempt to stem foreclosures. And GM is looking for another $16.6 billion to keep it afloat.
Through the eyes of one plugged-in Bay Area banker:
What I see as a banker really scares me. We are working with several exceptional technology companies (based in the valley of course) with excellent, cutting edge products that are very profitable. Many of them are running on fumes in terms of cash, and need money to invest in sales engineers, inventory, and development and test equipment (i.e. fund their growth). Us bankers are finding it nearly IMPOSSIBLE to find them even a small, conservative amount of financing they need to achieve their growth goals (including hiring [actual] employees at ~$100K/year). It is unprecedented. I’m talking about potential category leaders with a global market that runs into the billions who cannot get a few million dollars to fund some necessary investments. And yet there is somehow $800 billion dollars about to be pumped into propping up housing, backing bad debt, bailing out xyz, etc. Yet, the very engines that provided so much of the valley and American wealth are literally dying on the vine now.
It is a sad state of affairs and it has really [been] hitting home for me that the true engines of our economy are dying in front of us, yet all the media and politicians ever talk about is bailing out legacy auto companies that lost to Asia long ago and bad mortgages. Doesn’t anyone remember how beneficial science, technology, innovation, and investment in advanced research and product development brought us so much wealth in the first place? Have we all given up on learning real skills and doing real work? (And before I get ripped for being a banker, I was an engineer and computer scientist who did primary research earlier in my career – paid my dues there.) This is a clear sign to me that both the Bay Area and the US in general is clearly in a great decline… How depressing.
Food for thought, ideas for debate, and if nothing else a framework to discuss the bailout dollars allocated to date.
∙ $15,000 Homebuyer Tax Credit Cut, Conforming Loan Limits Restored [SocketSite]
∙ Obama Sets $75 Billion Plan to Stem U.S. Foreclosures [Bloomberg]
∙ GM Seeks as Much as $16.6 Billion in New U.S. Aid [Bloomberg]
∙ SocketSite’s San Francisco Listed Housing Update: 2/17/09 [SocketSite]
Comments from Plugged-In Readers
“We are working with several exceptional technology companies (based in the valley of course) with excellent, cutting edge products that are very profitable.”
My eternal question is:
If they are profitable, then why don’t they just retain their profits to fuel their growth?
Yes I know, they could grow even faster if they were given cheap subsidized loans but isn’t that what got us to this point in the first place?
If they need money for expansion can’t they put out a stock offering?
Why do we really need banks?
Amazing commentary – I agreee completely!
“If they are profitable, then why don’t they just retain their profits to fuel their growth?”
I am not a banker, just a spectator with connections to the tech industry:
Right now, profitable models are not as profitable as they should be because spending has slowed to a snail’s pace. This is a chain reaction–a real domino effect…
I was just at the aviation museum off of 101. There is a very cool helicopter type machine (thought of as a predecessor to the modern helicopter), which could not find funding for development during the Great Depression. It can happen again…hopefully, it won’t get that bad…
“This is a chain reaction–a real domino effect…”
Positive (self-reinforcing) feedback loop is the technical term.
also see; vicious circle, virtuous circle, self-fulfilling prophecy, paradox of thrift, etc.
“profitable models are not as profitable as they should be”
English translation: They’re not profitable, but they would be if only people would buy their stuff.
Diemos – I think you are missing the point of the banker’s commentary. However you feel about government subsidization, right now there are large amounts of resources going into bad mortgages & a failed industry (US automakers). If we’re going to spend federal money on something, wouldn’t you rather put it towards the development of new & innovating industries rather than lost causes? Most start-up businesses go through money-losing periods before they turn a profit – who would expect a business to start turning a profit on Day 1? I would rather invest my tax $s in an industry that has a chance of succeeding in the future than propping up one (crap mortgages, Detroit automakers) that has clearly failed.
It seems to me that the presidential press conference yesterday was very much about allocating monies toward innovative technologies. Particularly with regard to clean tech and solar.
“If we’re going to spend federal money on something,”
As I’ve said before, if it were up to me the gov would be printing FRN’s and handing them out to the people to stimulate demand and re-liquify the system.
Drizzler — but the original commenter said these mysterious tech businesses were “very profitable”. In silicon valley, “very profitable” might mean “this is a really cool idea I could totally get into TED with”.
In the 70’s, genentech, oracle, and microsoft all started without access to fast, loose cash. I mentioned it earlier, but there’s a fascinating interview with V.C. Tom Perkins discussing how they started genentech without burning thru tons of capital, and you should all go read it.
So I don’t weep for the future of technology, even in this environment. It will simply be smaller.
dub dub – I actually agree with you completely, I hate ALL of this government intervention in the free markets. If a business can’t get funding in this (or any) environment there is probably a reason for it. My point was simply that if it’s going to happen (which it obviously is) I at least want resources aimed at the businesses of the future rather than our failures of the past.
A profitable product isn’t the same thing as a profitable business.
I agree with dub dub that easy money isn’t necessary to fund new technology but it does raise the question of how much of the BA economy has been propped up by fast and loose cash and what happens if it goes away?
For whatever strange reason, I was pretty obsessed about learning about the background of The Great Depression when I was in high school. I remember this interest taking me to reading Sinclair Lewis’ Babbitt for an AP History book report, too (Historical Fiction–talks about Main St life in pre-Great Depression era).
I think it would be interesting for people on this board to pick up a copy of Babbitt and read it. It is the precursor to the Great Depression and it does directly deal with real estate since its main character makes a living from it…selling houses for more than people could afford…somehow, as financially successful as he is, he stays completely disconnected from everything outside his little world…
I appreciate the sentime etc., and i have also been an investor in many Silicon Valley ventures, most sucessful but some not.
But you really need to remember that newco investing in SV has been a graveyard for a lot of high risk private capital, and (2001) 401k funds. it is really hard for me to see recovery act money going to new venture / early stage cap and debt, and like it or not i do not think a lot of regular folks around the country would see it differently.
What are all these cool new technologies ? apps for twitter ? facebook toys ? iphone/andover apps for finding restaurants ? Who is going to use these technologies ? Companies who are cutting back on infrastructure and people every quarter and don’t know what to do with the technology they already have ?
diemos – unfortunately there is no such thing as a stock offering anymore.
imo the writer’s opinion is accuate. obama’s gonna help us continue to borrow and consume instead of save and invest in the long term.
our 2009 investment in technology will consist of giving 20 bucks a week more to poor people that can buy a bigger TVs.
The fundamental lesson of our crisis is that market fundamentalism is bunk. Traumatic crisis = lesson learned. Too bad the ahistorical perspective of libertarian and free market types prevented absorbing the lessons of Great Depression One, and we have to go through a massive wave of destruction that was entirely unnecessary.
But, get this. Those of you who think any company with a good business model and a profit stream who cannot get funding in the current environment somehow ‘should fail’ because they are failing the test of your precious free market need to replace your marbles with brains. Read a book with a grounding in history rather than ideology, hello.
In the real world there is a solution to this problem and it is NOT cascading waves of bankruptcy and scratching for crumbs in the streets. No. The good news is we can fix this over time if we nationalize those banks!!! Wipe out the shareholders. Create good banks. Sell the clean banks back to the private investors and then REGULATE. Even Ayn Randian Greenspan sees the merit of this approach.
Some business will fail in the interim but we will recover if we follow this approach.
I’m talking business now, not real estate. Prices in SF are still much too high.
And for those of you who think the stimulus plan is not about investment but consumption, cite chapter and verse please. Also, context: if your complaint is about .00000001 % of the stimulus, fess up, don’t manipulate.
“…cutting edge products that are very profitable…..Us bankers are finding it nearly IMPOSSIBLE to find them even a small, conservative amount of financing they need to achieve their growth goals..”
Hmm, maybe talk to IVP and Benchmark. Apparently they have a ton of loot to invest in companies that lack revenue models that will (imo) be relics in a few years (twitter).
Bigger TVs are made in Taiwan by the way…
This is a very serious and intense downturn, but the things that are being said here make no sense at all. What we are seeing is deadwood being flushed. It is an unpleasant process because these are people we are talking about, and over the course of this boom we all got way more used to deadwood than we tend to admit.
The bubble did put huge pressure on housing, but rental units in less desirable locations have been available for half or less what can be charged in San Francisco or Palo Alto. This bubble interfered with almost everything, but it only stopped businesses if the wrong people were doing the wrong things in the wrong location.
High tech companies need to be clever about starting businesses and cannot throw money around casually like the used to. This is similar to the situation Google was in when they started. They begged like crazy for a million dollars to continue and when they had trouble raising that they came up with the advertising concept that unleashed a record breaking cash flood. If financing were easy then Google might never have embraced profitability they way they did.
Now there are still investors with capital, they are just more cautious. Businesses are still starting, but with more focus on the art of bootstrapping and the value of cash from sales. Many people who were pushed to the sidelines during the boom have a good idea what they want and how much it should cost and are just waiting for the right moment, which is likely not now.
What is going on in the Valley right now with talent is quite amazing. People are being let go from boated corporate corpses and either starting their own businesses or joining up with new enterprizes. As is always the case with tech, the big and known names are the least interesting because they have already had their phenomenal growth period. Without getting into cash throwing fights there are still major struggles over talent, and key players compete for positions with the best groups that have the biggest ideas. The idea that the hive of innovation that is the Valley is going to dry up and blow away because some big paycheck addicted bankers gave themselves the worst bad hair day ever is laughable. Difficult economic conditions only make innovators more determined and rigorous.
Agreed 100%. I can testify that our SF tech business has never been busier. We’re still hiring, for Pete’s sake! OK, I work in a niche market, but friends in the SV also give me a mixed message of the state of things as well. 2 lay-offs in my direct circle of friends, but others being promoted.
So far, I see only RE coming down. The rest seems a bit more resilient.
lark – Libertarian and free market types view the Great Depression as a business downturn that was prolonged by government intervention and regulation.
I’m no expert on this but my understanding is that no company these days, profitable or not, funds their operations through their revenue stream. If they had tried to, their Wall street analyst would have crucified them as inefficient and their stock price would have plummeted.
For those companies with a number of non-performing employees, retrenching operations back in line to what revenue can support might seem like an opportunity to get read of deadwood. But the systemic effect of millions of businesses doing that all at the same time is staggering – and of course threatens the revenue stream of every company. The end result is a death spiral as everyone chases their revenue down.
I’d say at least half of the Silicon Valley companies had no business being in business.
Within two years, we’re likely to see 20%+ unemployment, or a mass exodus from the Valley or both.
This is probably going to be a very painful downturn for the valley, but how many animated second lives do people really need.
Good business plans aren’t enough. You also need capable managers and I’ve seen very few of those.
lark – The Wall Street Journal in a chart published last Friday breaks down the stimulus plan as 24% investment, 38% aid, 38% tax cut.
The spending includes $30B for the electric grid, $19B for computerized medical records, $8.5B for tthe NIH, $5B for home weatherization, $6.3B for energy efficiency upgrades to public housing, $29B for roads and bridges, $4.8B for public transit, $8B for high speed rail, $18B for water infrastructure.
The aid includes $40.6B in aid for school districts to balance their budgets, $87B for Medicaid, $2B to buy and fix foreclosed properties, $8B in aid to states for public safety and critical services, $14B in tuition refunds, $17.2B in increased student aid, $27B to extend jobless benefits.
Sorry to be so exhaustive, but you asked for verse and chapter.
Lets face it….Atlas is Shrugging
Let’s see now. Consumers own homes, drive cars, like to borrow money, and they have one vote each. So which would you subsidize if you were Obama?
I am honored Socketsite has put my comments on the economy on the main page – actually the second time it has happened which is great! I think this is a very cool website and visit regularly.
As for my comments on funding advanced technology companies, I am merely trying to provide a window to Socketsite readers to what I see as the “inside” of what has traditionally been the SF Bay Area economic engine. Most of us see the economy from the “outside”, in rental rates, housing prices, sales, etc. I think this type of data is really driven (with a time lag) from what happens on the “inside”.
Anyways, I am not talking about web 2.0 companies, social networking, or companies of that nature. There are quite a few out there, and I wish the founders and management teams well – they are by and large cool and innovative people. Many need to figure out a revenue model – My belief is most won’t.
I am talking about more fundamental technologies – think advanced enterprise software, telecommunications equipment and various key internet, telecom, and other infrastructure plays. Big global markets, technological barriers to entry and innovation, and requiring larger up front investments. There is basically no money available for them now.
Everyone likes to trash the hedge fund, venture capital, and private equity set, but they really grew to fill the void left behind your old fashioned retail investor that used to buy IPO’s. Now that they are on their heels, and have battened down the hatches. The big pension funds are all pulling back (their LP’s) commitments, etc. So really there are few options for a company to raise money anymore. Many of us in the industry hope the market will “re-open”, but we have been waiting for the IPO market to “re-open” for years now. I have seen bulge bracket bank books and their assumptions are “IPO market reopening in 2010 possible”. It has turned into Waiting for Godot…
And Diemos, unfortunately retained earnings are just not sufficient to grow a high tech growth company. A big market with rapid sales growth sucks up investment capital at an extreme rate – the good news is you will get many times your money back in short order. Unfortunately no one will even take this somewhat “sure bet” anymore. Market dynamics dictate that if you cannot fund the business, you “miss the window” (semi companies are the worst for this) and you may as well liquidate and send everyone home.
So, if you really look at it, the engine below the Bay Area is cracked rusty and seized up. We all hope it will start moving again but I’ll tell you from firsthand experience no one is optimistic. As for housing, based on what I see everyday I can almost guarantee you we are in for a multi-year grinding decline. Unfortunately most of our politicians and citizenry really don’t get it, which ensures we will not work to solve the real problems. Oh Well.
the wierd thing about Babbit is that it also applied to the 80’s when I read it and thought the exact same thing. The Casino Society, that’s what program trading was referred to when it began and that was the end of the world. It became a new world and the economy adapted to it and flourished, Clinton era created over 30 million jobs. Even though it was a bubble, people had confidence and we grew. I don’t agree with a stimulus package in general but the main purpose is to create confidence and try and shake of this negativity.
There are is also plenty of busineses that are gearing up for opportunities from the stimulus package. Those that jump in on these early will be the next Bill Gates so there is a big prize at stake, although TB Pickens already is probably going to get the big prize. And its not just energy, it’s also the financial and legal services around them and the economics that they contribute to GNP, given that are are a service economy. The brightest know this and they are working out plans that will ultimately drive the new economy. And I for one have lots of confidence in them, I know they are out there.
These posts remind me of the Lord of the Rings line… go and die as you see fit.
Just my two cents…
I think while the downturn has affected companies-good and bad, profitable and unprofitable-the notion that financing is unavailable is disingenuous. Cheap financing is unavailable as it once was but traditional venture capital and private equity or being acquired is available, at the right price.
What we are seeing now is a contraction of valuation multiples towards where companies have traded pre-tech bubble and a general pushback from private companies and their existing investors on new financings that are significant down-rounds (that is, at a lower valuation than previously invested at).
Most companies that are cash flow positive with poor visibility into the following quarters are retaining cash and growing conservatively. This is because their customers are struggling and reducing their spending and the company is creating a rainy day fund.
The few companies that are high growth are being “doubled-down” by their private investors. Scuttlebutt down the Peninsula has been that multiple brand-name VCs are ranking their investments. The A’s are the winners and get more capital. The C’s are let go.
As Warren Buffet once said: “In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.”
What I think I’m missing or maybe everyone is missing is that what started out as CRAP mortgages is now invading all sectors — the good mortgages are now affected because, the values are gone, the owners can’t sell and the owners can’t pay because they’ve lost their job (let’s talk Yahoo, Gap, State of CA, advertising, etc.), So, an umemployed person has to pay $600 a month for COBRA and also try to make their mortgage payment which was based on past values and an income that could sustain it….CRAP mortgages?? I can make my mortgage payments thankfully, but if my partner lost his job and we quickly went through our savings on mortgage payments, health care ($1,200 a month at least!), we’d be one of the ones with a CRAP mortgage…wouldn’t we? Didn’t start that way, but could head up that way…then we walk….
From my perspective, lending won’t happen for start ups or traditional companies until we get rid of this huge debt situation (consumer, corporate, housing, etc.) By the way, I’m not a fan of bailing out Detroit — that train was coming down the track decades ago…
So, How do we reconfigure the debt? Maybe we need a Jubilee — “the year of Jubilee is a special year for the remission of sins and universal pardon where debts are forgiven — I believe it was every 50 years…”
Just a thought — pile on folks!
This is a mix of spending to support infrastructure, jobs, long term investment, and to prevent the collapse of social spending by the states.
These are facts. Where is your opinion?
If you are going to argue like Republican Boehner that ‘the govt never created a job’ you have to do better than that. Anyway, something like 20% of our jobs are actually created by govt.
I agree with Mole Man that tech can still progress by being careful with business plans and bootstrapping with limited funds. I think that what The Banker refers to is the situation where you need to either beat your competition to the market or hit a closing market window.
If every startup had restricted access to funding then the playing field would be level and products would still be delivered to the market albiet at a slower pace. And since the cost of funds are so high better executed products would become the norm. But a shrewd investor could pick one player in a market space and juice them with funds to deliver the knockout blow to their competition. It doesn’t even matter whether their product is superior. This sort of biasing competition isn’t really productive but is part of reality. Betamax anyone ?
And to those who think that tech just churns out useless novelties, think again. How many people know what Marvell, IDT, Cadence, Rambus, etc. create ? Some of those don’t even produce anything, they simply license patents and other IP. Much of these products are boring and esoteric but quite valuable stuff.
My opinion is this bill is more about aid (38%) than investment(24%). You may view it as good or bad based on your personal stand on social justice.
This is why we had to create a purpose-built capital: to moderate the influence of any single group over the governance of the country.
The reason why our less-than-optimally profitable businesses are not going to receive the operating capital that they need/want/whatever and GM has the nerve to ask for a 16 million dollar bailout for a company that is a proven failure is simple: Detroit simply commands more power than Silicon Valley.
Given that we have a de-facto socialization of private capital (in the form of our national banking industry), the economy is now controlled from Washington DC. We have no separation of economic and political powers, and we have a stunning geographic concentration of power on the East coast.
This bill is an open tab for those who command more/better/richer political favors than we (Californians) do.
“I am talking about more fundamental technologies – think advanced enterprise software, telecommunications equipment and various key internet, telecom, and other infrastructure plays. Big global markets, technological barriers to entry and innovation, and requiring larger up front investments. There is basically no money available for them now.”
The equipment gets manufactured in Taiwan/China, not the bay area and a certain Chinese company is starting to kick serious ass with regards to telecom equipment in Asia, wait till they improve enough to sell in Europe, Cisco is betting on telepresence/Webex/… not telecom gear. Enterprise software ? it’s being written in India not the bay area, sure there might be a small team here but a lot of the work for any company gets outsourced these days.
Even if companies that you are mentioning were being funded they wouldn’t be providing that many jobs in the bay area, it would be mostly overseas.
“Enterprise software ? it’s being written in India not the bay area, sure there might be a small team here but a lot of the work for any company gets outsourced these days.”
This is just false — especially since we’re talking about emerging-growth companies in this thread. Bay Area enterprise software companies continue to employ the bulk of their engineers locally. Since ~2004 recruiting top Bay Area engineers has been brutal; they are in high demand.
Incomes falling 5-10% for 7,000 BA HP employees: “Attempting to avoid massive layoffs in the face of the ongoing recession, Palo Alto-based Hewlett-Packard (HP) has announced pay cuts for all of its employees. CEO Mark Hurd will take a 20% cut, members of the executive council 15%, other executives 10% and all other employees 5%.”
Being unemployed in a bread line is the same as being employed and paying $50 for a bread loaf. You are both still in a line.
No. In the second case you have the illusion of control and choice.
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