Is the get rich quick dream over? Dark clouds are gathering for start-ups in Silicon Valley, according to our US expert, Tim Ole Jöhnk. In other news: how Bremen has become the talk of the town in Los Angeles.
Tim Ole Jöhnk, Director of the Northern Germany Innovation Office (NGIO), reports directly from the USA on topics that have been hotly debated by Silicon Valley over recent days and weeks. If you'd like to receive these reports as regular newsletters, simply register here.
A feeling of uncertainty has finally reached Silicon Valley, more than two years since the COVID-19 pandemic started, bringing with it challenges in global supply chains, rising inflation and troubled markets.
Fears of a recession are building on the horizon – and investors are running for cover with their investments. Hence the warning from Sequoia Capital, one of the earliest investors in Apple, Google and Airbnb, that there will be no rapid economic recovery. In May, the company sent a 52-page presentation to the more than 200 companies in its portfolio and warned them of a "crucial moment", caused by global uncertainty and change.
Its message: there are no options for quick fixes by politicians and companies should keep a hold of their own capital. The era of "hypergrowth at any cost" is coming to an end. Since then, the investors Andreessen Horowitz, Y-Combinator and Lightspeed have published warnings on their blogs, and Lightspeed Venture Partners has written a "Survival Guides in the Economic Downturn".
We are also seeing the first signs of action from groups in the established tech sector: Meta has stopped hiring, Uber is saying "Hiring is a privilege", Amazon is talking about overstaffing in its warehouses and Robin Hood is cutting staff by 9 percent. Peloton's cutting 20 percent.
Even when I talk with company founders (in Germany or the US), I see more and more people whose faces are racked with pain when they talk about their investor meetings. Start-ups that have benefited from millions and billions in financing cycles over many years are now being faced with challenges if the cash tap is turned off. And if making profits, and handling investments effectively, are the order of the day, instead of revenue growth at any price.
Some companies have come back even more strongly after past crises. Examples include Cisco (1981 crash), Google and PayPal (dot.com bubble), Airbnb (2008 financial crisis) and DoorDash (the pandemic).
Technological progress is independent of changes in the market – many investors continue to believe that digitisation is still in its early stages, and that new technologies, whether it's workflow process automation, cloud infrastructure online marketplaces, AR/VR (the metaverse) or AI/automation, offer the potential for growth. If any region knows how to make these technologies a reality, it's Silicon Valley. Andreessen, who is an investor, is so convinced of this that she just set up a huge 4.5 billion Dollar Web 3.0 fund, in May.
I've been thinking about what the future of venture capital might be for some considerable time now. The current investment system rewards rapid growth at any price. It has been optimised to achieve rapid growth in values and fast exits. That mean that we give company founders the signal to "focus on short-term profits". But if you do, you can quickly forget the bigger picture. Facebook's famous mantra "Move fast and break things" doesn't work anymore. Experience in the Internet since, at the latest, the Cambridge Analytica scandal, disinformation campaigns and hate speech, has shown that rapid progress at any price brings costs for society.
But what happens to technologies and ideas that don't fit into the rapid growth model? Technologies in realms such as health, sustainability, diversity/equity/inclusion or renewable energies, that rather could help us to bring about a positive change in our society?
Perhaps this moment, in which we need to take a deep breath and consider our situation, is an opportunity to reflect on slow capital and find new approaches (such as non-dilutive funding, grants and impact investments). Stanford, MIT, other universities and non-profit organisations seem to see it that way. At least, programmes such as Emergence, USAIDS DIV and Stanford's new School of Sustainability, which has received donations worth 1.1 billion Dollars from venture capitalist John Doerr indicate that time and money are being invested in these considerations. So the end of hypergrowth can also have some positive consequences.
Space Tech Expo USA – one of the biggest space-related trade fairs of the year – was held in May, in Long Beach, also known as "Space Beach". Front and centre was the Federal State of Bremen, which presented itself to the 3,000 event visitors on one of the stands.
In addition to this, the Hanseatic city had the honour of organising the matchmaking for the entire trade fair event, for the first time, bringing people whose passion is space travel together, from all over the world. It was a complete success for the trade fair and the Federal State: both the event visitors and the organisers were impressed by the high levels of interest and the smooth way in which business meetings were organised. A total of 475 meetings took place.
Bremen actually already has a great deal of matchmaking experience. It has been successfully enabling intercommunication between businesses at Space Tech Expo Europe, which is held in Bremen in November every year, over a period of years. Bremen has now been asked to arrange the matchmaking again, when the trade fair moves to Los Angeles, as planned.
You will find more information about Bremen, as a location for the space industry, and about the entire space sector and Silicon Valley's space travel ambitions, in our Winter Letter 2021.
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