Mar. 30, 2015
While the US economy has been gradually recovering, it is remarkable that Information Technology (IT) startups in Silicon Valley are rapidly growing by taking advantage of aggressive venture capital funding. This report will overview the current status of venture capital investment that drives Silicon Valley, and highlight the latest trends in recent years of technology development in three noteworthy areas-hardware engineering, digital health, and financial services.
1.Enormous Venture Capital Investment Stimulates Silicon Valley
Although it has faced a couple major economic stagnations in the last 15 years, Silicon Valley is currently bustling with fortune drawn from enormous venture capital funding and job opportunities are abundant. According to PricewaterhouseCoopers and the National Venture Capital Association’s co-study on US venture funding, the total amount of venture capital investment in Silicon Valley reached $23.4 billion in 2014, an 86% increase from 2013, and the largest investment since 2000 when the dotcom bubble occurred. Also, according to Joint Venture Silicon Valley, an economic think tank, there was a 4.1% increase in Silicon Valley’s job growth rate between 2Q 2013 and 2Q 2014, which is the highest rate since 2000 and added approximately 58,000 jobs. The think tank believes that this boom differs from the dotcom bubble because it has been reached by a steady incremental growth and that this boom will continue for a while due to the development of many promising new technologies such as big data and the Internet of Things (IoT). Other experts agree that the current status of Silicon Valley is not the return of the dotcom bubble.
- Data about US venture funding
- 2015 SILICON VALLEY INDEX from Joint Venture Silicon Valley
- CAPE COD TIMES “Venture capital investment returns to boom levels”
This active venture funding is seen as a reason why many Silicon Valley IT startups are delaying going public. One such startup is Uber, an innovative taxi dispatch application company, that was expected to have an Initial Public Offering (IPO) in 2014 but this did not happen. The company, founded in 2009, successfully secured a total of $2.9 billion of venture funding within five and a half years, and was valued at $40 billion as of December 2014. This value is almost equal to the total current market capitalization of four major IT companies-Yahoo, Amazon, Cisco, and eBay, all of which went public with less than $1 billion valuation in 1990s and have grown by gaining capitals via publicly held stocks. Some other IT startups that have not yet gone public but were valued at around $10 billion in 2014 include the following: Snapchat, a photo sharing application developer; Airbnb, a web service that intermediates rentals of mainly vacation houses and homes; and Dropbox, a cloud storage and file sharing web service. In general, IPO is an effective measure to obtain large funds; however, in order to go public, a company must comply with various laws and regulations for financial reporting. In addition, information disclosure is necessary before IPO, which requires a lot of time and expense. After IPO, with the obligation to ensure continuous compliance, a company has to grow its business while being strictly monitored by institutional investors. The current big wave of ample venture funding gives startups an option to wait for IPO until the right time comes.
- Uber Announces $1.2 Billion Raise, Confirms $40 Billion Valuation
- Venture capital’s macro forces
- Startups in over $10 billion valuation
- Is The IPO Outmoded? Why Venture Backed Companies Are Waiting Longer To Go Public
2.Return to Manufacturing
Today, Silicon Valley represents not only the semiconductor industry where the name of Silicon Valley came from, but also the software industry that has been a significant figure over the last about 30 years. However, a recent trend in Silicon Valley is a return to its hardware roots.
One example is the emergence of an automotive industry in Silicon Valley. Detroit has been known as the Mecca of the US automotive industry and the symbol of car manufacturing, but the dawn of the electric vehicle (EV) age has stimulated Silicon Valley engineers to manufacture cars. Tesla Motors, which is an EV startup and the largest automaker in California, was founded in 2003 by Silicon Valley engineers who wanted to prove that EVs surpass gasoline-powered vehicles. Tesla Motors has currently about 6,000 employees in California: hundreds work at its headquarters in Palo Alto and most of the others work for its factory in Fremont, a neighborhood of Silicon Valley. Tesla Motors has set a goal that it will produce 500,000 cars a year at the Fremont factory, where it manufactured about 35,000 cars in 2014, by 2020. This will have a great impact by not only stimulating the local economy but also promoting other automotive-related companies to Silicon Valley. A couple automotive components suppliers, including Futuris Automotive, an Australian maker that provides seats and ceiling systems to Tesla Motors, have already moved to Silicon Valley.
Renovo Motors is another EV startup based in Silicon Valley. The maker of electric supercars was co-founded in 2010 by a Christopher Heiser, a former product management director at Verisign, and Jason Stinson, an 18-year veteran engineer of Intel. In August 2014, Renovo Motors unveiled its first product and the first all-electric supercar in the US, the Renovo Coupe, which had a price tag of approximately $530,000 and was developed by less than 20 employees. Moreover, Silicon Valley’s two IT giants, Google and Apple, are working on the possible future of automobiles: self-driving cars. Google has completed actual prototypes of its self-driving car in December 2014, and is considering using the car as a shuttle within its campus or as public transportation for the city of Mountain View where its campus is located. Also, the media reported in mid-February 2015, based on an anonymous source, that Apple has been assigning a few hundreds of employees to develop EVs, possibly including self-driving cars.
- RENOVO MOTORS DEBUTS ALL-NEW 2015 RENOVO COUPE AT THE 2014 PEBBLE BEACH CONCOURSE D’ELEGANCE
- Apple studies self-driving car, auto industry source says
- Apple Said to Be Working on Electric Car to Challenge Tesla
In terms of small hardware, various kinds of technologies have been emerging and growing in Silicon Valley in recent years. 2014 was an especially notable year with hardware startups either going public with a lot of excitement or acquired by IT enterprises for billions of dollars. For example, GoPro, founded in 2002, has been popular with its small wearable digital cameras that are suitable for sports and action. The startup achieved nearly $1 billion sales in 2013 and went public at the NASDAQ in June 2014, when it was valued at about $3 billion. Another example, Nest, a maker of environmentally adjusting smart thermostats, was founded in 2010 and acquired by Google for $3.2 billion in January 2014. Also, Oculus, a maker of a virtual reality headset for 3D games, was founded in 2012 and acquired by Facebook for $2 billion in March 2014.
- GoPro IPO at $24 a share, company valued at $3 billion
- Why Google paid $3.2 billion for Nest’s smart thermostats
- Facebook’s $2 Billion Acquisition Of Oculus Closes, Now Official
Compared to software, which can be fixed and updated online after being released, hardware has more challenges to overcome before being released, such as design, production, and supply chain management. Also, hardware has a larger initial investment, which means higher risks. However, recent evolutions of 3D print technology and software tools have made hardware design and prototype production easier, allowing for hardware startups to focus more on product development and market analysis at an earlier stage. In terms of funding, crowdfunding has recently become an avenue for funding that allows those with project ideas to seek funding from the general public. Kickstarter, established in 2009, is a well-known example of a crowdfunding platform. Crowdfunding reinforces the foundation that has been built in the US that tends to encourages entrepreneurs to start businesses with small scale experiments without large sums of funding. Moreover, until recently, many people had considered horizontal specialization as the best way to pursue efficiency and establish outstanding competitive strength in a particular domain. However, there are increasing views in the mobile industry that a vertical integration business model that integrates hardware, software, and service will be a way to create better customer experience and retain long-term customer relationships. The fact that IT enterprises have been acquiring hardware startups for large sums of money demonstrates this shift to a vertical integration business model.
3.Opportunities and Challenges for the Digital Health Industry
One of the areas that US venture capitalists are currently watching is Digital Health, which was born at the crossroads of the entire healthcare area and various Internet technologies. According to Rock Health, a San Francisco-based startup accelerator in the digital health area, venture capital investment in US digital health area exceeded $4 billion in the US in 2014, which was nearly five times more than the amount in 2011. Major areas for digital health investment in 2014 were big data integration and analysis that support wide usage of healthcare and consumer tools to purchase healthcare services and insurance. These areas show that developers from various fields have been seeking potential business opportunities to create new tools and services with healthcare data that have become newly available. Under the Patient Protection and Affordable Care of 2010 (PPACA), or Obamacare, more healthcare related data, such as healthcare service price and quality, have been disclosed to the public in order to allow citizens to better understand types of healthcare and insurance and choose proper services.
Nearly half of the 2014 venture capital investment in digital health went to Northern California, mainly Silicon Valley. The center of the US pharmaceutical industry has historically been on the East Coast, specifically in Boston and New York; however, there are promising digital health startups growing in Northern California. In general, East Coast firms tend to take science into account, spend a long time to bring products to market, and focus on B2B (business-to-business), a traditional business model in the healthcare industry. On the contrary, Silicon Valley is strong on consumer-faced business and tends to give marketing products high priority and generate new businesses one after another. Because of such business culture differences, an expert points out that many of the venture capitalists who are interested in digital health, which focuses on customer-faced orientation, tend to concentrate on Silicon Valley, instead of the East Coast.
On the other hand, Silicon Valley digital health startups are also facing challenges to entering the healthcare industry. A major challenge is to comply with strict regulations imposed on the industry, such as obtaining authorization from the US Food and Drug Administration (FDA). Google has entered in the healthcare area with innovative approaches, such as contact lenses that measure glucose levels in tears and nanoparticles that detect signs of diseases like cancer within the body and report the finding to a wrist band. In July 2014, Sergey Brin, co-founder of Google, said that he has keenly realized the difficulties in responding to the strict regulations of the healthcare industry, and such regulations could discourage many entrepreneurs from starting businesses in the industry. In fact, his wife, Anne Wojcicki, founded a genetic testing company, 23andMe, that is being funded by venture capitalists including Google. Because one of its DNA services was on disease risks, the FDA warned the company in November 2013 that it must have FDA approval to provide such a service, which made it difficult for the company to expand its business in the US. Since then, the company has had to shift its focus to overseas markets while making an effort to obtain FDA approval.
AliveCor is an example of a Silicon Valley digital health startup that has successfully navigated healthcare regulations. In December 2012, the company obtained the first FDA approval for a cardiac monitoring mobile device technology that enables a user to record electrocardiograms with a heart monitor device, which can be attached on a smart phone and the records can be sent to the user’s doctor. With FDA approval, the company is able to expand the adoption of the device by prescription. In August 2014, the company also received FDA approval for its algorithm to automatically detect atrial fibrillation, which is a type of heart arrhythmia and seen as a premonitory symptom of heart attack. The company believes it has proved the accuracy and effects of the algorithm based on experiences from its about 6,000 device and application users.
4.Silicon Valley Challenges Wall Street
The US financial service industry has been adopting online and mobile services; however, many legacy services, such as bank tellers at branches and paper checks, remain. Silicon Valley startups are actively aiming for a share in the US $1.2 trillion financial service market by using IT to provide more efficient financial services with fewer fees than conventional financial institutes.
Wealth management is an example of a financial service startups are targeting. Traditionally, wealth management services have been provided by qualified financial advisors who consult their clients and provide advice in person or by phone. New wealth management IT services provide online portfolio management tools, called roboadvisors, for individual investors. Based on risk tolerance assessed by asking an individual investor client simple questions, a roboadvisor can automatically adjust the client’s portfolio to maintain a secure portfolio allocation or enhance tax saving efficiency. It also provides cheaper conventional financial advisor services. Wealthfront, founded in 2007, and Personal Capital, founded in 2009, are examples of Silicon Valley startups that have successfully managed a total of over $1 billion in assets and secured more than a total of $1 billion of venture funding.
Another service targeted by startups is the Personal Loan. A leading peer-to-peer lending company, Lending Club, founded in 2006, has been operating the world’s largest online peer-to-peer lending market that matches individual borrowers with individual or corporate investors. The market allows individuals to take out loans with lower interest rates than the rates that many banks and credit card companies offer. It has become popular and provided a total of over $6 billion in loans by September 2014. The company went public at the New York Stock Exchange in December 2014, when it was valued at $8.5 billion.
These kinds of Silicon Valley financial services are especially attractive to younger generations, who prefer online convenience. This could become a threat for Wall Street by taking away potential customers. At an investor conference held in February 2014, CEO of J.P. Morgan, Jamie Dimon pointed out the advantages of IT venders that provide personal banking or payment services and mentioned that Silicon Valley will be a direct rival of his company in the future. On the other hand, in consideration of the enormous capital of Wall Street and financial institutes as well as obstacles, such as compliance obligations with strict regulations imposed on financial industries like the healthcare industry, an expert supposes that Silicon Valley startups will not defeat Wall Street right away but instead most may hope to be acquired by a giant financial institute. In recent years, New York and London have been seen as cities where venture capital funding for financial IT startups has been rapidly increasing; however, Silicon Valley still receives the world largest venture capital investments today.
5.More Diversity in Silicon Valley
Currently, Silicon Valley is composed of not only by IT vendors but also various kinds of companies looking for great talent in the area. For example, Ford just opened a new lab in Palo Alto, the center of Silicon Valley, in January 2015. Ford hopes to advance new automotive technologies, such as built-in Internet connection and ultimately a self-driving car, and has hired Dragos Maciuca, who was a senior engineer at Apple, as the leader of the lab. Mark Fields, CEO of Ford, hopes the company will become part of the Silicon Valley ecosystem.
According to Mark Zawacki, a founder of 650Labs, a business strategy consulting firm in Silicon Valley, there are more than 200 non-IT multinational corporations that have opened a strategic hub in Silicon Valley for a various reasons, ranging from new product and services development to market research, venture funding, partnership search, and acquisition. Also, more than 10 clusters of major industries, including automotive, healthcare, finance, mobile, and retail have been established. In addition, industry clusters are dynamically collaborating with different industry clusters-for example, a financial service cluster working with a mobile/telecommunication industry cluster-and that such collaborations have not been seen anywhere else in the world.
Today, the Internet, cloud, and mobile services assist business operations no matter where data or offices are, but Silicon Valley is still a place where the world’s top-level engineers relocate to take advantage of abundant business opportunities. This support of entrepreneurship is not imitated by other cities. Silicon Valley is transforming from a collection of specific industries led by the IT industry to a miniature of the world economy by expanding to other various industries, such as manufacturing. It will be interesting to keep eye on the future developments of Silicon Valley.