Exchange Rate and Silicon Valley

What does the ever-declining value of the US dollar mean for Silicon Valley?

The US dollar has been emulating a brick lately. With housing prices plummeting, subprime fallout ongoing, and oil prices soaring, the general economic news is grim but for the occasional “the investment environment is still sound” noises.

What does this mean for Silicon Valley?

At the moment there’s not a lot of effect. The valley still has critical masses of experience, capital, and enthusiasm. This means that it’s a great place to start a company, turn an invention into a product, and build tomorrow’s technology. The valley’s investors, from angel through VC into capital markets, have so far largely been or become American. Foreign entrepreneurs are still coming to Silicon Valley to start their companies. So far, innovation has been born, bred, and retired in the US but this may change.

Scenario 1: an influx of foreign capital. It’s cheaper than ever for foreign companies to take a flutter on US startups. It’s easy to say the US VC market has too much money in it already given the YouFaceSocialTubeBookr clones being funded. The right question is: what could Silicon Valley do with more money that it couldn’t do with the money it already has?

Venture capital is often compared to an ecosystem. Just as natural selection rewards those who best fit a niche, the inexorable invisible hand of the market feeds those companies that best meet customer needs. The more companies there are, the more and better the niches (needs) will be filled. This scenario has the benefit of building on the Valley’s strengths. Ultimately, though, overseas investment in US startups comes down to a bet that expected returns (probability of success * payoff) outweight the exchange rate losses and the exchange rates aren’t a happy bet at the moment.

Scenario 2: US startups seek VCs in booming markets overseas. In the past, companies and entrepreneurs moved to America to have access to US VCs. Savvy entrepreneurs may now move to Sao Paolo, Hong Kong, or Moscow to respond to the relocation of capital. Brazil, China, and Eastern Europe are all housing huge pools of developer talent.

As a contra argument, however, the US is home to almost all the people who have been through startups and learned what succeeds and what doesn’t. International capital sources don’t have to just lure the enterpreneur, they need to lure the management team as well. That’s a higher barrier. We are seeing foreign-born entrepreneurs and execs returning from the US with their skills and knowledge. The long time it takes to share that knowledge (the lifetime of a startup or two) means foreign startup centers won’t organically grow into Valleyesque hotspots any time soon.

Scenario 3: successful (and growing) companies look to IPO in booming markets. Hong Kong has seen a huge upswing in IPOs, as has Brazil. It’s becoming the case that you can still IPO for great profit, just not on NASDAQ and NYSE. Even little old New Zealand has American firms going public there. This is the best scenario for Silicon Valley (remain the feedlot for companies, merely with exits that happen in more favourable currencies), requires no change, and thus is already happening.

What do you think the falling USD holds in store for Silicon Valley, startups, VCs, and entrepreneurs? The comments hold your feedback ….