Nov 7

Nat Torkington

Nat Torkington

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 ....

tags: the long view  | comments: 13   | Sphere It

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Comments: 13

  monopole [11.07.07 05:52 AM]

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.

Um, H1-B? Let's grab a bunch of foreign workers treat them like indentured servants, put them through a 7 year intensive course of how Silicon Valley works. And then, even if they really want to stay, ship them back! This wouldn't metastasize innovation all over the globe (to the advantage of the world but the disadvantage of our economy). Coupling that with incessant outsourcing wouldn't have any impact! Not a brain drain, but a forced pressure brain spreader.

Of course this all came about because we need scab labor to undercut the domestic, permanent resident and naturalized work force, reducing the impetus for people to get into critical fields.

I'm not being a nativist here, quite the opposite, the problem is that we aren't doing enough to retain the best and brightest from the rest of the world. Instead we pursue the race to the bottom labor policies with utmost haste and wonder what happened when we get there.

  chris [11.07.07 07:20 AM]

No one knows anything, but one analyst based at some bank in Asia recently wrote something that sounded true to me: The dollar's position as the world's reserve currency has for years enabled the US to have lower interest rates than it otherwise would have had. My view is that these lower interest rates have encouraged more risk-taking and more venture-capital-funded activity than in other regions, e.g. Europe.

If the dollar loses its position as the world's reserve currency or at least as sole reserve currency, interest rates will have to rise as the Fed becomes less able to print money at will. All other things being equal (which they never are), that'll make the US a slightly less supportive environment for new ventures. But, let's face it, no one knows anything about how economies work.

  anjan bacchu [11.07.07 07:44 AM]

hi nat,

been your regular reader.

however, this caught me by surprise "Brazil, China, and Eastern Europe are all housing huge pools of developer talent."

You're missing India. Sure, India rarely gets to see a software IPO; But as you said, some of the guys who have seen the startup experience will return and spread their enthusiasm back in India.

I'm still trying to understand why you left out India ?


  Brian McConnell [11.07.07 08:44 AM]

Silicon Valley has a unique business culture that rewards risk-taking, and the mistakes and failures that come with it. It is probably the only place in the world where investors will put millions or tens of millions of dollars on the line, with the real risk of losing 100% of that investment. Most investors are scared of knowingly taking that kind of risk.

More importantly, when businesses do fail, which most of them do, the response by investors is to learn and move on. Anywhere else on earth, the response would be to punish the entrepreneur, or at least to black list him. I know many entrepreneurs who left Europe for this reason.

It seems to me that this is the hardest part of Silicon Valley to replicate because it is so rooted in culture. It is hard to replicate even in other parts of the US, much less other countries where the culture is a lot more traditional and risk averse.

I don't think the exchange rate will have much of an effect on this one way or another, except to make investing in emerging companies even more attractive to foreign investors who have an appetite for high risk, high return investments.

  Juergen Brendel [11.07.07 08:52 AM]

A few comments:


Don't know if you actually have any experience with H1-B work in the Silicon Valley. I have, though. I was one of those 'indentured servants' as you put it. I couldn't disagree with you more. That description doesn't do the situation justice at all. Firstly, it is possible to change jobs on an H1-B (with some forms to file, of course). Secondly, the salary of H1-B workers isn't any lower than that of 'native' workers. I was on a good salary level, got the same perks and other things as any other employee. The job market over there is hot again, and I bet that most H1-B employed foreigners will confirm that they are not treated like indentured servants at all.


I'm located in New Zealand, just like you. The VC culture here seems to be a bit ... well ... underdeveloped at times, to put it mildly. It's certainly imaginable that with the horribly high NZ dollar and the plunging US dollar it will mean that more NZ companies won't bother going through the pain of VC funding in NZ, and just go straight to the Silicon Valley. Having good developers in other countries is nice, but the amount of connections you get in the Silicon Valley and the density of innovation and activity in the field there is an advantage that is tough to get anywhere else.

  rabble [11.07.07 10:29 AM]

One thing which i've found interesting having done consulting in a number of countries is the pay rates. Even with a weak dollar, US clients pay better. The same developer doing work for a client in spain might get 55 or 60 euros an hour, where as they'd get 120 dollars from a silicon valley company. Even with the pound being more than 2 to 1 against the dollar, american companies expect to pay more.

With a weak dollar then these stingy non-US companies might now be able to attract talent, if things keep going this way.

  gnat [11.07.07 11:02 AM]

@anjan: sorry, yes--India should be on that list. I saw it for myself when I visited in February!

  gnat [11.07.07 11:13 AM]

@chris: that's a great point, and one that I hadn't considered. Of course, low interest rates aren't the US's exclusive domain--the Economist's rankings show a lot of countries with similar interest rates to the US. The question is really how high interest rates can get ...

Apropos not much, check out Japan, whose 1.6% interest rates are artificially buoying the NZD as Japanese investors borrow in Japan, deposit in NZ, and roll naked in the resulting riches. Lucky buggers!

  chris [11.07.07 11:17 AM]

China today effectively signaled the end of the reign of the dollar as the world's reserve currency.

This (along with all the United State's other economic problems relating to low-interest-rate-fueled debt) will - either directly or indirectly - damage many aspects of Silicon Valley's ability to nurture startups, with some combination of high interest rates, high inflation, and/or a falling dollar raising required rates of return.

Nov. 7 (Bloomberg):

"Dollar Slumps to Record on China's Plans to Diversify Reserves"

"The dollar fell the most since September against the currencies of its six biggest trading partners after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves."


"The dollar is 'losing its status as the world currency,' Xu Jian, a central bank vice director, said at the same meeting [today in Beijing]."

  chris [11.07.07 11:32 AM]


Yes, but Japan's low interest rates are fueled by extremely high savings rates, of which interest rates are supposed to be an (inverse) indicator. The Fed has been keeping interest rates below their natural level, effectively printing money not backed by real value. If you click on Google Finance and look at today's dollar chart, you'll see some evidence of how that is now unwinding.

Britain is in the same boat as the US, to a degree, for sure.

I'm not talking catastrophic collapse, but, slowly, at the margins, all the things that make Silicon Valley the astounding success it has been will be eaten away at, from the cost of capital, to the salaries it can pay employees, to the chance of fortuitously running into your friend's backer when you pop round to his office to say hello. On paper, at least, this is very likely to happen: Risk is about to get a whole lot more expensive in the States.

  gnat [11.07.07 11:52 AM]

@rabble: Marc Hedlund mentioned that when I circulated my ideas on the internal Radar mailing list. He said that it's becoming increasingly possible for work to be outsourced to the US. That will lead to some interesting pressures on the labour market, given that the US claims already to be unable to produce enough CS grads.

  Nick Owen [11.08.07 08:03 AM]

I think you have missed a major point (beside the fact that there are start-ups outside Silicon Valley :). Our last deal was with an Italian brokerage firm. Today, in our IRC channel, we had more Norwegians than Americans. Commenting on our pricing, one Norwegian said our software was "practically free".

At the same time, it will become harder for non-US companies to sell into the US.

  Tony Stubblebine [12.02.07 11:49 AM]

I'm seeing the same thing as Marc Hedlund and @rabble. We're increasingly doing projects for clients overseas and getting much less push back on prices.

There are plenty of entrepreneurs in the valley who would rather be independent than take venture capital. The money has to come from somewhere though, so they're often funded by paying clients. It's been a huge boon to us to have clients who can easily afford to pay us. The combined fall in the position of the dollar with the cost of development makes this a great time to start an independent business in the US.

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