PALO ALTO, March 19, 2003 - A panel of leading venture capitalists joined
by a prominent Santa Clara University marketing professor took a candid
look at how the impending war and the conflict between the U.S. and some
of its most important trading partners might affect the strategy and behavior
David J. Blumberg, managing partner of Blumberg Capital, led the panel
discussion organized by Silicon Valley's VC Task Force.
Blumberg quickly set the stage for this lively discussion citing that
the impact of defense spending on the economy is declining. U.S. defense
spending vs. the GDP has shrunk dramatically during wars and in peace
time, from 130% during World War II, 15% during the Korean War, 12% during
the Kennedy administration to just 4% currently. Even including the cost
of the post-war rebuilding of Iraq, he said, "In a 10 trillion dollar
economy, cost wise, this war is minor."
While opinions ran the gamut from little or no effect to a challenging
economic environment for start-ups from 18 months to five years, the panel
unanimously said that the pending war would not alter their own firm's
actual investment strategy or decisions.
What was obvious in each panel member's opinion was the harmful effects
of the underlying current of uncertainty. Those uncertainties - the length
and the cost of the war, its degree of success, and the unknown backlashes
such as retaliatory terrorist activities in the U.S. - elicited a variety
of scenarios for the economy and start-ups specifically.
According to Tyzoon Tyebjee, professor of marketing at Santa Clara University,
the first scenario is a short successful war that stimulates the dollar
and consumer confidence, depresses oil prices and lets the good time roll
again. The second post-war scenario is one that removes some uncertainty,
but does not fundamentally help the economy, since the current economic
situation is not related to the war. In this scenario, new financing is
the least affected. The last scenario, a more precautionary perspective,
looks at wars historically - they last longer and cost more than predicted
- that plays out in rising interest rates, lower oil prices, lingering
global trade effects, increased world diplomatic tensions and continuing
Tyebjee, who has been working with a survey of the Silicon Valley business
community on the war and its potential impact, says that preliminary results
indicate that 40% of those surveyed believe the war will be bad for business,
30% are undecided, 20% predict a neutral impact, and 10% think the business
impact will be positive.
Robert Winter, managing director, Rocket Ventures, observed that pre-war,
we are heading into a recession with war talk picking up where the bubble
left off, leaving businesses on hold with federal "levers" having
minimal impact. "The fundamental challenge," said Winter, "is
lack of liquidity." In this environment, funding has eroded. War
environment observations include a high financial market risk due to terrorism,
with the speed and success of the war being critical to an initial market
recovery. On the post-war environment, Winter foresees a global impact
for the next half-century with the balance of power and role of the UN
changing global dynamics. This environment sees the start-up environment
challenged for 18-24 months with an inflationary period and continued
On a more optimistic note, Vish Mishra, venture partner, Clearstone
Venture Partners, reminded the audience that Silicon Valley was built
during the cold war. "Good ideas don't wait for good times,"
he said. Venture capitalists have a sense of risk. Today's technologies
are employed in defense, communications and smart technologies. "People
have to look for these opportunities," he said. "In the end,
the global community will find China a safer investment environment, India
a force of stability and Europe sulking, trying to truncate America's
power or energy."
Uncertainty again came through from Andrew Kau, managing director, Walden
International. Kau envisions a huge economic drain with the war exacerbating
the United States' already strained relations with the rest of the world,
creating a bad outlook for start-ups for 3-5 years. According to Kau,
"the fabric of the international community is being ripped apart
and will take a long time to repair."
"Because venture capital investment cycles stretch over many years,
the impact of war won't have a significant impact on start-ups,"
said Alex Gove, vice president, WaldenVC. He said he was more concerned
about budget deficits, corporate discipline, and investor confidence.
Since the U.S. is an integral part of the world economy now more than
ever before, Gove said he was also concerned that "The U.S. will
win the war but lose its soul." Gove cited North Korea as potentially
a bigger threat to the U.S. than Iraq and wondered whether a war on Iraq
will have a significant impact on U.S. security. "What is the uncertainty
of a nuclear bomb or a bio attack in the next ten years? That is the bigger
Eric Buatois, general partner, Sofinnova Ventures, noted that there will
always be money coming into the venture capital community. In spite of
the war, venture capitalists still invest in the market. "The key
is diversification," according to Buatois. But he noted that if Europe
is nervous about war, it is not about the war itself, rather the war's
resultant terrorism. "Europeans have lived with terrorism for years,"
he said, "and they are very afraid of it."
While the range of scenarios was wide, the recurring concerns and observations
were hard to miss: we are operating in a time of extreme uncertainty with
the investment community suffering from a lack of liquidity. China was
repeatedly mentioned as a high-growth environment for low-cost manufacturing
with a growing domestic and huge overseas market, while the U.S. market
was portrayed by some panelists as more risky. Although, as Blumberg pointed
out, the financial market's judgment of risk has pegged U.S. interest
rates at the lowest in 40 years with foreign direct investment into the
U.S. much higher than into China. Moreover, the U.S. still attracts the
overwhelming majority of global venture capital investment, with the largest
share in California.
The consensus was that venture capitalists are not operating much differently
now than before 9/11, and that they probably won't operate much differently
after a war. There are strong entrepreneurs with good business ideas seeking
capital. Companies will still be built and venture capitalists will continue
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companies. The Task Force also provides a forum for venture capital firms,
institutional investors and portfolio company management through which
they can share ideas, mutual concerns and information.
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