Silicon Valley tech has long run on DOD and related monies. From established companies like IBM and Raytheon to think-tanks like SRI and Xerox PARC to startups, it was understood that national security was a lucrative opportunity. War, whether hot or cold, is good for business, if you’re the right kind of business.
Symmetric Computer Systems, founded by William Jolitz in 1982, was one such company. Unix, TCP/IP and networking software, and processor technologies were all considered controlled technologies subject to export restrictions. Heck, when William and I took a 375 computer to Germany for a USENIX conference, we had to have the appropriate license to carry one with us — and I had to take special courses in how to apply for and maintain such licenses. I also had nice conversations with the various national laboratories and security agencies who loved our little systems. Easy to transport, hardy, and enough processing power to handle any immediate intelligence and scientific need. William understood his customer. And his primary customer was not conventional.
But things changed here in the Valley. Companies exported their technologies to cheaper shores. We stopped making semiconductors. We stopped building computers. By the time I had co-founded InterProphet, an inventor of low-latency TCP chip technology we pioneered, few VCs would consider a hardware or semiconductor investment at all. Everyone talked about their “China Strategy” and their Guangdong manufacturing as if that was the only key to success (it wasn’t). Even the US government was asking for RFPs for technologies which were expected to be built, not by US firms, but by Huawai. Technology was viewed as trivial, of no value except to pass on as a bribe to build inexpensive trinkets to bored Americans.
Silicon Valley transmuted from one that invented technology to one that concerned itself with “unicorns”, aka fantasy companies devoid of financial fundamentals. One of my investors in InterProphet, Dan Lynch of Cybercash and Interop fame, warned William and me of the folly of nailing down the technology too soon, before investment was secured. Once the market cap was determined, you were no longer a fantasy. Sometimes it was better to not build the product, but just talk about it. This was an accurate assessment of the situation over the last twenty years. Unfortunately, it was one concession William and I could never make. We loved to build products. We loved to make things. We loved to create.
So we retired from the game. It was sweet while it lasted.
This little meditation does have a point. And it has to do with the change in the world economy with 1) the pandemic and 2) the war in Ukraine. Bear with me.
The pandemic of 2020-2022 led to a sea change in the structure of work. In companies where people could work remotely, such as software development, there was little impact of the disease on the workforce. People could isolate, maintain their income stream, and produce. Technology companies were winners.
For the majority of businesses, people could not easily isolate. Schools were shut down and remote learning introduced (a boon to the Zooms of the world). But remote learning on such a scale had never been done, and its effectiveness was poor. Children isolated from their teachers, peers and supports did not do as well as college-educated professionals using Slack and cloud tools. Stores and entertainment venues such as movie theaters were closed down. Medical offices limited visits to reduce the threat of contagion. People died in isolation wards of the disease, separated from their families. It was a tragic and depressing time.
Given so many lost their jobs due to the pandemic through no fault of their own, extensive government funding was used to essentially pay people to stay home while a vaccine was developed. Remarkably, within one year after Covid struck our shores, a vaccine was made available. This will go down as one of the most amazing scientific achievements of our time.
But as the threat of contagion has eased, the ability to get tech workers back in the office has stalled. The frustration of the CEO and investment class towards these “entitled” workers has been venomous and extreme as they continue to look on their now empty business properties. And as government supports for the consumer class have ended, so too has the artificial consumer boom. And heck, if those tech workers won’t come to the office to bend the knee to management, well, let’s fire them.
Silicon Valley is a small place. One jumps off the cliff, all jump off the cliff.
The second impact (this is beginning to sound like Evangelion) was the war in Ukraine launched by Russia. This war had an immense unexpected effect on Silicon Valley investment for a simple reason — much of the funds channeled through crypto and currency schemes dried up when the EU, the UK and the US agreed to impose sanctions on Russia and its many collaborators. And while VCs and its unicorns did not advertise it, the underpinnings of many financial deals were based on money flows that have existed since the Cold War and were now interdicted. Whomp whomp, indeed.
It’s taken about a year for these investments to collapse. The collateral damage: job losses, startup failures, venture funds with negative outlook, and eventually clawbacks from angry customers, investors, and LLCs. We live in interesting times.
We are now embarking on a new Cold War, with Russia, China and the lesser lights (Iran, N. Korea, and so forth). There is no longer a demand for a China strategy or Russian oligarch monies. And this is a win for startups involved in technologies which have a basis in national security, just like Symmetric Computer Systems started with 40 years ago. What was old is new again.
So what should we be looking at in well-positioned investments?
Strategic investments in battery technologies, carbon capture, and energy storage are still strong contenders for long-term investment. AI technologies focused on separating the wheat from the chaff for meaningful intelligence, both business and governmental. Alternative satellite creation and maintenance, especially for low-latency non-interceptible communications — something I was solicited and wrote an RFP for about twenty years ago — will be a growing opportunity. And good old-fashioned secure software, hardware and networking is always a safe bet in bad times as a lucrative acquisition by a big guy.
Avoid broad consumer gimmicks like AI journalists, unless you’re a VC that can sustain the hype for at least six months. The lack of sustainable dark funds and non-protected IPR (AI can’t hold patents or copyright) given the current Cold War climate makes it problematic until everyone figures out how to get around the currency strictures. SPACs are nothing but trouble (hey, Palantir, how’s it going?). And the launch side of satellites is locked up for now.