- There is nowhere else in the world with as many successful companies by market capitalisation in one place as Silicon Valley.
- The huge concentration of entrepreneurs, technical expertise and capital generates new ideas and businesses every day.
- Investors should think about how things might change in the future and what that means for their current and future investments.
Andre, you spent several months in Silicon Valley for DWS. How did you get on?
I found it absolutely fascinating. And instructive too, of course. I spoke with lots of entrepreneurs and business founders, as well as university scientists and people in the finance sector. And if I came away with one thing, it's this: the region is going to continue to produce many more disruptive inventions and technologies. They mean business!
What were the main insights you got?
First, that the economic power concentrated in this region is simply unparalleled. There's nowhere else like it on the planet. The valley itself is not that big. Around four million people live in San Francisco and the Bay Area, which is about 1.2 percent of the total population of the USA. But the market capitalisation of all the companies based in the region equates to around a third of the total S&P 500. The number of billionaires is similarly high.
What’s behind the region's success, in your view?
I was particularly impressed by the incredible energy that emanates from Silicon Valley. The region has developed a unique ecosystem. You can find everything concentrated there in a densely packed area: entrepreneurs and business founders, cutting-edge research and an unbelievable amount of money available for innovation and developing new technologies. And that, of course, works like a huge magnet for the region. That's why countless brilliant minds from around the world come together there to compete for the best ideas but also to collaborate and inspire each other.
What’s your view of financial conditions in Silicon Valley?
There's really an abundance of money; that's part of the secret of its success. The only place that can really compare is China. First, there are the private individuals who've become very rich through their own businesses and now act as business angels, investing capital in young start-ups. The big venture capitalists are also there, providing the next million dollars of capital to successful start-ups. And then there are the big tech companies who say: "We'll try out your product or take over your company."
But good ideas don't just come from start-ups. The big technology companies are also constantly developing.
Yes, and capital naturally plays a key role in that. For a business like Google, it's no problem to throw a billion dollars at self-driving test vehicles, for example. Established industrial companies often can’t compete with that. It is therefore very important for investors to consider the changes coming out of Silicon Valley. What are the new developments? Where is most of the money going? And what does it all mean for their current and future investments?
So, what happens in Silicon Valley has implications that go far beyond the region and the companies that are based there?
Precisely. You see everything there as if you were looking through a magnifying glass. That means you don’t just have a better idea about developments on the horizon but also about established business models with a question mark over them. Having an idea of areas to avoid in future is also be quite valuable for investment decisions.
The valuations of many Silicon Valley companies seem rather high right now. Is it therefore better for investors to stay away?
No, not at all. Many companies based there have very robust business models and great prospects. In such cases, high valuations are justified. It’s very much on a case-by-case basis.
Which criteria do you apply to select the right investments for your funds?
With each company we look at, we first ask ourselves if the business model is sustainable. Can the company grow? Is management closely tied into the company? Are balance sheet numbers conservative? And, of course: is the valuation right?
How can you tell whether a company is on the right path?
When you spend time looking around Silicon Valley, one thing that really strikes you is the different cultures companies have. When assessing which companies will succeed in the long term, this is really important. Apple's culture, for example, is completely closed. All the developers there are required to sign agreements saying they won't speak about their work, not even to each other. People work on small tasks and often don't understand the bigger picture.
At the other extreme is Google, i.e. Alphabet. The company conducts all kinds of fundamental research, involves people from all sorts of disciplines, works closely with universities and makes the results available to everyone. Google's founders no longer even bother with the search engine that generates all the money but instead focus on all the start-ups they have. In a rapidly changing world, I don’t believe it’s possible to control everything yourself. That's why I think Google's model is much more promising.
So ultimately, it's innovation that counts?You could say that. It's important for any investor to consider new developments. We have to learn to assess these ideas properly and to evaluate how they will influence our future behaviour. The answer to the question about business potential then appears almost automatically. This has definitely become more difficult in recent years, simply because the pace of development has increased so rapidly. And that's precisely why it's so important as a fund manager to get an idea of the situation on the ground. That's what we do at DWS anyway.