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If things are so bad, why are venture capitalists smiling?

By Chris O'Brien
Mercury News
Article Launched: 11/07/2008 12:00:00 PM PST

Taking the pulse of Silicon Valley these days is no easy chore.

By all indicators, gloom should prevail. Layoffs are making a comeback at some big companies. Earnings are slowing and profits are taking a hit. The stock market, well, best not even to talk about it. And perhaps most troubling should be the news that venture capital investments, the lifeblood of Silicon Valley, are down in the most recent quarter.

Yet in listening to venture capitalists and entrepreneurs talk over the last couple of days at the Web 2.0 Summit in San Francisco, they seem to be rather upbeat. Which means they are either hopelessly delusional, or they know something the rest of us don't.

After talking to attendees and listening to some of the presentations, I think it's the latter.

Several themes emerged to explain why these people see the glass as half full. Perhaps it's just a bit of spin, or an attempt to put the best face on things. But I don't think so.

Here's a few reasons VCs seem to be walking on the sunny side of the street:

• Opportunities are incredible: John Doerr of Kleiner Perkins told attendees that the areas where venture capitalists are investing, like green tech and energy, are many magnitudes larger than basic Internet companies. The ability to reinvent these markets and the potential payoff down the road remains enticing, and no short-term change in the economy has changed that view. And because their focus is on the next three to five years, they're not panicking over short-term ups and downs, he said.
  
• Technology marches on: The economy may have retreated into its shell, but technology is still evolving. That means companies still have to spend to keep up, even if they get a little more tightfisted. But these changes create new opportunities for someone to launch or invest in new companies.
  
• A little Darwinism is a good thing: "This is a good time for innovation," Christine Herron, a principal at First Round Capital, told me during a break. "The hobbyist entrepreneurs and investors are going home, making more room for those creating the best opportunities. People have been reminded that this business is supposed to be hard."
  
• Obama, Obama, Obama: It wasn't too hard to see that this was a pretty pro-Barack Obama crowd. And there was plenty of talk about how Obama "gets" the Web and will bring people into government who share his perspective. Also, this is an industry that feeds on optimism, and his election has definitely provided this crowd with a healthy dose of optimism.
  
• We're older and wiser: John Battelle of Federated Media said the industry has grown up a lot since the last bust. "The industry is much more mature than it was 10 years ago," Battelle said. "Thank god. I think there's more perspective now."
  
• No guilt complex: When it comes to the global financial meltdown, no one is blaming Silicon Valley. "This time, it's not our fault!" Battelle said.
  
• Plenty of nuts gathered for the long winter: In separate sessions, Facebook founder Mark Zuckerberg and Twitter founder Evan Williams didn't break a sweat when pressed about the economic gloom. Both insisted they have plenty of money on hand to keep rolling along with building out their respective platforms. They weren't feeling any undue pressure to stop focusing on development and to start spending more time thinking about how to make money.
  
  "We're not focused on optimizing our revenue strategy," Zuckerberg told the audience. There's no hiring freeze at Facebook, which now has about 700 employees. In fact, Zuckerberg said the company is busy opening offices around the world to continue its expansion.
  
  "As a private company, we have the luxury of not having to worry about the valuation of our company," Zuckerberg said.

Let's hope this optimism holds through what looks like a long, cold winter ahead.