Moritz’s Provocative Claim: Silicon Valley Needs Just $400M a Year

A lot of venture capitalists are concerned about how their industry is shrinking, but Michael Moritz isn’t one of them.

A partner at Sequoia Capital, Moritz was one of several VCs at yesterday’s DLA Piper Global Technology Leaders Summit who claimed the industry might be better off contracting.

“I don’t think Silicon Valley needs all that money,” Moritz said. Innovation can be funded for $300 million to $400 million a year, he said.

To put that into perspective, venture capitalists invested $7.3 billion in 761 Silicon Valley-based companies last year, according to the MoneyTree report by PricewaterhouseCoopers and NVCA, based on data from Thomson Reuters (publisher of this blog). Since 1990, the median amount invested annually in Silicon Valley has been $6.4 billion, while the average amount has been $7.3 billion, according to peHUB’s analysis of the MoneyTree data.

Moritz’s extreme view might be selling the Valley short. (If VCs put $400 million or less into Silicon Valley annually, that would put the region on par with the amount of money that flows into Dallas and Philadelphia annually.) Clearly he set out to raise eyebrows and spark debate. It is hard to take him literally. Nevertheless, VCs have to look for a new “efficiency of innovation,” says Promod Haque, managing partner at Norwest Venture Partners. It’s a discipline that might be good for the business.

To begin with, there is no doubt startups — particularly Internet startups — are coming together for a lot less. With cheap Intel-based servers and open source software, entrepreneurs can test their ideas for about $500,000 in funding, points out SV Angel investor Ron Conway.

That means an average angel round can be $100,000, and a good sized angel fund $10 million to $20 million in size, says Conway.

If money goes further and startups survive longer on the same dime, then innovation efficiency becomes a new measure of performance. The theory is this new efficiency (perhaps calculated as a ratio of sales to dollars invested) will lead to better returns.

Of course, one barrier exists. Engineers. It is hard to find them, says Haque. The majority of engineers graduating from U.S. universities with master’s degrees or Ph.D.s are not U.S. citizens — and it is not always easy for them to stay in the country.

The solution: Perhaps they should be naturalized upon graduation, suggests Moritz, tongue in cheek.

Well, maybe not so tongue in cheek.