The expectation of recession is beginning to adversely affect business in Silicon Valley, the nexus of the US IT industry.

In the past few years, large amounts of venture capital and a buzz of excitement have returned to the Valley for the first time since the dot-com crash. But this week, an article published in The New York Times concludes that optimism is abating.

The number of technology-related start-ups to list on a public stock exchange, for example, has dropped dramatically in the last three months. In the final financial quarter of 2007, the number of IT-related initial public offerings (IPO) was 31; in the first quarter of 2008 the figure was just five.

Of those companies that have listed publicly, only a third of companies are worth more than when they initially launched. In other words, two-thirds of recently-listed technology companies have less earning potential than originally believed.

The industry is also suffering from the declining value of the dollar, which makes outsourcing development work to offshore destinations more expensive.

The global IT industry is presently awash with speculation over the impact of the credit crunch – and the putative ensuing recession – on technology companies. While IT can form part of cost-cutting initiatives, it is also easier for companies to wheel back IT spending than to impose redundancies.

Oracle – one of Silicon Valley’s most successful progeny – recently reported revenue growth of 20% and a US$1.3 billion profit for its third financial quarter. The company’s share price dropped by 8%, however, because a shortfall in new application licence revenue was seen by investors as a sign of vulnerability to economic downturn.

Further reading

Economy has become a drag on Silicon Valley - New York Times

IT vendors borrowing more despite downturn fears