South by Southwest

Silicon Valley's cooling off is felt at SXSW

Brain drain in Silicon Valley
Brain drain in Silicon Valley

Usually a big party for Silicon Valley investors and start-ups, this year the SXSW Interactive festival has diminished somewhat in importance. Although plenty still attend the annual Austin, Texas, event, there were signs of waning interest from some former SXSW Interactive mainstays.

Silicon Valley venture capital powerhouse Kleiner Perkins Caufield and Byers decided not to host its annual mixer, Yahoo did not take over Brazos Hall as it has over the past several years and many tech start-up entrepreneurs sat this year out. Executives from Yahoo and Tumblr did participate in half a dozen panels.

Some investors and entrepreneurs CNBC talked with blamed the relatively sedate mood on an overall cooling in the Silicon Valley ecosystem — from start-up seedlings to public tech giants. Also important, the event has become a harder place for start-ups to launch and break out, given all the noise.

Partygoers with unicorn masks at the Hometown Hangover Cure party in Austin, Texas.
Harriet Taylor | CNBC

"When I got here I just immediately just felt the difference," said C.J. MacDonald, co-founder of digital gift card company Gyft. "It's just a different vibe."

MacDonald said he was shocked to discover far fewer people from his Silicon Valley network in attendance. He said it likely reflected that many start-ups are tightening their belts. "I think it's the reality of where we are at."

"I have definitely noticed the same thing," said Tim Fong, a partner at Next Play Capital. "Everybody is conscious of burn rates."

All this reflects the diminished funding environment in tech. Capital invested in seed stage start-ups has so far dropped to $99 million in the first quarter of 2016, down from $155 million the prior quarter, according to Pitchbook.

Steve Case
Tech trends VCs are talking about at SXSW

"When it's really good in the market, it's frothier here too," said Eric Matzner, founder and CEO of supplement start-up Nootroo. "Literally, the drinks are frothier. They are shaken by a more bespoke bartender."

Not every gathering was muted — drinks flowed freely at a party hosted by Peter Thiel's Founders Fund.

Favor CEO Jag Bath, center, at the Hometown Hangover Cure party co-sponsored by Favor, Austin, Texas.
Harriet Taylor | CNBC

And companies are still attending, of course, but many are spending less, said Jag Bath, CEO and president of Austin-based Favor, an official SXSW partner and co-sponsor of the annual Hometown Hangover Cure party.

The infux of big brands has also made the event more marketing focused, though small companies are still coming, said Bath. Some tech teams noted that as the conference has grown, it has become harder to find developer communities and attend hackathons.

Still, the opportunity to network with people from other creative communities in town for the film or music parts of the conference remains a unique draw, said some attendees.

And the event is still attracting big names. Alphabet's sessions on Google's autonomous vehicles and innovation were standing room only, but this year's highlight was undoubtedly the opening keynote from President Barack Obama on Friday afternoon.

SXSW will not release attendance numbers until after the event, but expects to see similar numbers to last year: 33,825 people and 200 tradeshow booths.

"We've had several hotels pop up within the last year, so are able to utilize more space, still central to downtown, plus the nice weather allows for folks to spread out," said Hugh Forrest, director of SXSW Interactive. "We still have a strong presence of investors and entrepreneurs especially within SXSW Startup Village and SXSW Accelerator."