Silicon Valley struggling back
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Silicon Valley struggling back
By Dale Kasler -- Bee Staff Writer
Published 2:15 a.m. PDT Monday, October 6, 2003
PALO ALTO -- Ross Mayfield lived and breathed the tech bubble. He was
president of a hot telecommunications startup in San Francisco's
trendy dot-com district that became worth $1 billion practically
overnight and turned him, temporarily, into a multimillionaire.
"We would literally wake up every morning, at the dawn of the market,
and my wife and I would say, 'Oh, my God, we're worth another million,
on paper," Mayfield said.
Then the bubble burst, his company faltered and his paper millions
floated away. But he's launched another business, a software firm,
with a firm conviction that now "is absolutely the best time to start
a company."
So Silicon Valley is roaring back to life, right? Not exactly.
True, unemployment is subsiding and tech stocks are rising. Venture
capitalists are opening their wallets again.
But with the economy still sluggish and many tech jobs drifting out of
state or overseas, it's likely the recovery will be gradual -- and
won't generate the levels of wealth seen during the bubble.
"Everybody will be smaller and a little bit smarter," said Mayfield,
33, who works out of his house in Palo Alto. "A lot of companies are
going to take longer to grow. We're back to a more normal pace."
That could be sobering news for state government. Silicon Valley money
-- in the form of income taxes paid on stock options and capital gains
-- helped generate a $10 billion windfall for the state when times
were good, leading to higher government spending. The disappearance of
the tax revenue -- when the stock market collapsed in 2000 -- helped
spawn a massive deficit and fueled the drive to recall Gov. Gray
Davis.
And with the valley economy recovering slowly and the Nasdaq Stock
Market still 65 percent below the spring 2000 high, it's clear that
income tax revenue won't return anytime soon.
"I doubt we will see an economy that resembles the economy of two or
three years ago," said Alex Wong of Apax Partners Inc., a venture
capital firm in Menlo Park. "Today's expectations are more realistic."
The valley's slump has impact beyond the state treasury. It's holding
back the state's economy and, because there's less money for startup
companies, is hindering Sacramento's tech industry.
Yet people in the Silicon Valley don't hope to return to an era they
now view as unsustainable.
"Nobody wants that -- bubbles always break," said Dale Luesing, an
unemployed Los Gatos engineer.
Indeed, for all the pain the bust has caused, there's a striking lack
of nostalgia for tech's heyday. To many, it was a time of wretched
excess during which dot-com dreamers got billions in financing for
half-baked Web sites.
"It was fun while it lasted, but at the same time it was a huge
waste," said Reza Malekzadeh, head of Mountain View software firm
Twingo Systems.
But no one was prepared for the calamity that followed. The valley has
seen booms and busts, but, veterans say, this slump is exceptional.
Unemployment went from a microscopic 1.3 percent in December 2000 to a
peak of 8.9 percent in September 2002. It's fallen lately to 7.9
percent, but that's largely a function of the shrinking work force as
people have fled the area.
Steve Cochrane of the Economy.com consulting firm says the valley's
downturn eclipses some of the roughest regional recessions of the past
40 years, including the collapse of Detroit's auto industry in the
late 1970s and the oil glut in Houston in the mid-1980s.
Venture capital, the mother's milk of the valley, all but dried up,
going from $34.6 billion in 2000 to under $7 billion in 2002. Some
venture firms deserted Sand Hill Road in Menlo Park, the valley's Wall
Street.
The sheer size of the bubble has worsened the downturn: Industry is
saddled with an enormous oversupply of computers, servers and
telecommunications equipment.
Physical evidence of the slump is found throughout the valley. Office
vacancies have jumped to 19 percent from 3 percent, and the asking
rate for space has fallen by two-thirds, says BT Commercial Real
Estate.
"It's going to take longer -- this is my third recession -- than the
other two recessions," said Patti Wilson, a career counselor in Los
Gatos. "They're talking about a full decade for us to get back on our
feet."
Wilson said prospects have brightened in some industries -- like Wi-Fi
wireless technology and biotech software -- but not in others.
"If you're in telecom, it means you're transferring to another
industry," she said.
At the Calvary Church in Los Gatos the other night, the weekly Need a
Job Support Group drew its regular crowd of more than 60 unemployed
tech workers.
They mingled over cookies and coffee, many wearing name tags spelling
out their technical field: Hardware. Software. Marketing. It was
mostly a male crowd, middle aged, casually dressed, folks like Kent
Conrad.
A 41-year-old engineer from San Jose, he has started a handyman
business after six months of unemployment.
"There's more than one way to pay the rent," Conrad said. "That whole
dot-com bust, boom and bust, has damaged the whole industry. Companies
are real cautious about hiring people."
On this night, technical writer Milt Brewster was a star of sorts: He
just got a job after 32 months of unemployment.
The job will last only six months and represents a 30 percent pay cut,
but he wasn't griping: "I consider that a stroke of luck -- it's only
30 percent."
Things have gotten so bad that people aren't sure what to make of the
uptick in business. Many tech firms are reporting higher revenues but
aren't hiring.
"There's a recovery getting nearer," said Chuck Erickson, director of
a business incubator in San Jose. "But I don't know if this is all of
us drinking our own Kool-Aid or if there's something really going on."
Intel Corp., for instance, said recently that its revenue is growing
but refused to say a recovery is under way. Nor is Intel, whose
payroll has dropped by 13 percent the past two years, committed to any
major hiring.
Some experts say California's widely criticized business climate could
prompt some companies to move operations out of state. High-skill jobs
like software programming already are migrating to India, China and
other low-wage countries.
"The value of doing business in California has been declining, and the
cost has been increasing," said Michael Nevens, a valley business
consultant.
Nevens says the valley isn't dead, but it will have to change. Instead
of relying on traditional tech titans to lead the recovery, it will
need new industries to ensure its future, such as biotech or the
emerging field of nanotechnology -- the science of products built at
the molecular level.
Nanotech "will be the next great technology wave," said Steve
Jurvetson, a partner in the Redwood City venture capital firm Draper
Fisher Jurvetson.
But, in keeping with the new sobriety, Jurvetson doesn't predict a
nanotech bubble.
"It will be slower, steady," he said.
Caution notwithstanding, entrepreneurs are starting to receive funding
again, renewing the valley's endless search for the next big thing.
"It's so hard but it's addictive," said Emily White, 52, a former
social worker and management consultant who's starting her first
company, a software firm in San Jose. "There's an adrenaline."
Ross Mayfield understands adrenaline. As president of RateXchange
Inc., which traded telecommunications bandwidth, he was at the center
of the dot-com universe, based in a former fish cannery in San
Francisco's South of Market neighborhood.
Within two years, RateXchange held a $1 billion market value (stock
price times the number of shares). Mayfield's stock was worth $50
million.
Then the telecom market collapsed. RateXchange fell on hard times and
turned itself into an investment bank. Mayfield's stock -- he still
owns it -- became worth "less than 50 grand" and he left.
After stints at two other companies, Mayfield launched SocialText
Inc., a maker of software that lets employees share data and
collaborate on projects via an easy-to-use, in-house Web site.
SocialText has seven employees around the country, working out of
their homes.
An office may be opened soon, but for now, Mayfield speaks proudly of
SocialText's "humbler origins" and its bright future. It's harder to
raise money these days, but Mayfield thinks the slump has simply
cleared the field for true businessmen like him.
"The people who just showed up for the boom and left -- good
riddance," he said. "The real entrepreneurs are still here."