June 22, 2004
Silicon Valley (Version 2.0) Has Hopes Up
By GARY RIVLIN
http://www.nytimes.com/2004/06/22/technology/22VALL.html?th
PALO ALTO, Calif., June 21 - "Silicon Valley is back" is on the lips of
eager entrepreneurs and venture capitalists, who are rejoicing over the
success of Google and pointing to the modest comeback in computer sales. The
three-year-long depression, they say, is over.
But other signs tell a different story. The famed traffic jams of Silicon
Valley's boom times are still uncommon. A last-minute reservation at some of
the area's hot restaurants, like Tamarine or Spago Palo Alto, can still be
had. And a suite in a gleaming office park that would have cost nearly $10 a
square foot in monthly rent in 1999 can now be had for less than $3.
Big portions of sprawling projects built on optimism in the mid-1990's, like
the Midpoint Technology Park in Redwood City, sit dark and unoccupied. On
Mission College Boulevard in Santa Clara, 750,000 square feet of office
space is still available in an archipelago of office parks built during the
boom.
The optimists tend to compare today's prospects with that of the mid-1990's,
when Netscape Communications' initial public offering in August 1995 touched
off the greatest boom the area has ever witnessed. They believe that a new
era, which some are calling Web 2.0, is here.
"It feels like we're 12 months, 18 months away from the equivalent of the
Netscape I.P.O.," said Andrew Anker, a former venture capitalist who this
month became executive vice president at Six Apart, a start-up based in
Silicon Valley that aims to help businesses publish Web logs, or blogs.
Still, in more sober moments, even the optimists admit that this period is
something quite different from the boom of the late 1990's.
"I think people have been waiting so long for anything positive that a
little bit of green looks to them like a lush forest," said Konstantin
Guericke, the co-founder of LinkedIn, a business networking company and one
of Silicon Valley's higher profile start-ups.
Indeed, conditions do look relatively good because things have been so bleak
for so long. The area lost nearly a fifth of its jobs after the end of the
bubble in 2000, said Mark Zandi, the chief economist at the consulting firm
Economy.com. Looking strictly at job losses, he said, the San Jose
metropolitan area, which includes much of Silicon Valley, suffered the worst
collapse of any metropolitan area in the United States since the Great
Depression, surpassing Detroit, which lost 13 percent of its jobs in the
early 1980's.
"You're starting to hear about profits at some companies, double-digit jumps
in chip sales, and about increases on the executive compensation side of
things," said Stephen Levy, director of the Center for Continuing Study of
the California Economy in Palo Alto. "But I think you can say Silicon Valley
is on an upswing only if you don't care about the 200,000 jobs that
disappeared when the bubble burst."
Since 2000, the region has added one new job for every 15 jobs lost,
according to data provided by Mr. Levy, and added roughly 13,000 jobs over
the last four months.
"At that rate a jobs recovery is going to take a long, long time," he said,
maybe through the end of the decade. Silicon Valley's unemployment rate of
5.9 percent does not sound extremely high, but as Mr. Levy points out, tens
of thousands of workers left the area after the collapse.
Office vacancy rates in the region were below 4 percent during the boom, but
reached 18 percent in the second half of 2003, according to BT Commercial
Real Estate/NAI. That figure now stands at 17.6 percent, even though office
rental rates are at their lowest level in more than seven years, according
to that firm's Silicon Valley Office Report. (Home prices in the area,
however, are at record highs, according to DataQuick Information Systems, a
real estate data firm based in San Diego.)
"Silicon Valley is no longer at death's door," said Mike Moeller, director
of corporate communications at Hewlet-Packard. "People are no longer in
shock. But is Silicon Valley back? That's like saying a patient who was in
diabetic coma for several years is healthy again because he can lift his
head and open his eyes."
The optimists, though, cite the visitor parking spots at Cisco Systems, the
network equipment maker. For the first time in years they are filled with
representatives from start-ups hoping to cut a deal with the company. The
busy lunch corridors, whether Castro Street in Mountain View or University
Avenue in Palo Alto, are once again filled with junior moguls in the making
wearing khakis and blue oxford shirts, the standard Silicon Valley uniform.
"The bleeding has stopped," said Alex Resnik, a part-owner of Spago Palo
Alto. No longer do "three youngsters in their late 20's spend $3,000 on
dinner," he said with a frown, but the restaurant is starting to do a brisk
business again in wines that sell for $60 a bottle.
The economic rebound and a modest rise in technology spending by corporate
America have been good for companies that specialize in critical software
areas like security. But companies selling less than crucial products have
not experienced big improvements.
"I think this is going to be an environment that treats some people very
well, and some people very poorly," said Roger McNamee, a longtime
technology investor based in Silicon Valley. "You're going to find companies
that are doing spectacularly well sharing parking lots with companies that
are on the verge of shutting down."
Those with a more tempered opinion say Silicon Valley is in the midst of a
recovery that is as modest as it is delicate.
"I think the operative word is fragile," said Paul Saffo, a research fellow
at the Institute for the Future in Menlo Park, Calif. Mr. Saffo, who has
lived and worked in Silicon Valley since the early 1980's, noted that the
region "has always been dependent on events and trends happening far from
the Valley, but that's now more true than ever."
For 20 years, Mr. Saffo said, people have been predicting the area's demise,
citing factors like its horrendous traffic and surging home prices, and for
20 years he has chuckled over their doomsday pronouncements. But the lack of
traffic causes him to worry.
"You have mixed feelings on those days you sail up and down the Valley," Mr.
Saffo said. "You're glad to get around, but on the other hand, you worry,
`Is it over?' "
In 2000, according to the Santa Clara Valley Transportation Authority, 55
percent of the region's major freeway miles were snarled in traffic during
commuting hours, compared to less than 40 percent in 2002, the latest year
with data available. The traffic was far worse for those commuting to and
from the area, whether over bridges or via a route like State Highway 17,
which runs southwest from Los Gatos, Calif., through the Santa Cruz
Mountains. Traffic on more than 8 in 10 miles on that highway slowed to a
crawl at rush hour in 2000, compared with 3 in 10 miles in 2002.
"We're seeing a slight increase in traffic in the past few months but
nothing like it was three years ago," a spokeswoman for the transportation
authority said.
Google, of course, offers good news for those who believe that the region is
about to see a full-bore revival, but even the most exuberant optimists
admit that Silicon Valley needs more than a single spectacular stock
offering.
"I think people who are expecting a phoenix to rise out of the ashes are
going to be disappointed," said Joseph Ansanelli, a 15-year Silicon Valley
veteran and entrepreneur who helped found his latest company, a data
security firm called Vontu, at the end of 2001. "We're looking at a slow and
steady return," he said.
That view is shared by William T. Coleman III, the co-founder of BEA
Systems, one of the more successful start-ups created in the 1990's, who
predicts that the region will not see any kind of full-bore recovery until
"later in the decade."
"Silicon Valley grows in great spurts, and it grows connected to big
themes," said Mr. Coleman, now the chief executive of Cassatt, a business
software start-up. He said that, for now, "no big themes" had yet emerged to
drive the next wave of growth.
The region has suffered other downturns, of course, including a steep
decline in the mid-1980's after the excitement over the advent of the
personal computer. "But that recovery was much quicker than it will be this
time," Mr. Levy said. "Previously, the job levels had always bounced back
really strongly in two or three years. This time it's going to take much
longer."
The revival of the venture capital investment provides perhaps the most
encouraging sign. By all accounts, venture firms are once again investing in
promising but risky technology start-ups. They are competing over the
hottest deals, slapping down term sheets and offering a few million in cash
in exchange for a chunk of the business.
"There was a long stretch there where the environment was so negative that
people felt that no matter what they did, they couldn't be successful," said
Jonathan Feiber, a partner at Mohr, Davidow Ventures. "I don't know where we
are in the cycle, but I know we're well past that point."
Yet even on this front, the excitement should be muted. For one thing, there
are so many tens of billions in the hands of venture capitalists that
renewed investment may simply indicate their impatience.
For another, the numbers are not all positive. Venture firms, according to
Thomson Venture Economics, invested $1.8 billion in Silicon Valley start-ups
in the last quarter of 2003. That is far more money than they had invested
in any three-month period during the previous 18 months. But that figure
fell to $1.5 billion in the first quarter of 2004, a number in line with
tougher times in late 2002 and the first three quarters of 2003.
Josh Becker, a top executive at Agile Software, a company that sells
software packages to large corporations, offers another test for Silicon
Valley's prospects. "When you see people starting to leave companies like
eBay to start their own companies, despite leaving considerable money on the
table in unvested options," he said, "then you know Silicon Valley is back."

For now, Mr. Becker added, "that isn't happening."

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