Tech Region Ponders How Deep the Valley
No place was as emulated in the ‘90s as the gold-paved way between San Francisco and San Jose, which gave birth to what venture capitalist John Doerr called the greatest legal creation of wealth in history.
Small wonder: Silicon Valley was home to three of the world’s 10 most valuable companies. Start-ups in the region took in nearly half the record $69 billion invested by venture capital firms in 2000. And the dot-com explosion was the most spectacular in a series of innovations dominated by the valley’s firms, following the booms in integrated circuits and personal computers.
Inventors, investors and public officials from around the world studied the region’s universities, venture firms, technology companies and the supporting cast of bankers and lawyers. Then they took what they learned about the fast-paced synergy and the entrepreneurial spirit back to their home turf, building research parks and encouraging professors to start businesses on the side.
In a nutshell, that strategy worked.
Now, Silicon Valley is crashing as it never has before. And its fall is being hastened by the spawn of its success--imitative hot spots of business growth in Boston; San Diego; Austin, Texas; and elsewhere.
Some are wondering whether Silicon Valley will ever be what it once was.
“There is a healthy paranoia,” said Carl Guardino, president of the Silicon Valley Manufacturing Group, an association of 190 firms employing 275,000. Every chief executive Guardino talks to says the current recession is the worst in the valley’s history.
“It is the longest and the deepest, and I haven’t heard one say they can see an end in sight.”
Venture investments are down everywhere, with some places seeing their share of new money fall by half. In Silicon Valley, however, the drop-off recently reached 83%. Now, firms in the region take only a third of new venture money.
In employment, the numbers are brutal as well. The valley lost 8% of its jobs--100,000--from December 2000 through May 2002, or 1 in 13 jobs. Massachusetts, by contrast, lost less than 2% of its jobs--64,000 out of 3.4 million, or 1 in 53. In Texas, it was 1 job in 136.
“We just plain got creamed,” said Richard Carlson, chairman of Spectrum Economics Inc. in Palo Alto. Other areas are “clearly turning around, and we’re skipping along the bottom.”
Not surprisingly, Silicon Valley residents are more pessimistic about the economy than those in other parts of the country, surveys found. In June, only 40% of area residents thought the national economy would be good in the next year, down from 58% three months before.
For two years, business and civic leaders have explained that the area simply had further to fall than its geographic rivals. And they’ve reminded each other that the region had been incorrectly written off as a failure during three previous recessions.
But the tenor of those conversations is changing.
There are enough signs of lasting trouble here--and signs of new life in other places--that “I’m convinced the next upturn won’t help us as much,” Carlson said. “The next wave of start-ups, I’m expecting a lot more to be happening elsewhere.”
Many observers agree. One reason is that the last boom was unprecedented, and the fever might not return. Silicon Valley is at its best when the intensity is greatest.
“There was a need to be close to competitors and suppliers. It’s almost a network phenomenon--you need to be at the center of it or you lose out,” said Tom Lieser, senior economist for the UCLA Anderson Forecast. “I expect it will not return to boom-time economics. There will be some return to places that have lower costs.”
Three years ago, “there were so many things going on here, there was no need to go anywhere else,” said longtime investor Barr Dolan, a general partner in Charter Venture Capital in Palo Alto.
Back then, nearly 90% of Charter’s new investments were in the valley. Of the three new companies Charter has funded in the last year, only one is nearby, in Emeryville. The others are in New York and Ohio.
The boom in venture capital spread the money and expertise far and wide. And because venture capitalists are being more judicious, they make time to travel. A start-up firm in Cleveland no longer must come West to get funded.
From now on, “Silicon Valley won’t be quite as unique,” said Robert Caret, president of San Jose State.
Without venture capital, the start-ups were the first to get crushed. But the pain has gone all the way up the food chain. Santa Clara-based Intel Corp., which put the Silicon in Silicon Valley, said recently that it would lay off 4,000 workers. Sun Microsystems Inc. and Hewlett-Packard Co., both based in Palo Alto, are firing employees as well, helping to push Santa Clara County’s jobless rate to 7.6% in July. The level has been at least 7% for seven straight months, the longest stretch above that rate since 1983.
San Jose-based Internet equipment maker Cisco Systems Inc., which for a brief time was the world’s biggest company by market value, no longer ranks in the top 10. Also exiting the list are hometown software champion Oracle Corp. and Intel.
Vacancy Woes
One of the most talked-about statistics among CEOs here is the office vacancy rate. Formal surveys put the figure at more than 20%. But even those estimates are too rosy, some say.
Many firms, including Cisco and Sun, have empty space they can’t fill with workers or sublease to other tenants, said a team of Merrill Lynch real estate analysts who recently drove through office parks, counting cars and people. The actual vacancy rate in the region may be 30% to 40%, “higher than what we’ve ever encountered in any market for any property type in the past several years,” they wrote.
Some lifelong residents are struck by more subtle changes.
Because they could catch the eyes of so many billionaires, Valley billboards on the 101 Freeway once fetched $100,000 a month. Prices have since plummeted. Even at the reduced rates, many billboards are without ads and others feature outdated content. Recently, one still advertised a comedian’s performance that had taken place five months earlier.
And organizers canceled this year’s Sand Hill Challenge, a soap-box derby-style race that had raised tens of thousands of dollars for area charities from entrance fees paid by venture capital firms clustered on Menlo Park’s Sand Hill Road.
In time, the business climate in the valley will improve, as it must in a cyclical economy. Many observers say the valley will regain some of its former glory.
“The brainpower that’s been generated in the last 30 years is all here--the venture capitalists, the entrepreneurs, the experts, the medical schools,” said Jim Woody, president of Roche Bioscience, the Palo Alto unit of Swiss pharmaceuticals giant Roche Holding.
Wilf Corrigan, chief executive of chip maker LSI Logic Corp., said, “Silicon Valley has this enormous capability to regenerate itself. That’s not going to change.”
The executives aren’t going to stand by and watch. The crisis has stirred valley leaders to come together as they haven’t for a decade. Guardino’s Silicon Valley Manufacturing Group and Joint Venture Silicon Valley, a nonprofit coordinating panel, have convened workshops to start trying to fix things.
“We are smart enough to be glancing in the rear-view mirror behind us,” Guardino said. “The competition is close.”
The groups are lobbying for public help with education, transportation and especially housing, because still-breathtaking home prices have companies worried about recruiting mid-level employees.
Joint Venture is laying out a vision for how the valley could return to power: when nanotechnology, the emerging field of manipulating molecules, merges with information technology and biotechnology.
Many firms in the area already straddle those fields, and the region’s powers are pushing for more organized interdisciplinary brainstorming.
As improbable as it might seem, that sort of high-level guidance worked a decade ago, when Joint Venture asked for help in funding pilot Internet projects. One of those projects hired Marc Andreessen, who soon after co-founded Netscape Communications Corp. Backed by Doerr’s venture capital firm, Netscape’s initial public offering in 1995 ignited the Net boom.
Need for Joint Effort
Without coordination, the next period of innovation could skip the valley, Joint Venture warned in a white paper last month.
“History teaches us that economic leaders in one technology era can lose their place in the wave of innovation that forms the next era,” the group wrote.
The evangelists of convergence make some compelling arguments. Advanced technology was needed to analyze the human genome, and the approach is speeding the pursuit of holy grails such as medical devices tailored to individuals.
The harsh reality, however, is that nanotech is in its infancy and Silicon Valley is nowhere near as dominant in biotech as it was in info-tech.
One predictor of economic vitality in science is funding from the National Institutes of Health.
Boston’s share of the NIH pie has held steady for 10 years at about 6%. The share in the Bay Area, still No. 1, has fallen to 6.2% from 7.8%.
Another measure is the IPOs of biotech firms. None of the five most recent offerings was by a Northern California company. The largest was by Third Wave Technologies Inc., which is based in Madison, Wis., and makes software for analyzing genes.
Third Wave Chief Executive Lance Fors said he has had little problem recruiting employees from Silicon Valley, who are delighted by the lower housing prices and good schools.
“The most critical thing is the people,” said Fors, who recommends that young companies inspired by university work stay near those institutions. These days, he said, “there are more success stories outside of the original hubs.”
Raising Hopes
At the annual Silicon Valley Manufacturing Group barbecue last month around an executive’s backyard swimming pool near San Jose, CEOs hobnobbed with Gov. Gray Davis and state Senate and Assembly leaders, pressing for tax breaks and infrastructure improvements.
The executives were most excited about joint public and private financing of four university-based science and innovation centers around the state--including a $300-million institution being built on San Francisco land donated by Catellus Urban Development Group.
Under construction just south of the city’s financial district, the UC San Francisco-led center is exactly what Valley leaders are looking for--a research park where businesses and academics can influence each other.
However, it remains a dream deferred. After institute plans were announced in late 2000, “there was a hope people would move in in droves,” UCSF Vice Chancellor Regis Kelly said.
But Catellus Senior Vice President Mike Monroe hasn’t been able to sign a single biotech tenant in 1 1/2 years.
Discussing the hopes riding on biotech, Monroe shook his head.
“It’s certainly not going to be the main driver to the Bay Area. It’s not going to save the situation,” he said.
Carlson agreed. “We’re going to get a recovery, but it’s not going to be a bed of roses,” he said. “The degree of dominance we had was really unsustainable.”
