As Tech Stocks Rise, Silicon Valley Is Acting Like It’s 1999
“Please God, Just One More Bubble.”
That’s the message on a legendary Silicon Valley bumper sticker, and whaddaya know? It seems to be coming true.
Close your eyes and it feels a little like 1999, that giddy, amazing, lost moment when Silicon Valley was the most important place on Earth and just about everyone in it was happily adding a zero or two to his or her net worth.
The stock prices of unproven Internet companies that no one has ever heard of, such as PacificNet Inc. and EuroWeb International Corp., are once again doubling in a single day. The tech-heavy Nasdaq composite index is up 56% from a five-year low reached in October. Insiders are happily selling shares, cashing in options that recently were fit only for making paper airplanes. Call a chic Bay Area restaurant such as Delfina or Betelnut or Greens on a typically dead night like Monday and you will be told, simply and sweetly, no table, no way. The hottest car is a $50,000 Hummer.
The future, once again, appears unlimited in many eyes.
Prices of Internet stocks such as United Online Inc. and EBay Inc. may seem sky-high, U.S. Bancorp Piper Jaffray analyst Safa Rashtchy wrote last week in his newsletter, but it “is hard for us to identify a negative catalyst
Statements like that were frequently made by analysts and dot-com executives toward the end of the boom, and in retrospect they provided an excellent signal to sell. But no one is acting alarmed by their sudden reappearance.
In fact, people have decided to forget they ever heard such claims before, said William Cockayne, an affiliate with the Institute for the Future, a Menlo Park, Calif., think tank.
“Part of the advantage of Silicon Valley is that it has no memory. That’s how it can continue to innovate. But that’s also its Achilles’ heel -- it will continue over the next 10 years to do the same things wrong again,” said Cockayne, who compiles an influential daily e-mail newsletter of tech stories from newspapers and magazines. “The valley finds something amazing and, instead of letting it slowly develop, accelerates it and draws in all the people who want to be part of the next new thing.”
He practically guarantees it: “There will be another rise, then another bubble and then another crash.”
Things already are going so well here that an Internet retailer has applied to sell shares to the public, something essentially unheard of since such infamous collapses as Pets.com and EToys Inc.
RedEnvelope Inc., a 100-employee San Francisco firm, sells upscale gifts through its Web site. If the planned offering goes through at even a modest price--and analysts think it will-- RedEnvelope will be a billion-dollar company. Not bad for an outfit that had a net loss of $7.7 million in its last fiscal year, has only $5 million cash on hand and competes with everything on- and off-line from Amazon.com Inc. to Macy’s.
When companies aren’t announcing improbable debuts, they’re staging even more unlikely returns from the dead.
Ask Jeeves, an Emeryville Web search firm, is typical: From a peak of $190 a share in November 1999 it skidded to 92 cents as recently as October, at which point it was being written off as more Internet roadkill.
On Friday, Jeeves closed at $16.42. Like many of the Internet firms, it’s still a long way from its high. But anyone who invested in the company during the last two years has made a killing.
Meanwhile, the auction house EBay, always the gold standard of Web investments, is within a few points of its all-time high.
“I’ll be darned if I don’t see some authentic exuberance coming back,” said Jamis MacNiven, the proprietor of Buck’s Restaurant in Woodside. Buck’s proximity to the estates of the venture capitalists made it a key deal-making spot in the boom era, and it continues to function as a useful weathervane.
MacNiven also subscribes to the “no-memory” theory of the crash. “It’s like childbirth. You have to forget how bad it was so you can do it again.”
He ticked off the signs: “We have more reservations. I’ve once again started seeing people earnestly shaking papers at each other. We had our best month ever about two months ago. Even the number of parties I’ve been invited to has gone up.”
Parties--now there’s a retro concept. The market peaked in March 2000, but it took another year to make clear the downturn wasn’t just selective but all-encompassing. When there was nothing to celebrate, the parties abruptly died out.
For the next two years, people mourned their losses and tried to hang on to their jobs. Venture capitalists who once hired publicists to get them in the newspaper began employing publicists to keep them out of it. New investments dwindled and old ones died.
“In the bubble, all the VCs felt very smart,” said Larry Kubal, managing partner of Labrador Ventures. “Then for the last three years we all felt foolish. No one’s IQ has changed. Egos have. The pendulum always swings too far in the venture business.”
Now it’s swung back from the extreme pessimism of, say, four months ago. Labrador just raised $100 million for its fifth investment fund. That’s $10 million more than the previous fund, which was launched at the end of the boom in 2000.
“It’s a great time for investing in early-stage companies that will mature in three to five years,” Kubal said. “Other venture firms are also heading out to raise money and will be successful.”
Another leading indicator is public relations firms. Since money was plentiful during the boom and attention was not, start-ups handsomely rewarded the PR shops in the hopes of buying enough media attention to become viable. When the money disappeared and the media moved on, the PR firms cut back or folded.
The drought is over. “We’ve just gotten five new clients in the last month,” said Melody Haller, president of Antenna Group. “We only got six all last year.”
Despite the fizziness in some stocks, Haller maintained that “this is not a repeat of 1999. This is learning from 1999.”
The start-ups looking for publicity four years ago often were headed by business school graduates who wanted to sell things over the Web such as dog food and greeting cards. The ideas were so simple anyone could do them, and anyone often did. Three of Haller’s new clients are in “clean” technologies. One makes hydrogen fuel cells, another organic pest management products, and the third turns industrial sludge into renewable energy. These aren’t the creations of smooth-talking MBAs.
“These companies all have strong technology patents. Silicon Valley got rid of the airheads, the stupid me-too stuff,” Haller said. “The people who are still in this, the vendors, the support network, are the smart ones.”
The employment market, although continuing to flag badly, is showing signs of improvement. State unemployment figures released Friday showed that Santa Clara County, in the heart of Silicon Valley, had a jobless rate of 8.5% in June, a small improvement over the post-boom high of 8.9% in October but still well above the 6.7% state average.
Last week, 2-year-old start-up company Jumpstart Technologies posted listings on the job site Craig’s List for a quality assurance engineer and an application engineer. Each drew about a hundred responses. Three months ago, the San Francisco company said, it saw more desperation in the job market: A similar posting for an application engineer drew 300 responses.
Jumpstart, which was founded by two Stanford University doctoral candidates in molecular physics, creates Web sites that collect marketing information. Freeflixtix.com, for instance, gives free movie tickets to people who register not only themselves but also four friends. Those friends supposedly will register others to get tickets themselves, and so on.
This approach, called viral marketing, was tried during the boom with generally miserable results, but Jumpstart says it’s already profitable.
“Companies are succeeding now because they’re trying to build profitable business models instead of focusing on exit strategies like going public or being acquired,” said Sean Eilers, Jumpstart’s vice president of sales.
But this is still Silicon Valley, where the final payoff is not only creating something great but also being handsomely rewarded for it.
“They still think about going public,” Eilers said. “It’s just not all-consuming.”
In the second quarter, only two venture-backed companies offered shares: credit-card processor IPayment Holdings Inc. and FormFactor Inc., which makes semiconductor testing tools. During the boom, two initial public offerings would have meant a slow week, not an entire quarter.
It was a symbolic moment last month when IPO.com shut down. The company had tracked public offerings for six years, but its own $10-million funding had apparently been exhausted.
Suddenly, though, the new-issues dearth has ended. Digital Theater Systems Inc.'s public offering Thursday was the strongest in more than a year. Shares of the Agoura Hills digital audio system firm rose 47% on the first day of trading.
Half a dozen other companies are in registration, the last step before going public. None is likely to plumb investors’ new-found affection for tech more than RedEnvelope.
The 6-year-old company is using the Dutch auction method in which the price of the offering is determined by how many people commit to buying shares. Previous Dutch auctions among valley firms have been subscribed at prices between $10 and $12.
If RedEnvelope gets such a price, its chief executive, Alison May, will follow a valley tradition of suddenly being quite rich, at least on paper. According to filing documents, May, who joined the retailer in April 2002, has options to buy 3.5 million shares at 14 cents each.
Large option grants to executives became a prime symbol of dot-com excess. Critics say they often were so lavish that they encouraged executives to pump up their firms’ stock prices and then dump their shares as quickly as possible. They also distorted a company’s true earnings.
Microsoft, the biggest technology firm, announced last week that it would no longer grant employee stock options. But in Silicon Valley, as the filing for RedEnvelope demonstrates, the desire for options is one thing that never gets forgotten.