Silicon Valley starts to party like it’s 1999

Silicon Valley starts to party like it's 1999

Posted 9/11/2006 10:33 PM ET

They work long hours for below-market rates. Their boss, CEO Mary Hodder, is a 39-year-old Internet expert who has never started or run a company before.


Dabble has received funding from angel investors. But it must fight dozens of other start-ups for attention. And when they finally get off work, the Dabble team grapples with heavy traffic, crowded restaurants and outrageous housing prices.

But it's all OK, because Hodder and her crew are convinced that their company offers a compelling online service that will be a huge success — and will make their stock options pay off.

Sound a lot like 1999? Silicon Valley and the San Francisco Bay Area, the world's technology hub, is starting to buzz again for the first time since the dot-com bust. The Valley's infamous start-up community is coming back, thanks to Dabble and its contemporaries. New powerhouses such as Google, eBay and Yahoo are driving growth and hiring workers. Stalwarts such as Hewlett-Packard and Oracle are reporting stronger sales and posting higher stock prices.

Evidence of an uptick is everywhere. The amount of venture capital invested in Internet companies has jumped almost 75% since hitting bottom in 2003. The Valley unemployment rate has dropped to 5%, down from 9.3% during the darkest days. The median home price is $700,000 and rising. Party invitations are going out — and the buffets once again include shrimp.

It's a welcome change after five tough years of layoffs, bankruptcies and empty office parks.

"Bubbly things started happening three, four months ago," says Hodder. "It's exciting." This round of growth will be based on real, useful products without the excesses of the dot-com boom, she says.

Many other Valley technorati agree. But critics, especially those outside California, say that the Valley is once again getting caught up in its own hype.

Nicholas Carr, the Massachusetts-based author of the book Does IT Matter?, says he expects the tech industry to grow but at an increasingly slower pace. The current frenzy is a "miniboom" that will soon peter out, he says. "There isn't any sign that this new wave of entrepreneurial activity is capturing the imagination of the public the way it did before."

That hasn't stopped John Chambers, CEO of San Jose, Calif.-based networking giant Cisco Systems, from predicting that his already-huge company could see its revenue rise as much as 20% this fiscal year. (An acquisition accounts for part of the increase.)

Chambers and Cisco were badly burned by the bust. Cisco shares trade at about one-fourth their boom-era high. But Chambers believes Cisco and the industry can grow without a crash. This time, "The circumstances are dramatically different," he says. "There were a lot of lessons learned."

Many tech entrepreneurs insist that they, too, will not make the same mistakes. Hodder started Dabble — a site that allows people to search, organize and bookmark videos — with $350,000 in seed money. Future funding proposals are modest. "We're not going to go crazy," she says.

Budgets are also tight at Redwood City, Calif., start-up Renkoo. Co-founder Joyce Park has strong memories of being unemployed during the bust, "sitting in front of Palo Alto City Hall, drinking triple espressos, going, 'Man, this is depressing,' " she says.

She started her company, which offers an online service to help people plan casual gatherings, with longtime friend and co-worker Adam Rifkin in her kitchen. She carefully sought out venture capitalists that offered advice, not just money. (Renkoo closed a $3 million round in March.) And she has made a habit of hiring engineers and other technical workers who are inexperienced but have potential to grow.

Playing it safe, mostly

Some of the Valley's biggest companies are also being cautious. No. 1 chipmaker Intel last week said it is cutting 10,500 jobs in a bid to save money and make the company more nimble. Hewlett-Packard is cutting about 15,000 jobs as part of a restructuring. (The No. 2 PC maker is also embroiled in a boardroom scandal related to the aggressive way the board hunted for the source of news leaks to the press. Story, 1B.)

Caution is wise, says Kevin Wagner, an equity analyst at Baring Asset Management. New technologies such as advanced cellphone networks and state-of-the-art video game systems should help keep tech growing, he says. But the growth will be more modest than before, with small busts in limited areas, he says.

Still, the Valley isn't playing it completely safe. Video site YouTube has received $11.5 million from venture capitalists, despite the thorny issue of thousands of copyrighted videos that are uploaded by users. Staffers maintain a chatty blog about the site's inner workings, including a recent video of them goofing around with a dead rat caught in the office.

Venture capitalists gave more than $38 million to Facebook, a college community site run by a 22-year-old CEO, Mark Zuckerberg. When a USA TODAY reporter recently called Zuckerberg a businessman, he burst out laughing. "I don't think anyone's ever said that to me before," he said.

And Valley darling Google has more than 600 types of jobs open at its Mountain View, Calif., headquarters. The search giant, which officially launched in 1999, also offers bubble-like perks such as free meals prepared by a high-end chef, a staff doctor and onsite car wash. (The company also has a market capitalization of about $116 billion, which is higher than that of PepsiCo, Home Depot or Genentech.)

The largesse is starting to spill into the local economy. "We see a whole lot of money flowing out here right now," says Ginny Cain McMurtrie, a vice president at Saratoga, Calif.-based Alain Pinel Realtors.

In the first quarter of 2006, 82 homes were sold for more than $2.5 million in Santa Clara and San Mateo counties, the real estate firm says.

"I hear the agents talking about the Googlers and eBayers looking at $3 million houses," Cain McMurtrie says. A home in the tech-executive hamlet of Woodside recently sold for $10.3 million.

That's a striking contrast to the rest of the country, where a softening market has caused the median home price to nearly flatten at about $230,000, says the National Association of Realtors.

Commercial real estate is seeing growth, too. Real estate firm Brandenburg Properties recently offered to rent a 55,000-square-foot office building in Santa Clara to one or more start-ups in exchange for an equity position in the companies. Brandenburg received several proposals but pulled the offer when Yahoo began buying up office space in the neighborhood.

"I wouldn't say there's stellar demand (for office space), but there's unquestionably growing demand," says partner Bill Baron.

Intel CEO Paul Otellini, speaking at a recent party thrown by the No. 1 chipmaker, said he, too, has noticed an upturn in the economy. But he's not worried, because boom and bust cycles are a natural part of tech, he said. The industry will be fine "unless there's a major economic change," he said. Then he wandered off to sample the party's swanky Asian cuisine.

Upfront investments

One reason for the economic swings is that some fundamental tech products require huge upfront investments.

A semiconductor factory requires billions of dollars and several years to build. Thus, a factory planned during good times often isn't ready until the economy softens. Then it floods the market with new chips, causing prices and profits to fall.

Yet even seasoned veterans such as Cisco's Chambers were stunned by the dot-com bust, which caused the tech-heavy Nasdaq stock exchange to lose 78% of its value in just over two years.

Janet Yellen, president of the San Francisco Federal Reserve Bank, says she doesn't believe that type of collapse looms. "I'm not so concerned about a bubble," she says. "Some venture-capital money is coming back into the tech sector … (but) nothing like the amount that we had during the dot-com phase."

Indeed, it seems as if most of the excitement is limited to the tech-centric area around San Francisco.

J.P. Auffret, a professor at George Mason University in Virginia, says the only tech buzz he's noticed recently is an increase in Silicon Valley job postings. Few of his colleagues are interested, he says. "There's a more rational view on opportunity and risks. And there's the perception that it's quite expensive to live there."

Author Carr says the Valley's highs and lows will level out as the tech industry matures. After all, the PC is 25 years old, and the Internet is 13. "The really rapid growth stage of the tech industry is behind us," he says. "It's beginning to look like any other manufacturing industry."

Stability in maturity

And it's easy to forget that the tech industry has grown steadily since hitting bottom in 2001. While the industry is still far below its dot-com-era highs, a five-year growth spurt is a kind of quiet boom.

"Before you know it, the glory days will have already happened," says Su-Ming Wong, managing director of Champ Ventures in Sydney.

But Wong says tech will always bounce back, and Silicon Valley will likely remain at the heart of the industry. "Despite every country's best efforts, no one … has successfully replicated the Valley, and I doubt it can ever be done," he says.

That's what Valley entrepreneurs want to hear. Most of the time.

"People are having fun, but less fun than you'd think," Renkoo's Park says. "Because the way it works in the Valley is: When things are good, you work 24/7. When you get laid off — when everything tanks — is when you have time to spend with your friends."

Contributing: Janet Kornblum


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