BIZ: Silicon Valley Reacts to Economy With a New Approach

From: Chris Rasch (
Date: Thu Apr 12 2001 - 10:41:02 MDT

April 12, 2001

Silicon Valley Reacts to Economy With a New Approach


Dan Krauss for The New York Times
Walt Morton, center, of Sawhorse Partners, who spends his days hunting
deals on computer hardware, said that the entrepreneurial spirit of the
dot-com industry was still alive in San Francisco.

SAN FRANCISCO, April 11 - Among the junkyards, crushed cars and broken
glass in this city's warehouse district, Walt Morton spends his days
hunting for deals on computer hardware from failed dot-com companies.

The auctioning off of the infrastructure of the not-so-new economy is
sign that Silicon Valley is plunging into a financial abyss unparalleled
for decades in this high-technology region.

At the same time, Mr. Morton and others like him are evidence that the
entrepreneurial fervor that led to the boom is still very much alive,
that sprouts seem to be emerging from the rubble.

As he examined a pizza-box-size server computer and an auctioneer barked
out prices, Mr. Morton reflected that he might well be the first sign of
new era rather than an observer of the final moments of the old one.

"All the people I know who lost their jobs are trying to start new
companies," he said. But he added that their approach this time was
radically different from the gold-rush mentality of the quickly fading
dot-com era: "We're part of a whole new wave of cheap start-ups."

A former executive at America Online who is now chief executive of an
Internet start-up in San Francisco, Sawhorse Partners, Mr. Morton
several auctions each week.

"If these are cheap, enough I might buy a couple of them," he said,
a stack of computers sitting in a corner of a warehouse. He estimated
the infrastructure he built for his last start- up at a cost of $200,000
would now be less than $18,000.

The shift in the market has created an unfamiliar paralysis among
Valley's venture capitalists, many of whom have a dazed look as they
previous bad investments crumble and try to figure out what the next hot
investment will be. As a result, the area's
ecosystem has abruptly stalled, at least temporarily.

While some analysts have worried about the impact that such dot-com fire
sales are having on equipment makers like Cisco, Dell and Sun
the most visible beneficiaries of the boom, many economists noted that
recycling of equipment has always been a part of the high-technology
cycle, in which most start-up companies either fail or are acquired.
Employment, at this point, remains surprisingly strong.

"I think the whole dot-com layoff thing has been blown out of
said Steven Levy, an economist at the Center for the Continuing Study of
the California Economy, in Palo Alto, noting that in the last three
the San Francisco Bay area has recorded historically low unemployment

The California Employment Development Department reported this month
the state's unemployment rate dropped to 4.5 percent in February, a
low. (It was 4.4 percent in December 1969.) The unemployment rate last
month in Santa Clara County, which largely defines Silicon Valley, was
percent, indicating that only 17,600 people were jobless in a work force

Even in San Francisco, which has been more dependent on e-commerce
start-ups, unemployment was 3.2 percent, up from 2.6 last year.

Mr. Morton is one sign that while the dot-com bubble has burst and
expectations have been "reset" - in the current jargon of the e-commerce
neighborhood known as South of Market Street - the start-up culture here
now deeply ingrained.

Big Storage, a South-of-Market start-up with 30 employees that largely
missed the dot-com boom, turned profitable in March, two months ahead of
schedule. The company, which sells Linux-based disk arrays to companies
that need large data storage systems, once felt embarrassed that it was
on the public offering bandwagon but was now finding it easier to

"Last year, each month I would apologize to my board of directors for
finding more business," said Big Storage's chief executive, Sam Bogach.
Now, he says, missing the boom was a blessing.

Many Silicon Valley executives said the shift was away from the era of
easy-money dot-com start-ups and back to a climate that more closely
resembled the original Silicon Valley up-from-the-garage ethos.

"You're no longer viewed as a loser if you have a cheap office space;
you're perceived as smart," said Paul Kocher, chief executive of
Cryptography Research, who is financing a small start-up to develop an
e-commerce application.

Indeed, it may be that venture capitalists, who until recently were
the biggest beneficiaries of the boom, are now the biggest victims of

"The V.C.'s are hiding under their desks right now," said Anthony
co-author of "The Internet Bubble," a 1999 book that predicted the

"Most of them," Mr. Perkins said, "are facing up to the fact of whatever
percentage of their deals that were stupid. They're shooting all the

Mr. Perkins's company, Red Herring Communications, which publishes the
business and technology magazine Red Herring, had a round of layoffs not
long ago, but Mr. Perkins said that when he checked recently, he
that all but one of the former employees had found a job - and that the
person was not looking.

Of 742 venture capital firms in Silicon Valley, he said, 192 were
within the last 18 months, a situation that will inevitably lead to a
pruning of the venture community in the months ahead. That, in turn,
lead to a consolidation in the power and influence of venture firms like
Sequoia and Kleiner Perkins Caufield & Byers.

And if the venture capital industry is in shock, that has created a
effect among start-up companies.

"These guys are schizo right now," said David House, chief executive of
Allegro Networks, a start-up router company in San Jose, Calif. "They've
just raised their billion- dollar funds and they're scared. Now everyone
wants to be the second guy to invest, not the first."

>From the point of view of the venture capitalists, the entrepreneurs have
also grown more cautious.

"We think it's a wonderful time to be a bold entrepreneur," said Jim
Breyer, managing partner of Accel Partners in Palo Alto, Calif. "But
unfortunately we're not seeing a lot of people with those ideas. It's

The current period, Mr. Breyer said, was similar to the one venture
capitalists went through in the late 1980's and early 1990's, when most
people thought Microsoft had won the PC platform wars and they were only
interested in incremental ideas.

Today, most executives here remain convinced that the Internet is not a
and that it has only begun to transform the economy. But they are now
grasping for specific trends, with profit potential, to seize upon.

"There are no fads right now," said Sheldon Breiner, a longtime Silicon
Valley inventor who is now an independent investor. "Six months ago it
optical switching and a year ago it was business-to-business, but now I
don't know of a fad."

There are those who said that the absence of fads was a good thing and
the economy in Silicon Valley was being led back to its fundamentals in
technology, where it has always excelled.

"Two years ago you couldn't recruit anyone into the semiconductor
industry," said Andrew Rappaport, a partner at August Capital, a venture
firm in Menlo Park, Calif. "They all wanted to go to a dot-com. Now
all coming back and the talent pool is growing."

And some venture capitalists remain enthusiastic, certain that they are
only one company away from the Next Big Thing.

"We've gone from irrational exuberance to irrational pessimism," said
Galanos, a partner at Softbank Venture Capital in Mountain View, Calif.,
adding: "Have I told you about Danger Research? Wait until you see what
they're doing!"

R. A. Hettinga <mailto:>
The Internet Bearer Underwriting Corporation <>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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