New Song: Down in The Valley
Technology: At stake in the current downturn is Silicon Valley's standing as the cradle of innovation

Author: Gary Rivlin
Newsweek: April 16, 2001

Two years ago Jeff Bonforte was giving ultimatums. Fund my company by tomorrow, the 26-year-old told the partners at Silicon Valley-based venture firm Draper Fisher Jurvetson, or I'll get my money elsewhere. He got the firm's money then--and he's getting his comeuppance now.

"I don't think venture capitalists even want to be seen talking to me, at least in public," says Bonforte, chairman of I-drive.com, an online data-storage company that for the moment is surviving by recasting itself as a wireless firm. "God forbid another VC would see us and say, 'Look, he's talking to a young, twentysomething entrepreneur. Didn't learn his lesson'."

This is the new Silicon Valley, where the man-child CEO has fallen from favor and the masters of Sand Hill Road are reeling with self-doubt. Internal sniping is in, high-profile media appearances are out and the area's MBAs have once again been relegated to the shadows of its Ph.D.s. A year ago, says Robert Sutton, a Stanford professor with appointments in both the business and the engineering schools, M.B.A.s were telling him, "You're Old Economy and you don't know s---." Now they're coming by his office seeking his counsel.

Credit Suisse First Boston's Frank Quattrone, the boys at Benchmark Capital, Yahoo's Tim Koogle: the people who one year ago topped any list of high fliers are now the same names on people's lips when asked whose personal stock has fallen the hardest. Business has gotten so rough that picking out who's up is difficult.

The story of the Internet Economy as it has played out in Silicon Valley is a tale with a very clear "before" and "after." It was at this time last year - the first two weeks of April - that the Nasdaq suffered the four largest point-drops in its 30-year history. At the same time, the IPO market, which had created countless new dot-com millionaires, began to sputter. Gradually, the engine that had turned Silicon Valley into the center of the financial universe came to a halt. It's now just another important business hub braving hard times, like Motor City, Hollywood and Wall Street.

The Valley has seen steep downturns before, yet even old hands accustomed to the area's boom-and-bust cycle recognize that this time things are different. "This is about as steep and dramatic a decline in the economy of the Valley as I've ever seen," says Sanford Robertson, a local eminence grise who was one of the first bankers to specialize in high tech. Robertson points to the hard times that have hit even Cisco Systems, the networking company, which he describes as "more of a religion than a stock."

At stake is the Valley's future as the cradle of technological innovation. The excitement over the Internet is gone, and either no hot new ideas have emerged or the financiers are feeling too battered to embrace them. During a recent interview, Ben Dubin, a general partner at venture-capital firm Asset Management Co., was interrupted by a call pitching a new wireless firm. He passed, though he believed it was a good idea. "There are a lot of babies that will be thrown out with this murky bath water," Dubin says.

Every time the Valley has been through a downturn--think defense contracting, semiconductors and personal computers--the area has somehow come back stronger. But the new consensus in the venture-capital set is that wireless and health, including biotech and genomics, are strong candidates to deliver the next big thing. The problem is that much of this work is being done outside the Valley. Big wireless companies in Europe and Japan, including Nokia and NTT DoCoMo, give those areas a head start. And the top centers for biotech and the human genome aren't concentrated in the Valley in the way that computer science once was.

Moreover, the money to finance health research comes as much from Washington as from the private sector, and that could tilt the action away from Silicon Valley. While the most recent federal figures show that California is far and away the leader in research money from the Defense Department, NASA and the Energy Department, it ranks second by half to Maryland in research money from the Health and Human Services Department. And much of California's health-research money goes to Los Angeles and San Diego.

Everyone interviewed for this article agreed it would be a mistake to predict the death of the Valley. Spending on research and development is up at most of the area's top technology companies, promising further innovations in software, semiconductors and networking equipment. Despite the layoffs, the local job market remains healthy. In Santa Clara County, for instance, the unemployment rate for February was 1.7 percent, down from 2.4 percent a year earlier. What's more, the number of new jobs grew by 4.4 percent.

The Valley "may lose some of its luster," says Mark Hudson, a Hewlett-Packard marketing manager, but there are still "tons of brilliant people who will find the next wave" of technology. And as the dot-coms have fallen, Valley blue chips are back on top. "I can't tell you the number of calls I get saying Hewlett-Packard sounds pretty good these days," Hudson says, even as HP's stock is in the dumps.

In the new Silicon Valley, humility is in, while boldness--now called arrogance--is out. "Silicon Valley was in danger of drowning in the byproducts of its own success," says futurist Paul Saffo. "This gave us breathing room."

Yet people still haven't come to grips with how the mighty have fallen. For a while, "hiccup" was the term of choice to describe the financial downturn; now people are saying "crash." Semantics aside, many faded twentysomething stars haven't given up on a magic technological bullet that will bring back the good old days. "There's still this notion out there," says Jeff Bonforte: " 'Can't the Nasdaq just bounce back and we promise it'll be a higher-quality version of what it was before?' " He has friends and colleagues who harbor the "misguided hope," he adds, that the clouds will part and the sun will shine on the Valley once more. Perhaps. But neither he nor anyone else has a clue as to when that might be.

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With additional reporting by Mark Boslet, Jennifer Couzin, Dan Goodin, Miguel Helft, Vishesh Kumar, Diana Moore, Anya Schiffrin and Eric Young