THE
VALLEY HAS PLAYED KEY ROLE IN PROSPERITY
TECHNOLOGY BREAKTHROUGHS
FUELED GROWTH
BY MATT MARSHALL, Mercury News
Staff Writer
The San Jose Mercury News,Tuesday,
February 1, 2000
Success has many fathers, but
as the United States breaks the record for the longest economic expansion
in its history today, Silicon
Valley's high-technology industry is widely seen as having played a crucial
role.
Economists and other experts
say breakthroughs in technology and new business models, many of them
originating among local firms,
combined with flourishing global trade to fuel the unprecedented nine-year
economic growth.
''Silicon Valley became the
winning model,'' said Peter Leyden, co-author of the recent book, ''The
Long Boom: A Vision for the
Age of Prosperity.''
''It was so potent that it was
emulated by the whole economy. It is also the model that is now breaking
out throughout the world.''
Leyden, a former editor at Wired
Magazine, and Peter Schwartz, president ofthe Global Business
Network, a futurist think tank
in Emeryville, first argued in 1997 that the forces behind Silicon Valley's
model could create a continued
boom of economic growth, which they now say could last 20 years or
longer.
Economists point to factors
outside the valley that contributed to the boom -- such as a string of
recessions overseas that helped
keep U.S. inflation in check by lowering the cost of imports -- but most
of them agree that Silicon
Valley's contribution was essential.
It was Intel Corp.'s introduction
and refinement of its microprocessor, for example, that first helped
boost worker productivity,
Leyden says. Workers could produce more output per hour on faster, more
efficient computers, and could
demand more compensation without companies having to lift the prices of
their goods. This avoided the
wage-push inflationary pressures of past years that might have caused the
Federal Reserve Bank to raise
rates and put the brakes on economic growth.
Innovations by Intel and other
high-tech firms date back to the 1970s and were developed throughout the
1980s, periods of traditional
boom and bust, but most companies did not start applying these technologies
in productive ways until the
1990s. New application of the microprocessor spawned ever more
innovations by the area's firms,
eventually maturing into the Internet revolution -- and the so-called New
Economy.
Sun Microsystems helped develop
servers, which control computer networks. Cisco System
manufactured routers, which
keep a computer network running securely. Oracle produced database
software to utilize the new
technology. Along with the expanding use of the Internet as a business
medium, productivity in U.S.
industry has grown by 2.5 percent per year since 1996, a full percentage
point higher than the 25-year
average.
Simultaneously, a new kind of
business model was developed in the valley, one that was faster and more
flexible, and driven by the
idea that anyone with a good enough idea can get the capital, the workforce
and the markets to make it
a reality.
Companies like Sun could ally
temporarily with Netscape or Oracle, and build on each other's expertise,
explains Leyden. ''There was
this free-flowing dynamic, a cross-fertilization of people between
companies, a networking phenomenon.''
Anirvan Banerji, economist and
co-director of the Economic Cycle Research Institute in New York,
argues that the expansion is
partly the result of good luck -- luck that had nothing to do with innovation
in
Silicon Valley.
For most of the 1990s, Banerji
said, one or more of the world's major economies was in a recession.
This allowed the United States
to import cheaper goods and services to offset its own inflationary
pressures. By helping the Fed
avoid interest rate hikes, these overseas recessions helped create the
lowest
volatility of any post-World
War II expansion, he said.
That coincidental good fortune
may have ended in 1999, however, as Japan -- the world's second-largest
economy -- emerged from more
than eight years of recession. Now, import prices are increasing again
in
the United States, which Banerji
believes could cause the Fed to lift rates considerably.
''We are no longer able to benefit from the misfortune of other economies,'' Banerji said.
Yet even Banerji believes Silicon
Valley played a crucial role throughout the boom. Recession and
currency devaluation abroad
resulted in cheap imports that ordinarily would have hurt domestic
companies unable to compete
on price. But it was here that Silicon Valley played a vital role.
''The valley's investment in different kinds of technology enabled productivity gains,'' said Banerji.
''Jobs became easy to get. There
is a strong relationship between the ease of getting jobs and consumer
confidence. This in turn powered
the economy.''
Silicon Valley was also behind
the booming stock market, Banerji said. ''These stock market gains, year
after year, boosted investor
confidence in the economy, which in turn boosted consumer confidence.''
1999's flood of funding fuels valley Internet companies drawing more -- and larger -- investments
BY SHAWN NEIDORF
Mercury News Staff Writer
The San Jose Mercury News,
Saturday,
February 5, 2000
Venture capitalists, the financiers
of the
Internet revolution, poured
an astonishing $13.4
billion into Bay Area companies
last year --
more money than they invested
in the past five
years combined.
The latest quarterly Money Tree
survey,
compiled by PricewaterhouseCoopers
and the
Mercury News, shows that the
venture
investments surpassed all previous
records,
especially during the last
three months of
1999, when $5.68 billion went
to 358 local
companies. That means the fourth
quarter alone
outstripped the previous one-year
record
of $4.5 billion set in 1998.
As has been the case since the
mid-1990s, the
Internet remains the driving
force.
``Today, the Internet is transforming
so many
(traditional) industries that
we get great business ideas coming in every
day that we can't even process,''
says David Cowan,
managing partner of Bessemer
Venture in Menlo Park.
``I think at the core of the
growth is just
this huge, fertile unclaimed
continent that's been discovered. All that's
stopping you from staking your
claim is whether you can run
faster than the next guy.''
Money is pouring into software,
networking and
equipment companies, and it's
coming in larger and larger amounts.
According to the survey, the
average investment was $8.1
million in last year's first
quarter and soared to $15.9 million in the
fourth quarter. The mega-deals
are also increasing, with 18
companies receiving more than
$50 million in the fourth quarter.
Building fast
ValiCert Inc. is one example
of the 328
venture investments in Bay
Area software companies last year. The company
helps verify that electronic
financial transactions are
complete, that ``virtual''
money has changed hands. Chief Executive Yosi
Amram is trying to make his
company run faster, and he is using
venture funding and strategic
partnerships to power their efforts. ValiCert
raised about $23 million last
summer. ``You have to build
fast,'' Amram said.
The Mountain View-based company
has no direct
competitors, Amram said, but
he fears an entrant from a similar business. To
survive, ValiCert sought a
venture-capital
investment to grow quickly
and used some of the money to make a strategic
investment late last year.
Networking companies were also
popular with
venture capitalists last year,
drawing $1.64 billion to 104 companies. These
networking companies need larger
investments
to develop their products,
says Jonathan Feiber, a general partner in Mohr
Davidow of Menlo Park.
For example, Brisbane-based
Colomotion Inc.,
known as Colo.com, received
the second-largest investment of the year with
a $200 million infusion in
the fourth quarter.
Jetstream Communications of
Los Gatos and iBeam Broadcasting Corp. of
Sunnyvale also attracted large
sums in the last quarter.
E-commerce is hot
The investment in e-commerce
is also growing
rapidly. It rose tenfold from
$102 million in 1998 to $1.2 billion in 1999,
with major investments in e-commerce
sites such as
More.com of San Francisco,
Wine.com of Palo Alto and Petstore.com of
Emeryville.
However, these types of investments
could
decline this year because of
the increasing competition among
consumer-oriented companies.
The surge of money puts increasing
pressure on
venture capitalists to get
a deal done quickly before other venture
capitalists beat them to an
agreement with the entrepreneur.
``We're on rocket fuel,'' said
Hank Barry, a partner at Hummer Winblad
Venture Partners in San Francisco.
He contends that the faster
speed of
deal-making is a sign of an
efficient market. Since the investment
structure is ritualized, lawyers
and accountants know the system,
and venture
capitalists with the right
contacts can examine the deals quickly, he said.
But A. Grant Heidrich of the
Mayfield Fund
isn't so sure. Given the ``breakneck
speed'' of deals, he does not think
most venture capitalists spend
enough time getting to know
entrepreneurs before inking
a deal. He worries, for example, that some
``teams'' are really just groups
of people who recently came
together, untested alliances
of people who have not worked together
previously.
Despite the risks inherent in
fast-paced,
big-dollar Internet investing,
Mohr Davidow's Feiber expects the Net to
continue to dominate the local
economy, as the automobile dominated
Detroit. He thinks of the area
as a kind of large company town, ``and the
company is Silicon Valley Inc.''
Contact Shawn Neidorf at sneidorf@sjmercury.com or (408) 920-5916.
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Stream
of IPOs could subside. Havoc forces VCs to be more selective
BY SHAWN NEIDORF
Mercury News Staff Writer
The San Jose Mercury News,Wednesday,
April 5, 2000
The Nasdaq's recent slide and
its mid-day
plunge Tuesday could shut the
window for
IPOs if the market continues
its roller
coaster ride.
For now, Silicon Valley venture
capitalists
are staying calm though concerned,
waiting
for the return of more IPO-friendly
equilibrium.
``I think that we will continue
to see some
volatility, but my hope is
that some of the
speculation has been washed
out of the
market,'' said Jos Henkens,
a general partner at
Advanced Technology Ventures
in Palo Alto.
VCs have ridden public market
ebullience to
high returns through most of
the 1990s,
and those profits have allowed
them to raise
increasingly larger pools of
capital --
$46.6 billion last year --
which venture
capitalists have invested in
new companies.
Eye-popping returns
As of Sept. 30, the average
one-year return
for venture capital was 62.5
percent,
according to Venture Economics,
a Newark,
N.J., venture capital data
collector. Jesse
Reyes, vice president of Venture
Economics,
estimated the average 1999
return could
exceed 100 percent once it's
calculated. By
contrast, the average VC return
was 18.1
percent in 1998, when the IPO
market was much
leaner.
As Grant Heidrich, a partner
at Menlo Park's
Mayfield Fund, puts it, venture
capitalists
have been taking companies
public in a ``very
forgiving and generous environment,''
and the Nasdaq's gyrations
may bring a
Last week, Palo Alto venture
capitalist Cliff
Higgerson was visiting with
11 investors,
seeking their capital for a
new fund.
Their conversation turned to
the public
market, and both the fund manager
and his
backers agreed that of the
good, young
companies in the public market,
probably some
80 percent to 90 percent were
overvalued. And
of the not-so-good young companies,
they figured 98 percent were
overvalued, said
Higgerson, a general partner
at
ComVentures.
Everyone assumed it would be
just a matter of
time until the valuations snapped,
and
Higgerson said Tuesday that
perhaps this is
the time, reflected in the
Nasdaq tumult of
late. The index has been sliding
since March
10, and Tuesday saw a wild
dip of more
than 500 points, then a rebound
until it
closed down 74.79.
Plan B, as in bear
If this is the start of a lasting
downturn,
Higgerson isn't worried. It
would mean
marginal companies won't get
funded, and some
venture capital fund backers
likely
will leave the market, but
``venture capital
will go on just fine, thank
you.''
Indeed, venture capitalists
would be both
hurt and helped by a prolonged
stock-market
decline. The companies in venture
portfolios
that are ready to go public
or be acquired
would be less valuable. On
the other hand, a
dampened public market would
lower the
values of young, private companies,
and that
would cut the price venture
capitalists pay
for the shares they take when
they invest in
new companies.
Eventually, a bear market of
several years
would hurt venture capitalists
by dragging
down returns.
ATV's Henkens remembers when
an information
technology company was expected
to
have three profitable quarters
before going
public. These days, companies
go public
with no profits -- some without
even having
revenues.
That means the risk venture
capitalists used
to help wring out of companies
before
taking them public is being
passed on to the
public instead.
Are the companies pulled
by the public
markets onto the exchanges,
or are they pushed
onto the exchanges by eager
company managers
and venture backers? Probably
both,
observers say.
At least until recently, the
public has
gobbled up information technology
stocks, and
that helped lure more companies
into IPOs.
Going public and having a high-flying
stock
is seen as a ``weapon'' by
the companies,
said Ned Zachar, a director
of research at
Thomas Weisel Partners, a San
Francisco
investment bank. Going public
brings name
recognition with investors
and also helps
with branding efforts. Going
public also
gives young companies tradable
stock with
which to buy other companies
to ramp up growth.
But in an extended down market,
VCs expect
investment bankers will raise
their
standards for taking companies
public.
``I think it's going to raise
the hurdle a
little bit,'' Reyes said.
Contact Shawn Neidorf at sneidorf@sjmercury.com
or (408) 920-5916.