June 26, 2004

View from Silicon Valley -The inverse boom.

(c) Copyright View form Silicon Valley, 2004.  All rights reserved.


Silicon Valley is in a recovery but, despite the headlines, it's not a boom.   One interesting aspect is many business practices are the exact opposite of 1999 -2000 while others are distressingly similar.  For lack of a better term, Silicon Valley's 2004 condition is the "Inverse Boom."

It's no secret Silicon Valley aches for the good old days of 1999 -2000.  NASDAQ 2,000 is touted as evidence of our return to glory.  News reports are anxiously scanned for the next blurb to "prove" our economy is back.  Increasingly, the mantra is pre-IPO start-ups will lead us all to the new boom!

However, the prospects for small companies and IPOs to drive a new boom in the Silicon Valley economy are over-stated. For those outside the "golden inch" of IPO riches in this mile-wide/inch-deep "recovery," a comparison of Silicon Valley practices from 1999 -2000 to those in 2004 shows these are interesting times!

Characteristics of the "Inverse Boom" include:

Management: 1999-2000:  We want MBAs and lots of them.  Real world experience is "old economy" thinking.  This is a "new" product /service in a "new economy" and real-world experience is counter-productive.

Management 2004:  Job boards demand applicants with exact skill sets and who can immediately leverage personal relationships.  Additional demands for "verifiable track record of success," and a  W-2, to prove how much money you really make, are common. (And they still won't match your previous pay.)  No training.  No ramp-up period.

Summary:  Neither of these attitudes is a formula for long-term success. Or even indicative of companies expecting to be around for long.
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Personnel: 1999-2000:  HR's mission is it to give management engineers, engineers and more engineers.  We're not exactly sure what each one will do but, since the business will inevitably grow, hire more engineers! We'll put them to work after they get here and settle in.

Personnel: 2004: HR is outsourced.  The mission is to maximize engineering in India or China.  If engineering is still performed stateside, can another project be piled onto the current crew?  Is it REALLY necessary to hire more engineers?

Summary:  Job boards, temp agencies and outsourcing consultants are enjoying a boom.  Engineers are a commodity.  Isn't it supposed to be the other way around?
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Computer needs 1999 -2000: Call up H-P or Compaq and get a new desktop with the latest and greatest Intel processor with Windows.  Make sure it's loaded with all the latest Microsoft Office, a C++ and HTML compiler, Adobe Acrobat editions, etc.

Computer needs 2004:  Shop on-line for the least expensive laptop and have it shipped.  Almost any CPU is "good enough."  Get the latest anti-virus, SPAM blocker and firewall programs.  Don't clutter it up with too many applications since it's a nightmare keep all the versions updated.

Summary:  Keeping PCs virus-free and safe from hackers is more mission critical than CPU speed or application software.  Companies like Symantec and McAfee, rather than Intel and Microsoft, are the growth plays.
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IT infrastructure 1999 -2000:  Time-to-market and automating non-mission-critical functions is paramount.  Throw money at Sun, Oracle, Siebel, etc. for all-encompassing, enterprise-level solutions. Make sure we are really nice to these companies because their newest stuff is sold out and on allocation.

IT infrastructure 2004:  Google builds "roll your own" Linux-based cabinets using low-cost blade servers with the cheapest memory available, built on a plastic chassis.  Salesforce went IPO this week on the basis of never having to "buy" software.  Security for the data given to the engineers in India is critical.  Everybody has inventory so long-term supply commitments are un-important.

Summary:  Low-overhead and data security are more important than maximizing processing power.
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Facilities 1999 -2000:  We must have an office in Palo Alto regardless of the price.  If the landlords want stock options, give it up.  I personally dealt with a pre-IPO company who leased a space to create a Palo Alto address even though management lived back east.  Their only Bay Area employee lived in Oakland and never occupied the space. Nonetheless, they attracted another round of VC money shortly afterwards, before folding a few months later.

Facilities 2004:  Start-ups work from home offices.  Commercial real estate is ~17% vacant, 26% counting leased-but-unoccupied.  ( True "space available" estimates 30%+.)   Stories today focus on companies consolidating space as a cost-saving measure.

Summary:  Frugality is now "good," instead of a "failure" to "think big."
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Profitability 1999 -2000:  VC's fund companies based on "eyeballs" or "build it and they will come."  Many companies exist just hoping to get big enough to be bought out by Cisco or Siebel or Solectron.

Profitability 2004:  One "proof" of a "recovery" in Silicon Valley is companies are again being acquired by Cisco.

Summary: The 1999 -2000 tactic of hiding year-over-year financial comparisons via acquisitions is alive and well.
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VC companies 1999 -2000: How soon can we take this idea and turn it into an IPO?

VC companies 2004:  How soon can we take this idea and turn it into an IPO?

Summary: Don't kid yourself. This is always the goal.
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IPO's 1999 -2000:  Line up the investment bankers and just flip the switch.  The business plan only needs to be compelling enough to motivate the brokers in the week leading up to the IPO.  After the IPO, they will move on to the next one.

IPO's 2004:  Google "gives" by going IPO via Dutch auction but then "takes away" with management holding Class B shares worth ten Class A shares and letting employees cash out in the IPO.  (Effectively no "lock-up" period.)

Summary:  Not much has changed.  (As an aside, changing Frank Quattrone from  a rock star to a jailbird over an e-mail is like getting Al Capone on tax evasion.  If Quattrone committed crimes, the e-mail was not the worst of it.  Meanwhile Henry Blodget gets off with a fine and Mary Meeker still plies her trade, lately hawking China stocks.
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Just to round out the Silicon Valley experience, let's check housing and traffic:

Housing 1999 -2000:  A booming stock market (NASDAQ 5000) coupled with a belief the economy will remain strong forever ("the end of the business cycle") drives housing prices to unprecedented levels.  The $1M+ range was the strongest of the strong.

Housing 2004:  A "booming" stock market (NASDAQ 2000) coupled with 45-year lows in interest rates drive median house prices past the 1999 -2000 level.  The $1M+ range is strong but buyers are really(!) competing for near-median houses. (Now $590K in Santa Clara county.)

Summary:  Wages are stagnant, even down, over the last three years. ARMs are ~45%, up from 20% in 1999 -2000.  How many willing, and able, buyers are left?
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Traffic 1999 -2000:  Highways are clogged seemingly 24/7.  Multiple tax measures are approved by voters to widen highways, extend BART to San Jose, increase bus and light rail service.

Traffic 2004:  Rush hour is still three or four hours most weekday mornings and afternoons, but roads are otherwise clear.  The 1999 -2000 taxes intended for road building or new public transportation programs are being diverted to pay operating expenses for the current systems.

Summary:  A couple road projects were finished recently and there are 100,000+ fewer people in the Santa Clara county workforce.  Even outside of "Friday light", traffic is better!
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Conclusion:  Companies used to cut costs when sales were declining but accept higher headcount and costs when business was growing.  If there is a theme within the above, companies are trying to grow their business and cut costs at the same time.  Companies are cutting costs for equipment, the cost of offices and, especially, the cost of staff and wages. Simultaneously, house prices are up.

"Interesting times" indeed!