How Gray Is My Valley

The land of high tech suffers a wrenching mid-life crisis

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This time, however, many people believe the outcome will be different. Short of a product revolution, nothing on the horizon promises to bring a quick fix to the area's economy. "In the past, our recessions have been shaped like a V," says Richard Carlson of Spectrum Economics, a Mountain View consulting firm. "We dropped down sharply but came back roaring. This time it looks more like an L." Unemployment in Santa Clara County, once stuck perennially at about 3%, now stands at 5.5%. In the past year, two of the valley's pillars -- Apple Computer and National Semiconductor -- announced worldwide layoffs in the thousands.

Some of the dramatic decline in revenues can be attributed to the recession. But defense spending, which fueled many of the area's businesses and made Sunnyvale the state's second largest recipient of federal contract dollars (after Los Angeles), may never come back to 1980s levels. In another sense, the Valley is suffering from its own success. The rising cost of doing business in the area has ignited an exodus of manufacturing operations to foreign countries and to other parts of the U.S. ranging from Idaho to the Carolinas. And in the final cutting irony, the revolution in personal computing has turned the PC into a relatively low-priced commodity, so that electronics firms now face greater competition for shrinking profits.

The culture of entrepreneurship is fading fast. The most telling sign of that is the route that venture capital, the lifeblood of new growth and technologies, now takes through the Valley. Simply put, it has stopped flowing into the fledging businesses that spawned the success and defined the culture of the region. Though overall investment has increased in Silicon Valley, most seed money is now conservatively parked in middle-aged operations. Meanwhile, the costs of underwriting a new venture have skyrocketed. "There were days when $10 million would take a company from start-up to an initial public offering," says Robert Miller, chairman of MIPS Computer Systems in Sunnyvale. "Today the average is $40 million to $50 million." Adds Carlson: "The companies that were going to be the Apples of the '90s are in Chapter 11 now."

That doesn't mean that people have stopped dreaming. They have just learned to dream smaller. Phil Sih, 33, is managing director of his third start-up company in seven years, a small electronic-communications firm called DBC Associates. Sih is a true believer in the Valley's potential for entrepreneurs, but he acknowledges that finding investors to seed innovative visions is no longer the easy ride it once was. "There's still a tremendous degree of entrepreneurial spirit," he says. "But the days of people taking huge amounts of venture capital and turning it into 'burn-and-go' start-ups is less of a reality. You have to be much better now than you did then."

Complexity and competition are two prime reasons. Personal computers that were designed in garages have been supplanted by immensely powerful workstations that can do the work that million-dollar mainframes once did. Individual microchips now wield the processing capabilities of desk-size computers of the mid-1980s. Developing such sophisticated products can be far more expensive and risky than it was just a few years ago, so it has increasingly become the province of multibillion-dollar global behemoths.

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