Stephen Phillips in San Francisco reports on the dot-coms' fall
from grace with US investors
The party's over. The ant factory of IT startups that swarmed into
San Francisco and Silicon Valley in the heady days of the
Internet-driven Wall Street bull market is facing the financial
whiplash of the dot-com downturn. The collapse of the speculation
bubble that propelled the share price of unprofitable Internet
start-ups into the stratosphere is driving an austerity programme
as remorseless as the profligacy that preceded it.
Software and hardware start-ups that once spent with abandon,
fuelling a vintage sports car boom for the dealerships of San
Francisco and San Jose, are furiously curtailing spending, with
future financing uncertain. Extravagant expense accounts have been
consigned to history as Silicon Valley's venture capitalists come
over all choosy about the deals they cut.
VCs responsible for incubating the likes of Amazon.com and eBay
now wear a distinctly morning-after-the-night-before look. Many
financiers are nursing sore heads from the demise of countless IT
investments on which the cash of their clients was riding. But
while VCs are growing more discriminating about the companies they
bankroll, the pressure is on for them to strike deals that match
the 150%-plus return on investment averaged when the bull market
was in full stampede.
The hopeful cash sluicing into the new company treadmill of
Silicon Valley from venture funders like pension companies, which
stump up billions of dollars in the hope of snagging a piece of the
next big thing, has barely abated. Yet the market for initial
public offerings (IPOs) - the main way of cashing in venture
investments - has snapped shut for many Internet-related
businesses.
The straitened investment climate might explain the disquieting
spectacle I witnessed at a matchmaking conference pairing start-ups
with VC suitors in San Jose last month. A battery of Harvard MBAs
mobbed a Wall Street investment analyst after he gave a speech on
the network equipment market - one of the few IT sectors that is
still a white-hot ticket on the public markets - snatching up
print-outs of the besieged speaker's presentation and peppering him
with requests for investment tips and hot prospects.
The incident reveals in all its naked corruption the
lemming-like mentality of VCs and their faddish investment
strategy, which lies behind the failing businesses now littering
their portfolios. If so, it mirrors the momentum investing of
lumpen day traders on the public markets which drove the Internet
speculation bubble in the first place. The difference, of course,
is that VCs are professionals, so perhaps they should know
better.
But it's not all belt-tightening in Silicon Valley right now.
For those in the industry's hot spots, the rollercoaster continues.
Networking behemoth Cisco is splashing $1.3bn on a lavish 6.6
million square-foot office complex down the road from its San Jose
headquarters. And sales automation software upstart Salesforce.com
is moving into plush new headquarters in downtown San Francisco, no
expense spared. The popping of champagne corks can still just be
heard above the background din of shuttering businesses in the
dot-conomy.
While most US voters held their breath for the outcome of last
month's Florida electoral recount to learn whether their candidates
had made it to the White House, at least two West Coast technology
companies rested easy. Oracle and Microsoft are part of a select
group of US corporations that contributed more than $100,000 to
both Democrat and Republican coffers according to a recent report
on campaign funding.