Paradise lost

Stephen Phillips in San Francisco reports on the dot-coms' fall from grace with US investors

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 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 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.

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