Silicon Valley booms, but worries about a new bust

No matter what you call it a bubble, a boom or business as usual something has been in the air

Even now, technology types in their 20s and 30s are dropping a million-plus each on modest ranch houses in Palo Alto in Silicon Valley and Victorian duplexes in San Francisco, and home prices in some parts have jumped nearly 50 per cent in the last six months.

Jobs — good, six-figure jobs, with perks like free haircuts and lessons on how to create the next startup company – are here for the taking, at least for software engineers. And for anyone with a decent idea and the drive to start a company, $1,00,000 to get it off the ground is easy to come by.

Yet, for all the outward optimism, even before the recent gyrations on Wall Street, old fears have been creeping in, nagging memories of the dot-com bust. You can sense it at cocktail parties in Menlo Park, at business conferences in Redwood City, inside the hipper-than-thou offices of young Web companies in San Francisco. Maybe, just maybe, these good times won’t last, and it will all come crashing down again.

“There’s this '90s hangover people still have,” says Peter Thiel, a PayPal co-founder and tech investor. Now the worry is that all the turmoil on Wall Street will spread west. Can Silicon Valley really prosper if the general economy tips back into a recession?

Can you make a fortune on your IPO if the market is falling? Probably not. But then, no one should work here unless she is prepared to be lucky. Even in worrisome moments, like now, the essential optimism of this place endures.

“There’s a ‘greater-fool theory,”’ says Lise Buyer, who was a tech stock analyst during the dot-com bubble and is back with a consulting firm, the Class V Group, that advises on initial public offerings. “In Silicon Valley, we are as a species wildly optimistic. But if we weren’t, we wouldn’t have so many entrepreneurs because no one who’s being rational would ever found a company.”

And so startups are multiplying. Engineers are deciding that this is the right time to create would-be Groupons or Facebooks — “me-too companies,” valley speak for startups that are basically copycats of a winning formula — or yet another local, social mobile app.

“These are nouveau tech millionaires,” says Adeo Ressi, a coach for entrepreneurs. “It’s not that they don’t see the warning signs. It’s like roulette.” Even before the fragility of the stock market became apparent, people here had been asking this question: Are we in a new tech bubble?

The optimists — or, some would say, the self-interested who stand to profit from the hype – note that the amounts being invested are nowhere near what they were in 2000, and that the companies this time are generally profitable and mature. The pessimists say yes, a bubble has been inflating, yet even they aren’t fleeing. They just hope to be the smart ones who get lucky and get out before it pops.

A bubble looks just like a boom, says Marc Andreessen, who touched off the first boom when his company, Netscape, went public in 1995. Frank Quattrone, the investment banker who took Netscape and dozens more companies public back then, says that today feels less like the height of the bubble and more like 1995, when tech companies were starting to go public but investors weren’t yet speculative.

Startup investment boom
Just four short years ago, social media and the iPhone were the hot new things, and money was sloshing around. But when the recession hit in 2008, Silicon Valley froze. Of course, that didn’t last long: By 2010, startup investing was booming again with money from angel investors playing with their own cash, and this year the IPO markets opened wide to tech companies for the first time since 2007.

Twenty-two tech companies went public in the second quarter alone this year worth $5.5 billion, the highest dollar amount since 2000, according to the National Venture Capital Association. Only six went public in all of 2008.

The valuations of young startups, meanwhile, have been defying gravity. Almost 1,000 raised $7.5 billion from venture capitalists in the second quarter, up 19 percent from the first quarter and 61 percent from the same period in 2009.

No matter what you call it — a bubble, a boom or business as usual in a land of optimism — something has been in the air. It may be harebrained or hopelessly out of touch, but if you don’t have a rosy outlook, you don’t belong here.

Hanging out near University Avenue in Palo Alto or in the SoMa district of San Francisco, you might wonder where all the wealth is. You can’t spot many designer suits, diamond tennis bracelets or mansions with columns. Instead, waiting in line at the Off the Grid food trucks in SoMa or at Fraiche frozen yogurt in Palo Alto, you see people in fleeces emblazoned with the names of their startups and hear them chatting about their new app or what to do with $30 million.

“You never change the way you dress,” says an executive at one hot startup who made a small fortune at a previous one. He wore an orange T-shirt. “You don’t want to flaunt it,” he adds, “especially in front of your employees.”

So you might buy a car that’s nice but not too fancy — maybe a Prius or a BMW, but definitely not a Bentley — and take up a hobby like kite surfing. You occasionally charter a plane to fly privately, especially if it gives you more time to work on your startup. Efficiency makes sense to engineers; splurging for splurging’s sake does not.

The new home of Mark Zuckerberg, the Facebook founder, is more typical. Zuckerberg, who Forbes says is worth $13.5 billion, finally stopped renting and splurged on a house. He spent $7 million to buy one that is a century old — with just one pool (though it is saltwater).

Moah and Moore had come to the valley to raise money for their email startup, Baydin, but their meetings hadn’t gone well. So they leapt at McClure’s offer. Moore jumped into his Chevy Cobalt and picked up McClure. And by the time they reached his destination 20 minutes later, McClure had agreed to give Baydin $1,00,000.

Moore and Moah have since moved into an office with cement floors and sweeping views. Almost nightly, they attend networking events with other engineers, or parties like one in San Francisco featuring belly dancers playing with fire. The couple dream of turning their startup into a big company. But if the dream is contagious, so is the fear.

The other day, Moore went to a startup event to learn about ‘quick exits’ — valley talk for cashing out of your company while you still can — where executives from large tech companies coached young entrepreneurs on how to sell their nascent startups. Just in case.

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