Silicon Valley is the best place ever in the whole world

Inspired by Google, the high-tech capital's boosters have decided that it's boring to be pessimistic.

By Farhad Manjoo

Published May 27, 2004 7:30PM (EDT)

One day in the not-too-distant future, Google will finally begin selling its stock to the public, and several hundred of the firm's Silicon Valley employees will find themselves instantly weighed down by loads and loads of newfound cash. In the past, such a story would not have been very remarkable here; this region, you'll remember, was once prized for the ease with which it transformed ordinary, slightly geeky mortals into unspeakably wealthy hipsters.

But it's been a quite a while (as measured in Internet time) since anyone in Silicon Valley has been that lucky, and a certain wistful optimism has attached to Google's millionaires-in-waiting. After so long and desperate a lull, people here say, things in the Valley are starting to turn around, and Google's imminent fat cats are proof-positive of the upswing: If folks are getting filthy rich again, then Silicon Valley must be working just as it should.

For the Valley, Google's IPO couldn't have come soon enough. Since the end of the boom, the region -- broadly speaking, the string of cities and suburbs that border the 101 freeway on the peninsula to the south of San Francisco -- has suffered more than just about anyplace else in the country. During the past three and a half years, the Valley has lost more than 200,000 jobs, and incomes in the region have declined sharply.

More important, the Valley also seems to have lost some of its importance. In the late 1990s, when the world revolved around the wonders of technology, many in the region liked to think of their home as a modern-day Florence. Silicon Valley was not just a nice place where many tech firms chose to put down their headquarters; it was, instead, the epicenter of a renaissance in the way the world worked -- a model to prove the value of innovation, competition and entrepreneurialism. In those days, just about every place in America and the rest of the world was trying to build its own Silicon Valley, and, perhaps to the Valley's chagrin, many of those ventures did well. Now, in a time of easy global communication that allows for technology to be created just as easily in Bangalore as in Burlingame, it's sometimes hard not to think of Silicon Valley as a weary guest at the party it started.

Does Silicon Valley matter anymore? The people around here are emphatic that it does; even despite things like outsourcing, they say, the Valley remains the world's most fertile ground for tech innovation. Valley boosters are notoriously prone to overexuberance, so one is careful not to swallow everything they say. And yet the insiders do have a point: Whatever recent problems the region has had, it's still true that no place turns new ideas into successful businesses as easily as the Valley does. While other regions may have more ready access to cheaper programmers, it's only in the Valley, says Warren Packard, managing director of the Silicon Valley venture firm Draper Fisher Jurvetson, "that you have this huge entrepreneurial culture." People here don't want to work as cheap programmers; they want to start their own companies and hire other cheap programmers.

That's why, right now, Google's IPO is important for the Valley. The offering may not lead to another Internet boom, and it certainly won't ease some of the Valley's intractable local problems. But Google proves, just in time, that the peculiar cocktail of academia, venture funding and Silicon Valley culture of innovation still works.

"I would make the case that where else but in Silicon Valley could two Ph.D. students get funding and start a company like this?" Guy Kawasaki, the chairman of Garage Technology Ventures, says of Google. "Where else could they risk failure? If you fail in Europe your family is tarnished for the next five generations." In Silicon Valley, failure is acceptable -- and because of that, the region seems newly poised to succeed.

Less than four years ago, in December of 2000, Santa Clara County, which contains about two-thirds of Silicon Valley, recorded a dizzyingly low unemployment rate of 1.3 percent. (Unemployment nationally was at 4 percent.) The county's labor force stood at more than a million people, and only about 13,000 of them were out of work. Just 2 percent of the office space in Santa Clara County was vacant, and the average asking price was almost $7 a square foot. That year, personal incomes in the Valley grew faster than anywhere else in the nation.

When you look at the numbers chronicling the Valley's decline from the heights of 2000, what's striking is how quickly things collapsed. Just nine months after reaching a 1.3 percent unemployment rate, more than 70,000 people in Santa Clara County were jobless. In a year's time, the unemployment rate skyrocketed up to 6.6 percent, then, a year after that, to 8.1 percent, eventually reaching a high of 9.1 percent in January 2003. Unemployment in the county now stands at 6.2 percent, a few points higher than the national rate of 5.6 percent. Part of the reason it's not even higher owes to the fact that since the boom, hundreds of thousands of people have either moved out or stopped looking for work. About a fifth of all offices in Silicon Valley are now vacant, and the average rental price is a fraction of what it once was. And even though the Valley is still one of the wealthiest places in the nation, in the past three years, people here faced the largest decline in average income of any metropolitan area in the country.

It seems obvious why Silicon Valley hit the skids -- some of the world's largest tech giants are based in the region, and when the tech industry collapsed, the Valley sunk with it. But the Valley, like the tech industry at large, also seems to have been a victim of its own good fortune. During the boom, "it was like a gold rush," says Ben Horowitz, the CEO of Opsware, a Silicon Valley firm that produces software that runs in data centers. Horowitz -- who deserves some of the credit, or the blame, for what happened here in the 1990s, as he was one of the original executives at Netscape -- says that during the boom, many of the people coming to Silicon Valley weren't really Silicon Valley-type people.

The Valley is a place for people with innovative ideas concerning new technology, but those who landed on the shores of Silicon Valley in the late 1990s didn't know much about technology, and they didn't have many great ideas about what to do with it. They were coming here just because money flowed freely. "If you had a business degree, it was like 'The Apprentice' times a million," Horowitz says. "Everybody went out to Silicon Valley with the idea of making a lot of money. They didn't have anything unique to offer. People had ideas like starting an online pet store. And Silicon Valley isn't the best place to start a pet store. We don't have a lot of retail experience."

Horowitz believes that there's at least one silver lining to the thunderclouds that have hovered over the Valley during the past few years. "The talent pool has now changed a lot, probably, in my opinion, for the better," he says. The people who came here to make a quick buck have all gone home. The ones who remain are probably more committed to the idea of starting lasting, useful companies based on truly novel ideas, and on sticking with those firms until they start doing well.

Perhaps because those who remain in the Valley now harbor realistic expectations for what they want to get out of life, people here seem to have recently allowed themselves to become somewhat more sanguine about the region's prospects. "I think there is more optimism these days," Guy Kawasaki says. "It's not irrational optimism -- maybe it's just a disgust with pessimism. After a while you get tired of being pessimistic. One day you get up and decide to be optimistic." Such cautious moves toward optimism are accompanied by some actual optimistic facts on the ground. The national economy has been doing better of late, with job growth strengthening. Recently the Valley actually began creating, rather than losing, jobs; businesses in Santa Clara County added about 2,000 new positions in April.

This rate of job growth is definitely not spectacular. Stephen Levy, who directs the Center for Continuing Study of the California Economy, points out that according to current trends, it will probably take until the end of the decade for the Valley to replace all the jobs lost since the end of the boom. Companies in Silicon Valley face declining sales in a time of rising productivity; this mix of forces requires them to keep on a smaller workforce, says Levy.

Levy concedes that the Valley could surprise him: "The way the Valley can now create jobs is through the creation of new technology," he says. The wonder of the Valley is its ability to create fabulous new technologies, and it's possible that the region will spawn some great idea we can't yet foresee that causes employment to once again shoot up in the region. But it's just as possible, says Levy, that new technologies won't lead to tremendously many new jobs; he cautions that due to generally rising productivity, innovations out of the Valley may bring "a lower potential for job growth than in the past."

Optimists in the Valley insist that they understand such notes of caution, and if anybody here is expecting another dot-com boom, he's not admitting it. Still, there are good reasons to be upbeat about the future, and chief among them, people say, is Google's IPO. When Google goes public, the region will likely see a boost from all the millionaires, multimillionaires and billionaires the offering is expected to mint. Local businesses are surely hoping that the company's army of Ph.D.'s -- people who've spent years toiling anonymously on the search engine and things like AdWords and Froogle -- will decide to reward themselves with Audis and Lexuses and new mansions to park them in.

Google's more important contribution to the Valley might well be psychological. "It's one of those things that's slightly inspirational," says Marc Verissimo, the chief strategy and risk officer for the Silicon Valley Bank. A successful Google IPO, Verissimo explains, may encourage other Valley firms to go public; and if those firms do well in the market, venture capitalists will start funding more start-ups. Indeed, Verissimo says, venture firms are already beginning to invest more freely in new companies. And the new viability of start-ups is likely to spur innovation and encourage new entrepreneurs to come to the Valley, further strengthening the region's grip on technology and locking in its place as the hub for all things new.

While it certainly is plausible that Google's IPO will knock some wind into the Valley, there are a few here who think the region is counting too heavily on Google's success. "I think it's great that Google's going public, but I think people are overhyping its impact on the market and the Valley," says Judy Estrin, the CEO of Packet Design and one of the Valley's veteran entrepreneurs. "It makes me nervous that people are going to overreact to it -- the same way Netscape was a phenomenon and not a rule, and people tried to be like Netscape, and that didn't work." Many Valley insiders believe that people here have learned not to make that kind of mistake again, but Estrin isn't so sure of that. "Not when I hear them say that the Google IPO is going to be huge," she says. "That says we haven't learned enough of a lesson."

Estrin is probably right; by itself, Google will not spark a new boom, and those who believe it will are in for a rude awakening. Still, the story of Google's founding and its path to success is so thick with Silicon Valley lore that it's hard not to think of the firm's IPO as a validation of the Silicon Valley way, and as a sign that great things are in store for the region.

Larry Page and Sergey Brin, Google's founders, first met each other in 1995 as Stanford graduate students in computer science. Within a few months, according to the company's official history, the pair began working on a search engine they called BackRub -- so named because it analyzed "back links" to Web sites. BackRub was good, and it began to gain a following among people who'd tried it out; David Filo, one of Yahoo's founders (and also a Stanford Ph.D. student), was one of its early fans, and he encouraged Page and Brin to turn their technology into a search firm. In 1998, the pair approached Andy Bechtolsheim, a Valley legend who'd co-founded Sun Microsystems when he was at Stanford, with their technology, now called Google. On the spot, Bechtolsheim wrote out a $100,000 investment check for Google. The next year, Google netted about $25 million in funding from Sequoia Capital and Kleiner Perkins Caufield & Byers, two of the Valley's biggest venture firms.

When you talk to people in the Valley about what makes the place unique, they often use phrases like "entrepreneurial culture" to describe the feeling in the air here; what they mean by this is difficult to explain in the abstract, but you see this culture quite clearly in Google's story. First, two people discover a new way to search the Web. It's a pretty good idea, but the idea by itself does not make for a fruitful company. "You can get an idea anywhere in the country," notes Ben Horowitz, and surely people outside of Silicon Valley have good ideas all the time. In the Valley, though, a good idea is given special consideration. Here, a new way of searching the Web is recognized, by even a potential competitor like Yahoo's David Filo, as something that needs to be nurtured. The owners of this idea are encouraged to pursue it, and are not thought of as absurd dreamers when they decide to leave school in order to make a go of it.

"People in the Valley know there's a culture that embraces that kind of thing," says Peter Levine, a partner at the venture capital firm Mayfield. "In the Valley it's perfectly normal to start a company and take some risks, and people respect that. In many other places they'd wonder, 'How come you don't go work for a big company?'" Most important, a good idea in the Valley won't find itself at a loss for cash. Even post-boom, says Horowitz, "It's easier to raise money here than anywhere else," and there are many lawyers, accountants and other professionals here who are well versed in setting up new firms.

There's something else important worth recognizing about Google's early history. Look at the almost accidental way in which the company was formed -- two people meet at school, and they come up with something new. This happens all the time in Silicon Valley, ever since William Hewlett met David Packard at Stanford in the 1930s. The list of great companies formed through connections with Stanford is astonishingly long. But it's not just Stanford, it's everywhere in the region. In the Valley, says William Packard of DFJ, "you have the ability to bump into people who'll help you out. There are so many people in such a concentrated area all working in technology, you have this constant flow of information. For instance, you have all these informal social groups here -- every evening there's three or four of these events going on, whether it's in nanotech or service-oriented software or something else. You have the ability to stumble upon something useful."

People who've never been to Silicon Valley probably think of it as a cold, unfeeling place, chock-full of geeks typing away on their Linux boxes. (The Radiohead song "Palo Alto" paints the "city of the future" as a place you'd never want to visit.) Many of the technologies that have made the Valley great -- the personal computer, the Internet, video games -- have been criticized for the gulf they create in human affairs; we play Quake or chat online as a substitute for meeting friends in coffee shops. But if the Valley's hold on the tech sector does become increasingly threatened by processes like outsourcing, it's ironic that it will be the region's local, social connections that keep it competitive.

You can outsource customer service, and you can outsource Java code, but it's harder to outsource innovation. "That happens face-to-face," says Hermann Calabria, who heads business development at PARC, the famed Silicon Valley research center. "It happens in context of a critical mass of a certain type of people that doesn't exist elsewhere." It happens, in other words, only in a place where people can have serendipitous encounters, and they can dare to start a company on what is really a lark, and where they will then be praised for their courage in starting that firm, even if they eventually fail.

Can other places in the world do this? Surely they must be trying, and eventually they may succeed. But locals here note that it took 70 years for the Valley to perfect its famed culture, and other places in the world have a lot of catching up to do. "I'm not telling you that 200 years from now Silicon Valley will be the place where the innovation occurs," says Guy Kawasaki. "But for the time frame of your readership? Things will be done here."

Farhad Manjoo

Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society.

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