Silicon Valley Faces Dire Times

And no, green tech won't lead a turnaround, observers predict. Perhaps the only hope: "creative destruction."
Posted February 20, 2009

David Needle

Economy in Silicon Valley
PALO ALTO, Calif. -- When it comes to the economic outlook for Silicon Valley, the glass isn't half empty, it's just about dry.

Yet a panel of experts here at Stanford University still found room for optimism for some of the region's companies, despite the gloomy near-term prognosis.

For the meantime, however, the panelists -- speaking during an event titled "How Can Silicon Valley Survive the Great Recession?" -- still found plenty of reasons to stay hunkered down. For example, Valley veteran Patricia Sueltz, CEO of LogLogic, said her company has had good growth and, being in the security and compliance business, she's reasonably sure customers will keep buying.

That hasn't stopped her from taking steps in case there's "an economic nuclear winter," she said.

"Instead of breaking out the champagne, I let a sizable number of employees go so we'll have enough cash to keep operating for 12 to 18 months," Sueltz said. "I could see the Dow falling below 5,000 and unemployment hitting double-digit up to 12 to 15 percent."

Lisa Lambert, managing director of Intel's (NASDAQ: INTC) venture capital arm, said the chip giant has given similarly grim advice to its portfolio companies: "Conserve cash, and if you have to raise money, you're getting to get low valuations and difficult terms," she said.

They might do well to keep that advice in mind for the long haul. Joseph Grundfest, co-director at the Rock Center on Corporate Governance at Stanford, said he expects the actual recession to end in 2010, but that the bear cycle the economy's in could take as long as five to ten years to play out.

Part of the difficulty stems from the fact that the current downturn is a different beast than many remember from an earlier large-scale crisis. Bill Coleman, CEO of Cassatt and another Valley veteran, said the current crisis presents a far wider challenge than the dotcom bust at the start of this decade.

"This isn't about a next-generation technology being overhyped and oversold," he said. "This is about the cost of capital, and that affects everything."

Little good news for green tech

That could dampen hopes for the payoff from green tech, in particular. While the emerging industry is often seen as the next great engine of tech innovation and opportunity, the panel wasn't hopping on the bandwagon.

"I can't imagine a worse turn from where we were 18 months ago," said Stanford's Grundfest. "Much of clean tech is capital-intensive, and the higher the price of oil, the more profitable it is. When oil was trading at $145 a barrel, it looked good. But now we're at $38 a barrel, the number of technologies profitable today are a fraction of what they were 18 months ago."

While government subsidies and investment will help, Grundfest warned there's a danger that green tech would become Silicon Valley's first "welfare industry" -- dependent on the government for survival.

Coleman also said there's an important difference between green technologies and the computer-related industries that Silicon Valley has traditionally helped drive.

"Clean tech is a negative proposition from a dollar view," he said. "It's not ten times cheaper to run your car on alternative fuel; it's actually more expensive. This isn't like running an Apple versus a VAX."

Rather than enjoying the big IPOs emblematic of the dotcom boom, Coleman said that promising green tech and other companies starting now instead are more likely to be bought by larger companies.

"You can't grow quick enough to compete against the General Electrics," he said.

Where's the "wow"?

With green tech unlikely to pan out, Grundfest added that he was unsure whether the Valley has simply run out of gas when it comes to computer technology innovation.

"What is there that's 'Wow'? It's not personal computers," he said. "Twitter? I'm Twitter-incompatible -- I can't think of anything worth saying in 140 characters."

"It's cute -- I'll give you cute," he added.

But Cassatt's Coleman said he envisions a burst of innovation related to social networking, but that it could still take years to play out.

"IT will be turned into a utility, but that will take twenty years," he said. "The platform on top of that is social networking that will let you communicate with any group at any time."

He said that while today's social networks offer a lot of free services, the next phase is figuring out how companies can best monetize it. He envisions a system where consumers will want to readily communicate with vendors.

Coming out on top

After hearing the discussion, which was sponsored by the Churchill Club, one attendee at the event asked jokingly for the quickest way to the roof so he could jump off.

Yet in spite of their doom-and-gloom predictions, the panelists did offer some hopeful comments for a select few companies.

Coleman said some of the Valley's bigger, well-funded players stand to come out of the recession in better shape than before. He said Intel's CEO Paul Otellini once joked that it's a case of "Moore's Second Law" -- "During a downturn, the strong get stronger."

Coleman's not the only believer in that fictitious maxim, since Intel itself is certainly planning for a robust future. Last week, Otellini announced that the company plans to invest $7 billion over the next two years in building advanced manufacturing facilities at three locations in the U.S.

This article was first published on

Tags: security, social networking, networking, Intel, Silicon Valley

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