An Old Hotbed With New Crops

For nearly 50 years, Silicon Valley has been a marvel of re invention through

innovation. Every decade or so, a new generation of companies has come along to

spark the local economy. After the granddaddies of the Valley's high-tech

industry, such as Hewlett-Packard and Fairchild Semiconductor International,

there were Intel and Apple Computer in the wild early days of the personal

computer. Then computer networks became de rigueur in corporations, and Cisco

Systems, Oracle, and Sun Microsystems rose to prominence. In the 1990s, Netscape

Communications Corp. cooked up a spiffy Web browser and started the Internet

revolution. Even today, years after the dot-com bubble burst, Valley Net

companies like Yahoo!, Google, and eBay are changing the way people do business.

But along the 45-mile stretch of Highway 101 from San Francisco to San Jose,

there's a nagging question these days: What's next? The anxiety is fueled by

the employment picture. The number of jobs in the region has plummeted 20% since

2001, to 840,000, the steepest loss since the Valley's fortunes were fashioned

from silicon. The tech industry's prospects offer little comfort. While some

analysts believe the information-technology industry can resume growing at its

historical average of nearly 10% annually, others see it languishing at only 3%

to 5% annually for the foreseeable future. That's the kind of growth expected

from Rust Belt businesses, like the automotive industry.

Is Silicon Valley becoming the digital Detroit? Or can it reinvent itself one

more time? Look closely and you'll see that the process is already beginning.

University labs are bubbling with unorthodox ideas. Entrepreneurs are building

startups of a different species than traditional high-tech companies. And

venture capital is following. The Valley's best and brightest are heading off

in new directions, blending info tech with biotech and emerging material

sciences such as nano—technology. This cross-pollination is producing hybrid

companies that will play a critical role in the region's efforts to remain the

center of gravity for innovation. "The key is to look in the white spaces

between disciplines," says John Seely Brown, the former head of the famed

Xerox Corp. Palo Alto Research Center and now a visiting scholar at the

University of Southern California's Annenberg Center for Communication.

Think of this as Silicon Valley: Next Generation. A new crop of startups

offers a peek into the future. XDx, in South San Francisco, Calif., is using

information technology to improve the monitoring of heart-transplant patients'

immune systems. Silicon Genetics, based in Redwood City, Calif., has developed

software tools to make it easier to research human genetics. And Santa Clara's

Peribit Networks is applying biological research to data networking.

Lure of India 



The valley's startups aren't being built in the same old ways, either.
Increasingly, they're hiring many of their employees elsewhere - often

overseas. Two Valley venture firms, JumpStartUp Fund Advisors and WestBridge

Capital Partners LLC, even specialize in so-called cross-border startups that

split their staffs between India and the Valley. The top execs, along with the

sales and marketing staffs, typically are in the States, to be close to

customers, while the engineering staff, including most of research and

development, is in India. "Over the next five years, there are going to be

quite a few of these companies funded," says M.R. Rangaswami, co-founder of

Sand Hill Group, a Valley-based consulting company specializing in Indian

business.

The new regime in Silicon Valley means this round of reinvention won't be

anything like those of the past. In particular, there's unlikely to be the

kind of job growth that followed the personal-computer and Internet booms. The

cost of living in the Valley is now so prohibitive that cash-strapped startups

can't afford to hire many people here at the salaries they need. The median

price of a single-family home has shot up 240% over the last nine years, to

$640,000. The result: Only 21% of the people who live in Silicon Valley now earn

the median income necessary to buy a house, down from 36% in 1995, according to

Leslie Appleton-Young, chief economist at the California Association of

Realtors. That's one reason why the Valley is expected to see just 1% to 2%

growth in employment for the next several years, according to Economy.com.

Still, there's little question that the Valley will continue to create

important, innovative companies. The region has been blessed with a rare

combination of venture capital, good weather, and institutions such as Stanford

University and the University of California at Berkeley that are loaded with

academic and research talent. Most of all, the Valley has fostered a culture of

risk-taking, where talented hotshots itch to turn great ideas into corporate

winners. This ethos is alive and well in the Valley and continues to draw

ambitious entrepreneurs from far and wide. "We have a habitat for new

companies here that's unique," says William F. Miller, a professor

emeritus at Stanford and the former chief executive at SRI International.

"All the services are here, and they all specialize in dealing with

startups-the banks, the lawyers, the marketing firms. It all permits a company

to move more quickly and get good advice."

And don't discount the value of money, mountains and mountains of it.

Venture capital, so important to nourishing the ideas of young entrepreneurs, is

still Valley-centric, with its epicenter along Palo Alto's famed Sand Hill

Road. About 38% of the venture funding in the US in the second quarter of 2004

went to companies in the Valley. That's twice the share of the runner-up,

Boston, and almost exactly the same rate as it was 10 or 15 years ago. "It's

very difficult to find an area where there's more brewing, at least for a U.S.

investor," says Michael Moritz, a partner at the venture-capital firm

Sequoia Capital.

Even so, the Valley must contend with the likelihood that it won't be the

world's singular nexus for the funding and development of innovation. Silicon

Valley's share of biotech spending in the second quarter, for instance, was

29%, just seven percentage points ahead of Boston. "There was a time when

venture capitalists cared about where they were investing," says Daniel

Primack, editor-at-large at Venture Capital Journal, part of the research firm

Thomson Financial Venture Economics. "But venture capitalists are looking

everywhere for deals now."

They have to. Critical masses of talent are forming far outside the Valley's

borders. Bangalore, India, and several regions in China, for instance, are

emerging as important centers for software development, tech services, and

low-cost manufacturing. These high-tech workforces are beginning to create their

own entrepreneurs, and both financiers and high-tech companies are taking

notice. "The innovation's still bubbling in Silicon Valley," says

Shane V. Robison, chief strategy and technology officer at Hewlett-Packard co.

"I think it always will. It just isn't the only place that it's

happening."

Eureka Moments



The most successful startups may be those with one foot firmly planted in
info tech and the other in emerging technologies. Peribit Networks is one such

hybrid of the Valley's past and future. The Santa Clara company was founded in

2000 by a Stanford doctoral student, Amit P. Singh, who was doing bioinformatics

research, designing algorithms and computational models to speed up the analysis

of DNA sequences by recognizing hidden patterns. When Singh finished his PhD, he

was wondering what to do next. His "eureka" moment came when he

realized his work could be applied to routing computer traffic over networks.

"They took technology designed for the genetics world and moved it into the

communications world," says David Ladd, a general partner at Mayfield, one

of Peribit's investors.

At Singh's alma mater, they're trying to make those breakthroughs a lot

more common. Stanford opened the 146,000-square-foot James H. Clark Center in

October, 2003, to provide a place where experts in info tech, biotech, and the

material sciences can share ideas and, just maybe, spark a few business plans.

The space age-looking center, part of Stanford's interdisciplinary biosciences

program called Bio-X, will house 600 entrepreneurs and researchers when it

reaches capacity. The school is providing two-year, $150,000 grants for people

who want to do interdisciplinary research. "The health of the Valley

depends on really new things coming along," says Matthew P. Scott, a cancer

researcher and biologist who heads the Bio-X program.

The Stanford research center also has an eye toward the business community.

About 10% of the spaces in the center will be reserved for visiting academics

and people in private industry. Scott knows that whatever comes out of the Clark

Center, or similar centers being built at nearby University of California

campuses in San Francisco, Berkeley, and Santa Cruz, won't turn into big

companies overnight. But he has an eye on the long term. "The growth of the

Valley has been driven by a small number of very powerful technologies that

utterly transformed the world. But these are outgrowths of technologies that

have been developing for many, many years," he says. The original

programming protocols for the Internet, for example, were developed 26 years

before Netscape went public.

While such initiatives could pay dividends down the road, some startups are

going it alone. In a warehouse district of Redwood City, sandwiched into a row

of auto yards, is Silicon Genetics. The company's programmers and genetics

experts are working on software tools that make it easier to make sense of the

volumes of data unearthed in human genome research. It was founded by Andrew

Conway, a biochemistry researcher at Stanford. Conway grew frustrated with the

lack of good tools to help him do his job. So he built his own and created a

company to sell it with about $100,000 he made playing the stock market.

"That is what you do around here," laughs Conway, a 34-year-old

Australian who came to California for graduate school.

It's little companies like Silicon Genetics that are necessary to breath

life into the Valley and its more mature companies. On Aug. 23, Agilent

Technologies, the tech-equipment giant that was Hewlett-Packard's original

instrument and measuring business before it was spun off in 1999, acquired the

five-year-old company and its 50 employees for an undisclosed sum. Palo

Alto-based Agilent plans to add Silicon Genetics' two main software products

to its growing portfolio of biomedical research software. The room full of

programmers and PhDs will be moving out of the little office and getting new

digs with the rest of Agilent by early next year. Agilent is turning to a

startup to help it reinvent itself around genomics research.

Reinvention takes time, however. And some wonder if the Valley has the

patience to wait for those new things. Valley investors are especially wary of

biotech and materials research companies because of the inconsistency of the

payoff. Roger McNamee, for example, the co-founder of Silver Lake Partners,

prefers to steer clear of biotech. "The capital intensity is very high, and

the probability of success is very low," he says.

A Little Here, A Little There 



Still, many entrepreneurs are forming companies in innovative ways that don't
require as much capital as was needed before. Some are opting for offshoring

jobs from day one. Take Conformia Software Inc. Based in Redwood City, the

three-year-old software company has about 30 employees in Silicon Valley,

including the executive team, marketing, and sales. An additional 50 to 75

employees are in Bangalore, including nearly all of Conformia's engineering.

"When you're a startup and you're trying to conserve capital, it makes

sense," says co-founder Neil K. Kataria.

It's the new Valley startup model: Keep your top engineers, sales, and

marketing people local. If other jobs can be done elsewhere for less, send them

there. Of course, that won't lead to a lot of new jobs for the local folks.

But as long as Stanford and Berkeley have creative students, as long as San Jose

averages 300 days of sunshine per year, and as long as the venture-capital

community pours dollars into local startups, the Valley should continue to lead

the world in joining invention with a business plan- the most tangible

definition of innovation. From a region so accustomed to reinventing itself, the

world should expect nothing less.

By Jim Kerstetter with Robert D. Hof in San Mateo, Calif., and Bruce Einhorn

in Hong Kong in BusinessWeek. Copyright 2004 by The McGraw-Hill

Companies, Inc

Booms... And the Occasional Bust

Silicon Valley's business cycles are tied closely to innovation in the

computer industry. After the historic boom of the late 1990s, it's not clear

what the Next Big Thing will be to get the Valley growing again

1968 Semiconductor giant Intel is founded by Gordon Moore and Robert Noyce,

two employees of tech pioneer Fairchild Semiconductor. Intel, under the

leadership of Moore, Noyce, and Andrew Grove, becomes the model for Silicon

Valley's egalitarian engineering culture.

1976 Apple Computer is founded by Stephen Wozniak and Steven Jobs, beginning

the personal-computer boom. Over the next nine years, the Valley's workforce

increases by more than 60%.

1977 Database software maker Oracle is founded by Lawrence Ellison, Robert

Miner, and Edward Oates.

1981 IBM selects Intel's computer chips for its new PC. Intel, which had

focused more on data storage, shifts to making microprocessors for the growing

PC market.

1982 Corporate computer maker Sun Microsystems is founded by Scott McNealy,

Vinod Khosla, William Joy, and Andreas Bechtolsheim.

1984 Apple releases its initial Macintosh, the first affordable computer that

allows people to use a mouse to click on icons instead of typing complex

computer commands.

1986 The PC business begins to consolidate around a handful of manufacturers,

and the Valley loses 3% of its jobs in one year. Lacking a major new innovation,

the Valley's growth stays slow for the next eight years.

1991 The Cold War ends, and the Valley loses nearly 3% of its jobs over the

next year because of cuts to defense spending that hurt big contractors such as

Lockheed and United Technologies. Employment bottoms at 790,300 in March, 1992.

1994 Netscape Communications Corp. is founded by James Clark and Marc

Andreessen. Netscape popularizes the Web browser and starts the

commercialization of the Internet.

1995 Netscape goes public, igniting the dot-com boom. In five years, the

Valley's workforce increases nearly 30%. Employment peaks in December, 2000,

at just over 1 million jobs in Greater San Jose.

2000 The boom ends. Over the next three years, the Valley loses 212,900 jobs.

By July, 2004, total employment is 841,000 jobs, just 4% greater than at the

beginning of 1995.

Silicon Valley's Strengths and Weaknesses

The Valley continues to be a world leader in technological innovation. But

behind every attribute of the local economy, there's also a downside

Plenty of Talented Workers...



More than 30 years of high-technology entrepreneurs have created a strong

workforce of engineers, tech marketing experts, venture capitalists, and legal

experts necessary to get small companies off the ground.

As Leaders Plan for Future Growth...



Through groups like the Silicon Valley Joint Task Force, local business,

government, and academic leaders are planning for the Next Big Thing, which

could come out of the convergence of info tech, biotech, and material sciences.

The Bio-X Center at Stanford University was created for the study of such

convergence, and similar research centers are opening in University of

California campuses in nearby San Francisco, Berkeley, and Santa Cruz.

Venture Capitalists Prefer Silicon Valley...



Silicon Valley is still the biggest recipient of venture-capital spending.

In the second quarter, $2.13 billion in VC money was invested in Silicon Valley

companies, more than twice the next highest recipient, Boston, and 38.2% of all

the VC money invested in the US.

...But the Cost of Living is Scary



The Valley's 6.2% unemployment rate is still above the 5.5% U.S. .gure.

One reason why is that wages have to match the out-ofsight local cost of living.

The median price for a single-family home in the Valley is $640,000, more than

three times the national figure.

..But They Worry About the Local Infrastructure



Local leaders worry that a lack of affordable housing, cuts to the public

school system, a poor mass-transit system, and a crumbling road infrastructure

will limit Silicon Valley's ability to grow. Indeed, commuters on all bridges

over San Francisco Bay may have to pick up the tab for an overbudget earthquake

retro.tting project on the Bay Bridge, which connects San Francisco to Oakland.

That project alone could end up costing more than $5.1 billion.

...But in Biotech, the Gap is Closing



Silicon Valley's share of biotechnology venture capital was 29% of the

total spent around the US in the second quarter. By comparison, Boston received

22%. Clearly, the Valley's grip on biotech spending isn't as strong as it is

in traditional technology sectors.

Voices of Innovation

What can we learn from Apple's struggle to innovate during the decade

before your return in 1997?



You need a very product-oriented culture. Apple had a monopoly on the

graphical user interface for almost 10 years. How are monopolies lost? Some very

good product people invent some very good products, and the company achieves a

monopoly. what's the point of focusing on making the product even better

when the only company you can take business from is yourself? So a different

group of people starts to move up. And who usually ends up running the show? The

sales guy. Then one day the monopoly expires, for whatever reason...but by then,

the best product people have left or they are no longer listened to. And so the

company goes through this tumultuous time, and it either survives or it doesn't.

How do you systematize innovation?

You don't. You hire good people who will challenge each other every day to

make the best products possible. That's why you don't see any big posters on

the walls around here, stating our mission statement. Our corporate culture is

simple.

So the key is to have good people with a passion for excellence.



When I got back, Apple had forgotten who we were. Remember that "Think

Different" ad campaign we ran? It was certainly for customers, but it was

even more for Apple. That ad was to remind us of who our heroes are and who we

are. Companies sometimes do forget. Fortunately, we woke up. And Apple is doing

the best work in its history.