Tech Downturn Deflates Silicon Valley's Swagger

By CHARLES PILLER and JOSEPH MENN

March 9, 2001 12 AM PT

TIMES STAFF WRITERS

SAN FRANCISCO — There’s no longer a waiting list for Porsche Boxsters at Carlsen Motors in Palo Alto. Some recent paper millionaires can’t make house payments. And for the first time in years, cash invested in new Silicon Valley firms has slowed dramatically.

The domino effect of Internet failures and a sharp slowdown in technology spending by many U.S. companies already has triggered one of the largest Nasdaq stock market meltdowns ever. And now the first signs of an economic slowdown have hit Silicon Valley--technology’s epicenter.

In an ominous bellwether for future growth, the San Jose Mercury News, Silicon Valley’s hometown newspaper, suffered a $2.5-million drop in help-wanted ads last month and is planning some layoffs, according to a memo Monday from Publisher Jay Harris.

Signs of caution also have begun to infect the area’s hyper-inflated housing market. Even though Santa Clara County homes reached a median price of $505,000 in January, the increases should slow this year, according to John Karevoll, an analyst with DataQuick, a real estate data firm.

Lucky tech professionals who sold stock at the right time still make cash offers for new homes. But sellers no longer automatically list homes for more than the last comparable sale, say some brokers.

“It’s not the frenzy it was before,” said Woodside real estate agent Jayne M. Williams. “At an open house, we used to have 100 people. Now we’re getting half that.”

Local venture capitalist Tim Draper said a friend, who was worth $60 million on paper last year, no longer can make payments on his $7-million home. Another tech executive agreed to spend $12 million on a house in nearby Atherton, Williams said, then was forced to pull out as Nasdaq tanked.

The cooling real estate market also has been noted--with evident satisfaction--by San Francisco neighborhood activists. They had bitterly resisted Internet companies that swept up from gridlocked Silicon Valley to San Francisco in the last few years. The migration drove up city rents and drove out nonprofit arts and community organizations.

But the waves of dot-com colonizers have begun to recede. “For Rent” signs are multiplying in San Francisco, and some of the big office projects that displaced small businesses stand empty.

“It’s been like this huge economic acid trip for a lot of people [has finally ended],” said Debra Walker, an artist who fought to limit development in San Francisco’s multicultural Mission District. “Nobody’s under the illusion that they’re going to be millionaires anymore.”

A few victims of recent layoffs have abandoned dreams of Silicon Valley riches altogether.

A year ago Jay Vidheecharoen, 25, took a job designing Web pages at Zulusports.com, a Web site for information on athletic adventures. The company laid him off in November, and Vidheecharoen chased down new job possibilities at 50 or more companies. Only two or three called him back.

“It seems like the job market had completely destroyed itself in two or three months,” he said. Vidheecharoen’s savings ran out as the rent on his nondescript studio apartment climbed from $1,000 to $1,400.

Last weekend, he gave up and drove to his parents’ home in St. Louis to regroup.

Established Firms Feeling the Effects

In January alone, 53 Bay Area dot-com firms shut down, compared with 42 in all of 2000, according to market analyst firm Webmergers. Scores of others downsized or were gobbled up by stronger companies.

And the ripples from failed Internet ventures and from reduced or postponed technology spending by many U.S. firms are prompting layoffs at established Silicon Valley firms. Hewlett-Packard plans to cut 1,700 jobs, while network equipment maker 3Com and Excite@Home, a high-speed Internet access firm, announced layoffs of 1,200 and 250 workers, respectively. And Thursday, microprocessor giant Intel joined the list by saying it will cut 5,000 jobs.

Meanwhile, venture capital funding of new Silicon Valley firms dropped 27% in the fourth quarter of 2000, the first quarter-to-quarter downturn in nearly three years, according to researcher VentureOne.

Any economic downturn would be a sharp change from a dizzying growth rate. The unemployment rate in Santa Clara County, which comprises most of Silicon Valley, was an astounding 1.3% as of December--the lowest since 1949. Although preliminary data show that figure edging up to 1.6% in January, last year Silicon Valley firms added a net 39,200 jobs.

“There’s a tendency to think . . . that when the dot-coms go down they bring everyone with them,” said Doug Henton, head of Collaborative Economics, a Palo Alto consulting firm. But most failing companies are small, and “our region has the most diverse tech industry in the country,” he added.

“I’m not particularly worried,” said William Harms, 31, who lost his job as executive editor of Gamecenter.com, a Web site shut down three weeks ago by its parent, CNet. Harms is freelancing and posting his resume on Internet job sites.

Most people in the area earn the same salaries as before, but with their stock options under water, they no longer are rich on paper and buy less, Henton said.

“People are more careful with their money,” said Mario Chavez, vice president for engineering at Menlo Park-based Cuica Corp., which operates an online advertising exchange. “We go out to dinner pretty often, and the restaurants are pretty full” as are the shopping malls, he said. “Where I’ve seen a difference is in the big-ticket items.”

A year ago, Carlsen Motors sold a Porsche a day; customers would buy a used car for the same price as a new one rather than wait six months because of the order backlog. “We’ve definitely noticed a downturn in sales, particularly the Boxsters,” which are off 10% from 2000 figures, said salesman Christopher Bearman.

Although few people are panicking, the famous Silicon Valley swagger is less apparent. Rampant job hopping to bid up compensation packages is subsiding in today’s more cautious climate.

“People still can’t hire engineers fast enough, but the reasons are different,” said Chavez. “If you have a job, you’re not as likely to jump. A year ago it was ‘who has the best offer?’ ”

A modicum of common sense has returned to the local job market, said John Malone, chief executive of Equest, a job-posting service in San Ramon.

Donations Are Down to Local Charities

“The market was full of itself, making irrational hires and paying irrational wages,” he said.

Cosine Communications, a networking company in Redwood City, is delighted with that change. As it did last year, Cosine interviews as many as 40 job candidates a week. But now it has better luck closing the deal. Recruiting manager Carmen Jacinto recently interviewed a candidate who turned down a Cosine offer last year. This time the tables had turned.

“We offered the same salary as last year, but with half the stock [options],” she said. “And he’s coming on board.”

Meanwhile, local charities feel donors’ belts tightening.

At United Way Silicon Valley, large stock donations are dropping off. One regular $100,000 donor has delayed this year’s pledge, said Greg Larson, the group’s chief executive. “As we face a looming recession, it hurts those we serve the most,” he said.

The touted tech-driven “permanent economic boom” is rarely mentioned these days--as state officials have grimly observed. They estimate a drop in capital gains taxes of $2 billion this year.

Technology rapidly speeds up the economy in good times. But changes in consumer confidence and shrinking demand can have the opposite effect almost as rapidly, said Amy Dean, executive director of Silicon Valley’s AFL-CIO Labor Council.

“The ‘new economy’ hasn’t eliminated the business cycle,” she added. “It has increased its gyrations.”

Times researcher Norma Kaufman contributed to this report.