How Gray Is My Valley

Silicon Valley: the place is synonymous with bright ideas, fresh fortunes and sunny forecasts. But right now the mood in this region 40 miles southeast of San Francisco suggests a name like Gloomy Gulch. Gone are the days when development spread like brush fire across the region and upstart businesses leaped from garages to the FORTUNE 500. Absent are the fuzzy-cheeked genius entrepreneurs, the companies hungry for workers and a city so wealthy it once considered giving back $1 million in tax revenues to its citizens. Says Lawrence Stone, a city councilman in Sunnyvale, which no longer has a surplus, as he recalls the glory days: “Instant millionaires. Every day there was a firm doing a public offering and spin-offs being created. Everyone was on a high-tech surfboard. It was a lot of fun.”

Today the double whammy of a lingering U.S. recession and a maturing of high-tech industries has made life in Silicon Valley considerably less buoyant. Employment, profits and housing prices are down, traffic congestion is up, and the occasional layer of smog now looms overhead. “The vision we’ve had about this place has changed,” says Stone. “Economically, we’re a region at risk.” In what is probably the ultimate indignity, some residents say the area is becoming like Los Angeles. “The Valley,” notes Thomas Mandel, a futurist for the consulting firm SRI, “is going through a mid-life crisis.”

Nothing provides a better testament to the past decade’s growth binge than the headlong rise and subsequent stalling of home prices in Santa Clara County. From March 1985 to March 1990, the median price of homes zoomed from $125,000 to $235,000. Real estate appreciation ran at 3% a month, and most listings attracted multiple offers within 72 hours. Today 8,700 homes (median price: $226,500) languish on the market. “In Santa Clara County, it’s a sacred thing: property values go up,” says San Jose Realtor John Pinto, a Brooklyn native who came to the Valley believing it was the best place in the U.S. to live. He stops to wave at the lone pedestrian he can see through one of his plate-glass windows facing a main street. Though it is rush hour, the boulevard is eerily quiet. “This is as bad as it’s been,” says Pinto.

The Valley has gone through slumps before. Recession buffeted the region in 1981-82, but the explosive growth of personal computing brought the ailing industry charging back. In 1985 foreign competition, mostly from Japan, made serious inroads into the semiconductor market. From late 1984 to early 1986, the region lost nearly 33,000 jobs, or 4% of the work force. Just a year later, those jobs and more were reclaimed when a surge of new products and an infusion of venture capital helped rekindle the region’s growth. Regis McKenna, Silicon Valley’s pre-eminent marketing consultant, says he has seen half a dozen recessions in his 31 years in the Valley. “Every three years we go through these cyclical changes,” he says. “In the course of them, people predict that the Valley is changing or coming to an end.”

This time, however, many people believe the outcome will be different. Short of a product revolution, nothing on the horizon promises to bring a quick fix to the area’s economy. “In the past, our recessions have been shaped like a V,” says Richard Carlson of Spectrum Economics, a Mountain View consulting firm. “We dropped down sharply but came back roaring. This time it looks more like an L.” Unemployment in Santa Clara County, once stuck perennially at about 3%, now stands at 5.5%. In the past year, two of the valley’s pillars — Apple Computer and National Semiconductor — announced worldwide layoffs in the thousands.

Some of the dramatic decline in revenues can be attributed to the recession. But defense spending, which fueled many of the area’s businesses and made Sunnyvale the state’s second largest recipient of federal contract dollars (after Los Angeles), may never come back to 1980s levels. In another sense, the Valley is suffering from its own success. The rising cost of doing business in the area has ignited an exodus of manufacturing operations to foreign countries and to other parts of the U.S. ranging from Idaho to the Carolinas. And in the final cutting irony, the revolution in personal computing has turned the PC into a relatively low-priced commodity, so that electronics firms now face greater competition for shrinking profits.

The culture of entrepreneurship is fading fast. The most telling sign of that is the route that venture capital, the lifeblood of new growth and technologies, now takes through the Valley. Simply put, it has stopped flowing into the fledging businesses that spawned the success and defined the culture of the region. Though overall investment has increased in Silicon Valley, most seed money is now conservatively parked in middle-aged operations. Meanwhile, the costs of underwriting a new venture have skyrocketed. “There were days when $10 million would take a company from start-up to an initial public offering,” says Robert Miller, chairman of MIPS Computer Systems in Sunnyvale. “Today the average is $40 million to $50 million.” Adds Carlson: “The companies that were going to be the Apples of the ’90s are in Chapter 11 now.”

That doesn’t mean that people have stopped dreaming. They have just learned to dream smaller. Phil Sih, 33, is managing director of his third start-up company in seven years, a small electronic-communications firm called DBC Associates. Sih is a true believer in the Valley’s potential for entrepreneurs, but he acknowledges that finding investors to seed innovative visions is no longer the easy ride it once was. “There’s still a tremendous degree of entrepreneurial spirit,” he says. “But the days of people taking huge amounts of venture capital and turning it into ‘burn-and-go’ start-ups is less of a reality. You have to be much better now than you did then.”

Complexity and competition are two prime reasons. Personal computers that were designed in garages have been supplanted by immensely powerful workstations that can do the work that million-dollar mainframes once did. Individual microchips now wield the processing capabilities of desk-size computers of the mid-1980s. Developing such sophisticated products can be far more expensive and risky than it was just a few years ago, so it has increasingly become the province of multibillion-dollar global behemoths.

Not all the upstarts have surrendered. One of the best success stories belongs to T.J. (for Thurman John) Rodgers, the latest entrepreneur to serve as the region’s enfant terrible. The sandy-haired, squarely built former | Dartmouth lineman remains bullish about the Valley’s future. In eight years Rodgers has built Cypress Semiconductor Corp. into a $300 million concern specializing in high-performance specialty chips and featuring fanatical cost controls that include a careful monitoring of dinner tabs from employee expense reports (dinner limit: $50). “I don’t think Silicon Valley has changed at all,” says Rodgers, dismissing the gloom as “the lingo of losers.” He adds, “It’s the story of the Valley that’s changed.”

In Rodgers’ view the future potential of the region should not be judged on the basis of the slumps being experienced by Valley big guns such as National Semiconductor and Advanced Micro Devices, a collection of companies he calls “the dinosaur club.” Rodgers contends that these firms have failed to stay hungry and competitive. As a result, they have led people to believe the electronics industry requires protectionist legislation and subsidies to survive. “We should not equate their lobbying as lobbying for Silicon Valley,” he says bluntly. “This is still the center of the technology world.”

For all the current woes, that distinction remains true. At the end of 1990, Silicon Valley had three times the number of jobs and twice the number of electronics firms with sales of $5 million or more as the next largest technology region, the area along Massachusetts’ Route 128. While sales of computer hardware may be struggling, software is booming. Several software companies — among them Adobe Systems and Symantec Corp. — have lately posted record profits. But how much dynamism will remain in five years? With manufacturing moving out to cheaper areas, many locals fear that the Valley may simply end up as a research-and-development backwater. Moreover, at a time when American investors remain wary of committing to new companies, more and more Japanese companies are funding start-ups, which prompts worries that foreign ownership may eventually characterize the region.

Two decades ago, the notion that bucolic, orchard-filled Santa Clara County would become the world’s capital of anything would have seemed ludicrous, especially to its residents. Sunnyvale councilman Stone remembers how concerned one of his campaign workers was in 1975 because her son had dropped out of college to tinker away in the garage. Stone advised Mrs. Wozniak to be patient, that the boy would soon tire of his pursuits and return to school. But Steve Wozniak co-founded Apple Computer instead. “Silicon Valley snuck up on us,” Stone muses. “Now it’s a modern legend.” But will the Valley remain the stuff of legend? All it needs is a few more revolutionaries again — the kind who sort of sneak up on you.

CHART: NOT AVAILABLE

CREDIT: TIME GRAPHIC BY STEVE HART

CAPTION: SILICON VALLEY

THEN AND NOW

1984 1991