Spring Comes Early To Silicon Valley

By Michael Moritz

One statistic is missing from the slew of data published about the state of the U.S. economy. It is the length of the commute between San Francisco and Silicon Valley. Since last fall, when the layoffs began in the valley, this journey, which I have been making twice a day for the past 15 years, has started to shorten.

There are plenty of signs of the shockingly sudden economic slowdown during my commute. The radio isn't filled with the hopeful jingles of Internet retailers, and I can almost always get a cell-phone circuit. Some of the signs are just that--vacancy signs dangling from buildings whose landlords until recently were demanding shares in the companies started by their tenants. And the blank billboards along Highway 101--the valley's main thoroughfare--mutely advertise the downturn. There are few tire kickers in the lots of the luxury-automobile dealers. Near my office, the people who sometimes paraded along the sidewalk bearing placards that said WILL WORK FOR EQUITY have mercifully disappeared.

All this is good news for those of us whose business is to help start and organize young companies. Today Silicon Valley is akin to Fort Lauderdale, Fla., after spring break. The tourists have abandoned us. Most of the people who came here in search of a quick buck during the past few years have gone. The foreign billionaires have scuttled back to Europe and Asia, the corporate parvenus have retreated, and Hollywood celebrities no longer swish through our office seeking a smattering of pixie dust.

Suddenly, starting a company is no longer a fashion statement. Now only the genuine believers want to leave large companies to create or join a new business. Everyone has become far more prudent about spending money. Unbridled optimism has been splattered with a large coating of reality. Today the climate for investments in tiny, unknown valley fledglings is the best it has been for more than 10 years.

I don't mean to belittle the human consequences of the recent convulsions. If it's any consolation, plenty of companies with which I've been involved have encountered their share of bad news and hard times. But this is the inevitable result of the excitement and chaos that surround any new industry. Think of all the dreams that were shattered, careers that were ruined and money that was lost as a result of the birth of the huge industries that developed around oil, telephones, movies, automobiles, airplanes, semiconductors and personal computers. Working with young companies can be dangerous for anyone. It doesn't matter whether that was in Akron, Ohio, in the 1870s, Detroit in the 1920s or Santa Clara, Calif., in the 1990s.

In Silicon Valley the cycle of enthusiasm and disappointment has been compressed as the years have gone by and the pace of innovation has increased. The 1960s spawned the rise of the semiconductor business. The 1970s brought personal computers. The 1980s gave us computer-networking companies and biotech firms. And the 1990s produced a rush of Internet companies. Each of these waves was followed by disappointments as hundreds of weak companies collapsed or were gobbled up by their larger competitors. But all these periods gave rise to the formation of a handful of venture capital-backed firms that have come to occupy major roles in the U.S. and the global economy, such as Intel, Compaq, Amgen, Microsoft, Sun Microsystems, Dell, AOL, Oracle and Cisco Systems.

If the savagery of a young industry leads to casualties, so does the chaos surrounding rapid corporate growth. There is barely an important technology company that has not had a close encounter of the worst kind. Over the past 20 years, business writers have penned plenty of premature obituaries for all the companies I just mentioned. These companies seem to go through similar phases: a period of obscure labor followed--in rapid order--by glowing notoriety, loosely controlled growth, chest-pounding arrogance, a rude comeuppance and public humiliation. The fortunate recover and become stronger. The weak surrender to economic necessities.

Although stock-market indexes are dropping to ankle level, there is still little reason for gloom about the long-term prospects for U.S. technology companies. Progress will not stop. Invention will not cease. Ambition will not evaporate. Many years ago, during a similar period of bleakness, we encountered a little company with a dozen employees attacking a market that few people understood. Eight weeks after the crash of 1987, when the only sound in the air was of checkbooks slamming shut, Sequoia Capital became the first investor in this unknown company. Its name was Cisco Systems.

MICHAEL MORITZ is a partner at Sequoia Capital, the California venture-capital firm that has helped to organize and finance some of NASDAQ's leading companies