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Tech's big comeback
Startups are hot -- again. Valuations are nuts -- again. Fortunes are being made -- again.
October 28, 2005: 1:05 PM EDT
by Michael Copeland and Om Malik, Business 2.0 magazine

San Francisco (Business 2.0) - A new technology boom of potentially unprecedented power and durability is spawning in all of the nation's tech centers from Palo Alto to Seattle to Austin to New York.

That may sound absurd at a time when the country seems besieged by ominous economic forces. But a growing body of evidence suggests that tech is taking flight again. Venture capital is flowing more profusely than it has since the late 1990s. The downward trend in IT employment has abruptly reversed course, as companies both new and old hoard engineers. Corporate IT spending, both an engine and an indicator of tech industry health, was up 9 percent through the first half of 2005 and is expected to rise 7 percent more in 2006. Commercial real estate, dead in most tech hubs postbubble, is roaring back.

For a lot of entrepreneurial veterans, conditions today are sounding an irresistible call. Netscape founder Marc Andreessen has a new startup. Raj Singh, who sold one of his earlier efforts, Cerent, to Cisco for $8 billion in 1999 and spent the intervening years producing movies, is teeing up a new company.

From Boom to bust...and back again

The tech industry in many ways is following the classic arc of boom-and-bust cycles produced by transformative technologies of the past, from the steam engine to electricity to the automobile. Each time, the revolutionary technology—the Internet, in today's case—brought a burst of new enterprises that were just too early and got wiped out by brutal consolidation.

"The problem with the last boom was that it was a bunch of VCs getting together and writing on a napkin what the ideal company was," says Danny Rimer, a VC with London-based Index Ventures and an early investor in Skype. "The better entrepreneurs today are launching companies based on ideas that are already proven in some way, often with substantial revenues. Today's boom isn't a 'What if?' proposition—it's substantiated."

When Netscape's IPO kicked off the original Internet boom, there wasn't a proven, sturdy business model to support all the ideas that later came flying into the market. This time there is. It starts with the melding of advertising, search and e-commerce developed by what are now referred to in Silicon Valley as the Big Five—, eBay, Google, Microsoft, and Yahoo. Advertisers are flocking to the Web; Internet advertising, $9.6 billion last year, was up 26 percent in the first half of 2005 and is projected to hit $12 billion for the year.

For now, most Web ad spending is going to the big players, steadily adding to their accumulation of scads of cash. Google is sitting on more than $7 billion; Yahoo has about $3.5 billion. Microsoft remains the cash king with almost $40 billion on hand. A lot of that money will be earmarked for strategic objectives—acquisitions, say. But a good chunk of it will be spent in other ways, creating a slipstream that will pull many other companies along and provide strong impetus to the boom.

285 Hamilton Ave., an unusually accurate barometer

Two rubbery-looking potted plants adorn the lobby of 285 Hamilton Ave. in downtown Palo Alto. The city is the focal point for the massive surges of company creation that periodically course through Silicon Valley, and over the years 285 Hamilton has proven to be an unusually accurate barometer for detecting early changes in the wind. In the bubble days, cash-drunk startups jockeying for space packed the 285. When the music stopped and the money ran out, so did many of the 285's tenants. Much of the structure has been vacant since 2000.

That began changing about six months ago. "This building was a wasteland back in April when we moved in," says Prescott Lee, co-founder of FilmLoop, which now occupies half of the fourth floor. "Now it's completely full." So are many of the neighboring office buildings in downtown Palo Alto, and the coffee shops and the restaurants.

The real deal or "Bubble 2.0?"

It's that sense of a dawning of the real deal that's bringing the glow back to tech hubs across the United States . It's what enticed Indraj Gill out of a high-powered job at Dell. Now he's the CEO of gNumber, a startup that uses VOIP technology to allow consumers to conduct online purchases over any phone. "There are the same kinds of opportunities out there today that made the Yahoos and the Googles into what they are," Gill says. "We are just at the beginning of the Internet revolution. Now's the time to give it a shot."

Some observers see not a boom but a bust in the making. The Economist magazine, for instance, cited the $2.6 billion price tag on eBay's buyout of Skype, which has never earned a dime, as a prime example in an article headlined "Bubble 2.0." But many other longtime observers say the evidence favors the perspective that this is not another short-term run-up to a bubble, but part of a longer-lived phenomenon—the advent of the Internet era—that has already created several historic companies and will churn up many more.


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