Welcome To Silicon Valley's Twilight Zone In the nation's mecca of technology, they say they've learned to stop worrying and love the crash. Anyone care to take a lie detector test?
By Mark Gimein Reporter Associate Ahmad Diba

(FORTUNE Magazine) – Every two years or so Silicon Valley, that world-famous factory of futures, has a new eternal verity. In 1997, as the first dot-com millionaires were crawling out from under their desks into the pallid glow of the new economy, it was "The Net Changes Everything." In 1999, as every product manager within the fertile delta between San Francisco and San Jose got the idea that he was an entrepreneur, it was "We're Not Doing It for the Money." And in 2001, as the whole chicken-wire and tulip-bulb edifice comes wheezingly apart, there's a new consensus, a new truth, a new line in Silicon Valley: "The Crash Was a Good Thing."

Arguably, the principle that the crash was a good thing is more firmly established in the psychology of Silicon Valley than were any of the earlier cliches. At the height of the Internet frenzy there were skeptics who thought that the Net changed almost everything. There were cynics who admitted, in private, that they, or at least somebody they knew, were doing it for the money. But the idea that the crash was a good thing manages to bring together the investors and the dot-com kids, the rich and the not so rich, the techies and the business people, even the smart and the stupid. You hear it from the chief executives of Internet companies with one foot in the grave, from engineers, from mid-level dot-commers who saw their paper wealth evaporate. If you set out, as I did, to take a survey of the state of the Valley circa 2001, you could hardly get through a conversation without hearing the line or one of its several permutations at least once--and more often two or three or four times. You hear it from so many places that you can easily lose track of who it is you're talking to, until it all blends into one seamless string of variations on a theme:

"The tourists have gone home--anybody who's still doing this isn't doing it for the big payout," says a San Francisco dot-com CEO.[1] "I don't want it to sound like I'm hanging out a LOCALS ONLY sign," says the Sand Hill Road venture capitalist,[2] "but it was like a great resort. All the tourists came because everybody said it was great, and then when they got there, it was packed, you waited in line for everything, and the food sucked." "We got carpetbagged," says the scientist.[3] "It's cleared out the dead wood," says the programmer.[4] "Now the good people are gathering around the good projects." And so it goes, on and on and on. "The good part of this correction is that we can return to more realistic expectations."[5] "It's the marketing and sales types and biz dev people who said, 'Let's ride this wave while we can.'"[6] "People who were well established in the business world swooped down to make a killing without understanding what they were getting into."[7] "Hopefully, this will build character. Including my own."[8]

Well, it has been something of an expensive character-building experience, what with a trillion dollars of paper money disappearing overnight, not to mention a few billion of real dollars spent on ventures from which nobody but the liquidators will ever see any return. But it's a nice story nonetheless, a comforting narrative for a confusing time. We took a tumble in a tornado, but when we landed we found ourselves right back in good old foursquare Kansas. Nothing wrong with that, right? Now we can all go back to designing software and building companies and wearing Tevas like we used to before this whole, umm, thing.

If anything, the Valley insiders say, the crash serves to reinforce the basic principles that need reinforcing every once in a while. The venture capitalists pull out old reports to prove that the Net bubble was just like the retail bubble of the early '90s, the personal computer bubble of the '80s. As for the Great Reshuffling--the huge, albeit temporary, transfer of money to a new crop of Net zillionaires--it all worked out in the end. Those who still came out ahead when the stock prices tumbled deserved what they got. Those who didn't, the thinking goes, got what they deserved. "One of the enduring qualities of life in this valley," says Charles Darrah, an anthropologist who has been studying the mores of Silicon Valley for years, "is the radical individualism that says, 'It's your own fault.'" And if we can salve our own hurt with a bit of schadenfreude, so much the better: Did you hear the story about that David Hayden guy, who paid $8.14 million for an original Declaration of Independence? Now his stock's fallen 95% and the bank's closed off his credit and sold the shares he put up as collateral.

So it's back to business as usual, making software and optical networks and handheld operating systems, and Cisco will go back up and...and The Crash Was a Good Thing.

So why does everybody in Silicon Valley sound so lost? That's really the only word for it. Up and down the Valley, you're told that the Crash Was a Good Thing and that everything is fine. The strange part is that people tell you this even when you haven't asked, and the more often you hear it, the more worried you're liable to become. At the end of February, for instance, I set up an appointment with Greg Papadopolous, the chief technology officer of Sun Microsystems. These days, half the interesting ideas in the Valley come out of Sun, so you'd think a guy like Greg would be a sure bet to have some news about the Next Big Thing. But no sooner had we made our introductions than Papadopolous jumped up and started scribbling charts on the whiteboard, outlining the geometric growth of this and the exponential growth of that in a frantic effort to prove that...the Internet ain't dead. "We're like arms dealers," Papadopolous said to explain why demand for Sun's high-powered computers won't fall. "We don't care who's winning as long as there is a war."

Apparently some sort of truce was declared shortly thereafter, because within two weeks Sun announced that, in fact, sales were falling dramatically. This perfectly encapsulates the tenor of life in the Valley today. Over and over again you hear from executives and scientists and even ordinary foot soldiers of the bubble economy that the crash--the salutary jolt, the Good Thing--has hit everybody save them. But then hardly have you had time to close the door behind you when it turns out, as it always seems to in Stephen King novels, that the monster somehow got inside and is at that moment tenderly vivisecting the very characters who just finished explaining that it really wasn't worth worrying about.

Jeff Brody, a venture capitalist with Redpoint Ventures, compares the range of reactions to the bubble's bursting with the psychological stages that one is reputed to go through after being told that one has contracted an awful and potentially terminal illness: "denial, fear, then 'dealing with it.'" That doesn't quite tell the whole story, though. It's hard to find someone who doesn't say he isn't "dealing with it," but hardly anyone is. The Crash Was a Good Thing because we'd lost our sense of perspective/been overrun by greedy investment bankers/forgotten this is all really about technology/invested in dumb ideas/thrown too many expensive parties--everybody has a reason The Crash Was a Good Thing, but hardly anybody has much of an idea what the heck to do next. "When reality sets in," one former investment banker now juggling two separate startups told me, "you have, as Paul Tillich says [wow! now the heavy theological guns come out], existential disappointment. You've got a motivation problem."

It's not just that the money has disappeared. Okay, in some cases it is that the money has disappeared. Nobody but a few billionaires admits to "changing lifestyles," but a certain segment of the Valley engaged in purchases that were distinctly aspirational--like the $22 million estate down the street from Larry Ellison's bought by Edward Kinsey, chief financial officer of software maker Ariba, before his stock holdings lost 80% of their value. So some measure of denial and fear can be tied directly to the potential for financial catastrophe.

For a lot more people, however, it's that the story of the past four years just doesn't make sense anymore. The brave young MBAs and young mid-level line managers...uhh, sorry, entrepreneurs. The engineers who were finally supposed to get their due. The much maligned dot-commers, the kids supposed to be running around the halls of the startups with squirt guns, coding HTML. Not to mention the smaller subcategories of Homo siliconsis--the big thinkers who painstakingly explained how the boom was going to grow longer and boomier, the accountants coming up with whole new ways to "value" companies without the faintest hope of earnings, the lawyers who were now micro-entrepreneurs, working for slivers of equity. All the people who weren't just selling groceries but devising "last-mile plays." They had all come together, like some band of explorers assembled, as an 18th-century document might put it, to "undertake an enterprise of great mutual advantage." They sailed out far into the ocean, a strong wind at their backs, and when the wind died they were halfway to nowhere.

The most obviously adrift are 28-year-old vice presidents, brave entrepreneurs, and crisp Stanford-or-equivalent MBAs who made up the upper ranks of the dot-com army. Just a year or two ago they were told over and over again (sometimes by magazines like this one) that they were the nation's hope--the contemporary heirs to the legacy of those strong-limbed young men of an earlier century whose one thought was "to do or die for God, for country, and for Yale." They were the business-casual guys, button-down shirts, ranging from medium blue to pale cornflower. Many had gone to top business schools; others had quit their jobs at McKinsey/Microsoft/Procter & Gamble.

Suddenly, however, the crash has shorn them of the tufts of prestige that so recently seemed to sprout vigorously from their ears. "The MBAs might do a startup," says Elliott Stein, a recent Stanford grad who returned to the U.S. from Israel to live in Palo Alto and work for a dot-com startup, from which he was laid off in February. "But really they're the same as a Wall Street guy." Being "the same as a Wall Street guy" (which Stein defines as "someone else you can't trust") isn't much of a vote of confidence anywhere in the country outside Manhattan--quite a drop in status for the dot-com MBA types since the heady days of the bubble.

The dot-com entrepreneurs sense this, and though they are still reciting the same homilies about the joys of entrepreneurship, something is off. They're dealing with it by piecing together an ever more baroque narrative of the past years, one that keeps them from admitting the obvious: that the game they were playing just a year ago doesn't matter anymore.

Take Nirav Tolia. The young chief executive of Epinions.com was a minor star of the bubble economy, organizing Silicon Valley's Round Zero "networking events," rounding up millions of dollars in funding from blue-chip investors, and generally being everywhere at once. Now Tolia's company--an online consumer advice site--has laid off a quarter of its staff. ("There's a cognitive dissonance to saying that we're doing so well as a company," admits Tolia, "and also saying that we have to do this.") Now Epinions' well-appointed offices just south of San Francisco, whose pricey Herman Miller chairs were never filled to capacity, are more than two-thirds empty. But that's okay, because the whole crash, the whole ugly business of laying people off, is just another stage in Tolia's development as an entrepreneur.

"I called my parents, and I told my father, 'This is too hard. I can't do it.' My parents were in India, right after the earthquake. And I realized that was real devastation, and here I was freaking out because I had to lay off some people. My father told me, 'Make sure it's not in vain. The way to honor the people who helped us is to become successful.'" It's an intimate window into the psychology of the economy of diminished expectations. Tolia learns that it might be hard, but having to lay off some people is just one more moment in a saga of Internet-era personal growth. It's like Luke Skywalker calling Obi-Wan Kenobi and having Obi-Wan tell him that the Dark Side might have won a few battles, and wiped out a few planets, but it's all just part of Luke's progress as a Jedi knight.

The strangest part is that when it comes to looking at anything but themselves and their own companies, the young dot-com whizzes can be extraordinarily cogent. "People who are [laid off] and applying to brick-and-mortar companies are bearing the badge of the industry's hubris," says Jim Rose, the 29-year-old head of a San Francisco dot-com called Mobshop. "Many of their skills," he explains, "are squishy, soft skills. There were salespeople without quotas, business development people who had Barney relationships with each other--I love you, you love me, but nothing happens."

And yet, in the very same conversation, Rose will tell you that his own company (yup, he's laid off people too) is doing fine, thank you, because it's establishing some really good relationships. "The weird thing that's happened in the past three or four months is that our company has been doing very well while the market continues its slide. We're not having any problems getting traction with the people we want to talk to." Listen to that again, slowly: Mobshop, an online discounter that's closed its virtual doors and is hoping to survive by selling software--is doing well because he's getting "traction with the people we want to talk to." Not really sales or customers (he's gotten two since Mobshop "refocused" its mission), but traction. No Barney relationships there. No, sir.

That conversation, like the one with Papadopolous, was in its way typical of the Valley today. For the MBAs, success was the magic three letters, IPO, the $40 million of venture capital raised, the stock's first-day "pop." And now that isn't an option, so you have to move the goal posts. Success is coming in and doing a good day's work. Success is being an entrepreneur, having meetings, getting traction. Does anybody really believe this?

And then there are the engineers. Even the title is meaningful. In the rest of the country they would be "programmers," but in Silicon Valley, by long tradition, anyone who designs hardware or software gets to be called an "engineer," a word of much more impressive weight. The older ones had dropped out of college, worked at places like Apple, been doing this stuff since the time when you could hold the whole picture of a new machine in your head. More were younger: They camped out in the desert for the Burning Man festival and roamed the aisles of Fry's, the great Silicon Valley mecca of arcane computer components. A fair number were first-generation Americans, and a few were themselves immigrants, sometimes with degrees from the world's most prestigious engineering schools.

This was supposed to be their...well, not their revolution, but their debut ball. Of course the Valley had always been about engineering, but the engineers--with a few striking exceptions, such as Intel's Robert Noyce--worked in relative anonymity. Their paychecks were nothing to scoff at, but the rewards were more psychic than financial. Says Darrah, the anthropologist, of his early work in Silicon Valley: "The engineers talked in almost religious terms about their work--how privileged they were to be working on a class of technical problems that only a few people could understand."

The dot-com culture, to tell the truth, had a distinctly equivocal relationship with the engineers who set the whole thing in motion. The fabled fringe benefits of the dot-com companies were often of little interest to the people doing the hardest work. ("The engineers," notes one young employee of a software company called E.piphany, "never used the back rubs, just the sales and marketing people.") As often as not they were shoved into far-off corners of the building, the better to keep them out of the way of the big shots who could talk more comfortably about "last-mile plays" and "media plays." For a few brief moments in the bubble economy, however--the second before the MBA with the four-paragraph "business plan" became the iconic figure of the bubble economy--the engineers were supposed to be the ones reaping the fruit of the great economic miracle of technology. "[Jim Clark] believed in his bones that the people who mattered most were the brilliant engineers," the writer Michael Lewis rhapsodized in his homage to the Stanford professor turned tech tycoon. "He forced [that opinion] down Silicon Valley's throat."

It didn't really turn out that way. Though there are certainly quite wealthy engineers in the Valley, there are more disappointed ones. "The people who got rich," sniffs Laura La Gassa, a programmer who worked at several tech companies that went public, "were the venture capitalists, who were already rich anyway; the senior executives, who also were already rich; and a few of the first hires." But engineers often express a ready contempt for the purely mercenary motives of the bubble economy. "The best engineers," snorts Andy Hertzfeld, the programmer famed for designing the Macintosh's user-friendly interface, "are never motivated by money. Whereas business people, by definition, are. That's why they're business people."

And still, every time I spoke with programmers in the Valley there was a sense of deflated confidence. I had lunch one day with Hertzfeld and several engineers who worked for him at Eazel, an ambitious operating-systems developer Hertzfeld had helped found at the height of the boom. The engineers were working on building a user-friendly, easy-to-use front end for Linux, the free operating system that incites a striking level of passion among software developers. They were true believers. (One key difference between engineers and others in the Valley is that nearly everyone else is terrified of being thought of as a true believer. "The worst thing you can do in the Valley," says professional futurist Paul Saffo, "is breathe your own exhaust." The engineers, on the other hand, are completely unembarrassed about breathing their own exhaust.)

The Eazel team took their jobs seriously--or at least seriously enough that they could joke about how seriously they took it. "Studying to be a minister," quipped senior engineer Don Melton, who had indeed studied to be a minister, "prepares you well to be an engineering manager. It teaches you to stand up in front of a group of people and say this is the word of God." Then the conversation veered into dangerous territory.

Try as they might to stick to talking about the technology, the engineers kept turning to "business plans" and "business models." The Eazel programmers themselves were working on software that any Linux user could get, modify, copy, and distribute absolutely free. The plan was that Eazel would eventually make money by selling services like instant updates and software help. Two years ago this sounded like a programmer's dream job--an ambitious, high-prestige project paid for with plenty of venture capital. Now it made people nervous. "It seemed like a borderline-crazy business plan," observed Maciej Stachowiak, who is one year out of MIT. "But I said, 'Sure, I'll work on it.'" He was laughing as he said this, but his colleagues fidgeted uncomfortably.

I asked many engineers what was truly new and innovative in the Valley, but hardly anyone could point to a project (other than, of course, his own) that he would want to be involved with. Even the stars of the programming world--the people who might be expected to reel off a list of innovations just on the brink of commercialization--were stumped by the prospect of naming a new idea. They hemmed and hawed, explained and expanded, and mostly gave up.

"I hope this doesn't sound like 'Nobody will ever need more than 640K,' " said Brian Behlendorf, a widely respected programmer, referring to a famous (and possibly apocryphal) pronouncement of the young Bill Gates. "But the era of the Next Big Thing is over." Coming from the guy who created Apache--a heavy-duty piece of software that is one of the marvels of the open-source movement, a free program that is more widely used than competing software sold by Microsoft and Sun for many thousands of dollars--his was a deeply depressing pronouncement.

In the middle of February, I stopped in at a "pink slip" party held at a dance club in San Francisco. The party--a "networking event" at which (many) laid-off dot-commers, identified by red dots on their badges, could try to meet (very few) recruiters, identified by green dots--was a neat Hangover Era counterpart to the launch parties that not long ago kept half of young San Francisco in hors d'oeuvres and martinis. The party was crowded with cameras as the press gathered to catalog the species of struggling dot-commers--a feeding frenzy that the organizers, who posted an ominous sign telling attendees that by walking through the door they consented to let their image be used by the "mass media," did their best to encourage.

The reality of Silicon Valley, however, isn't the wall-to-wall trendiness that the press can't stop writing about. Several days before the media-friendly pink-slip shindig, I had spent an evening with a group of young Stanford grads living in a group house in Palo Alto, the epicenter of the Net boom. Here, too, I heard--in a version perhaps less baldly self-serving than that of the dot-com execs--the refrain that the crash came as something of a relief. Of the seven twentysomethings who lived in the house, six worked at Internet companies (or four: One was laid off from her second dot-flop the day of our meeting; another got the ax the next week). Still another, Pius Fisher, had himself helped start an Internet service provider that mushroomed to more than 100 employees at the height of the dot-com boom before crashing down to earth with a round of layoffs.

The twentysomething dot-commers were well aware that the past two years had been the most extraordinary aberration. They saw the bubble with a practiced eye, and on some level were just as happy as their counterparts outside the dot-com world to see the pretensions of the bubble economy blow up. They had little tolerance for the Internet entrepreneurs' claims to have reinvented business. ("A lot of the people who are proclaiming that they knew a lot just got lucky. They were in at the right time," summed up Erin Carlyle, herself a public-relations agent working with high-tech companies.) They spoke of programmers banished to distant buildings, were more inclined to trust in free "open source" software than the commercial products of the companies some of them worked for, and were furiously distrustful of the legions of MBAs and marketing experts who'd descended on the Valley.

But their skepticism about the values of the Internet bubble did not mask the fact that the bubble economy was essentially the only one they had ever known firsthand. They did not necessarily expect to become rich off dot-com options, but they also did not seem to know precisely what else to expect of the vaunted technology economy. They were generally happy with the day-to-day routine of work in an economy that quickly gave them serious responsibilities, but unlike the earlier generation of Valley engineers, they did not feel particularly "privileged" to work in technology. Instead they knew a world in which the big score was pretty much the only thing that the work world offered. "The question of 'What would you do if you had a billion dollars?' wasn't just theoretical [for me]," said Caroline Carter, a technical writer at the software company E.piphany. "It's a different world now than it was before, when you came out of school and looked forward to 45 years of work."

Katia Koelle, who left graduate school to work at a technology company (she asked that the company not be named) put the situation of the young dot-commers, their friends in technology, and their acquaintances at work most succinctly and troublingly. "A lot of people held off on their future because they thought things were going to pop." It's an especially apt construction for the age of the bubble. It is hard to say if it even means anything to people who were not part of it. "Things were going to pop" says everything and nothing, and yet it is immediately comprehensible to everyone who works in Silicon Valley today. It refers to a general sense that things were changing, percolating, and something--maybe the big score, maybe something else--was just around the corner. And yet in the strange world of Silicon Valley after the crash, it is an equally apt image for the weird transience of it all.

At the height of the Internet mania, I had a conversation with a friend who'd started a company then considered "successful" (meaning, essentially, that it was quickly burning through a great deal of other people's money). He told me that he'd gone into business with the thought that we were in the middle of the gold rush, so he'd do pretty well by selling shovels. There was nothing new about this--it was (and still is) one of Silicon Valley's favorite cliches. The twist, though, was that the friend, who would prefer to stay unnamed, admitted that neither he nor anybody around him had felt really contented "selling shovels," the cutesy name for selling services to all the patsies hoping to make money in the Internet boom. People, he explained, started off with the idea of selling shovels, but they saw so much digging for gold that they started wondering if there indeed was gold in those hills. And so instead of selling shovels, they started buying them and digging for gold themselves, even though no one was certain that there was really any gold there.

That story is still my favorite parable of Internet insanity. Much of the country outside Silicon Valley believes--with some justification--that the Internet frenzy was an elaborate con, devised by some sharp Valley money managers (the legendary VCs) to suck up a disproportionate share of the national wealth. It seems too much to believe that so many people in the Valley had succeeded with great efficiency at the bizarre enterprise of conning themselves.

But that, in fact, was the case. It was just too tempting. (Full disclosure: At one point, while working for a magazine covering the Internet industry, I even considered "doing" my own startup; I was motivated primarily by the money and never pretended that I wanted to do it so that "I would have something to say when my grandchildren asked me what I did in the Net revolution.") Everybody knew the crash would come, but nobody cared.

"Life in the Valley is always painted in terms of risk," Charles Darrah, the anthropologist, told me, sitting in a coffee shop not far from Stanford University. "But what's the risk [for the Internet startup guys]? That in the worst case the guy will wind up sitting in front of a restaurant like this two years later, back on his feet and making more money than ever?"

The probability, of course, is that, indeed, in two years or three, the Internet gold-rush guys and the engineers and even many of the dot-commers will be sitting outside cafes like that one, making more money than ever. Let us assume that they will then still be saying, The Crash Was a Good Thing. Let us hope, though, that by that point they will be able to say it with greater conviction--or at least less frequently.

[1]Jim Rose, CEO of Mobshop. [2]Jeff Brody, partner at Redpoint Ventures.

[3]Greg Papadopolous, chief technology officer of Sun Microsystems. [4]Don Nelson, engineering manager at Eazel, and a former Netscaper. [5]Dion Lim, co-founder of Epinions.com and founder and chief executive of Bannerama.com. [6]Elliot Stein, Stanford grad and laid-off dot-commer. [7]Laura La Gassa, programmer laid off from Critical Past. [8]Dion Lim.


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