February 11, 2010

2010 Index of Silicon Valley: Economy Stalled And At Risk

From Joint Venture: Silicon Valley Network with respect to the 2010 Index of Silicon Valley:

The economic recession has stalled Silicon Valley’s vibrant innovation economy and left its global competitive standing at risk as never before...

With respect to jobs:

Between November 2008 and November 2009, employment in Santa Clara and San Mateo Counties dropped 6.1 percent, compared to 3.8 percent nationally. Silicon Valley lost 90,000 jobs between the second quarter of 2008 and 2009, bringing total employment down to 2005 levels.

With respect to housing:

Residential foreclosure activity dropped by 39 percent in 2009 yet in some cities more than a third of sales are foreclosures. Housing affordability for first-time homebuyers is improving [i.e., values are falling]. New affordable housing units in the region doubled from 2008 to 2009. Average rents declined six percent from 2008, the first drop in rents since 2005.

And with respect to commercial real estate:

Office vacancy rates are at an all-time high since 1998. The continued decrease in demand for commercial real estate combined with the creation of 1.7 million square feet of new commercial space have driven commercial vacancies up 33 percent in 2009 over 2008.

On the plus side, growth in new Silicon Valley "green" businesses and jobs were up 18% and 24% respectively from 2004 to 2008 while median household income was up 5% over the same period. But the real blows to Valley employment didn't kick in until 2009 and per capita income fell 5% from 2007-2009.

2010 Index of Silicon Valley [jointventure.org]
Silicon Valley Faces Tough Climb Back From Recession [jointventure.org]

First Published: February 11, 2010 6:00 AM

Comments from "Plugged In" Readers

SBIR gets a positive mention (a whole half-page), right at the end! Whoo hoo!

In all seriousness, in the 1960s and 1970s, DoD and DARPA programs laid the foundation for the communications revolution in both cellphones and the internet (not to mention the integrated circuit years before). Silicon Valley VCs profited handsomly off of that government-funded R&D for almost 30 years. Now those industries are mature and the party's over.

-7% average returns over a 10-year period makes venture capital a pretty unattractive investment vehicle.

No one could have seen the decline in VC spending coming ...

What really struck me is that Silicon Valley lags Huntsville, AL in terms of Federal procurement dollars. That's pathetic!!

Federal R&D dollars pay for the basic research that turns into tomorrow's mega-industries. Turn off the taps (as the country did after the Cold War) and eventually the pool runs dry.

Just my 2 cents.

Posted by: Jimmy (No Longer Bitter) at February 11, 2010 7:41 AM

Old news. Duh. We all know quite well by now that the economy sucked between 11/08 & 11/09.

Posted by: 45yo hipster at February 11, 2010 9:18 AM

Jimmy (no longer bitter, but maybe just a little bit still) its not quite fair to contrast Silicon Valley federal funding and Huntsville's since they each represent a rather different pool of research. Huntsville is focused on engineering, space, rocket and the like (including so-called black projects), Silicon Valley researchers are focused less on this type of research. Its not apples to apples, but silicon to rockets comparison. Otherwise I think your summary is excellent.

Posted by: Oceangoer at February 11, 2010 10:01 AM

This is all positive. The private sector (office space, housing, etc) is rationalizing their cost structure here. Pretty soon, Silicon Valley etc will almost be a cheap place to do business...IF government would also rationalize its cost structure and cut red tape and taxes, the Bay Area would boom again.

Seriously. My PITI payment is now 30% lower than what it was in Chicago. And I'm not still shoveling snow in April, although weather was never a huge factor for me, I know a lot of people would pay a premium to avoid winter. Throw in cheaper housing etc, and Cali's not looking too bad too bad to live in...if only the taxes & red tape were taken care of...it wouldn't look too bad to start a business either.

Posted by: David at February 11, 2010 11:41 AM

SBIR gets a positive mention (a whole half-page), right at the end!
I'm not sure I'd call it positive (with respect to SV). They say the dollar amount directed to SV has dropped by 27% compared to 2004. Then again, this correlates nicely with bubblenomics and general affordability going out the window around 2004. I would hope to see this number rise again (and it probably will if the correction continues).

Posted by: EBGuy at February 11, 2010 12:02 PM

I just got back from a meeting with a tech company in Santa Clara. I meet with them about once per year.

The buildings around their offices are still as vacant as they were a year ago. Almost every one of them is for lease.

The building they were in was 1/2 full last year, and this year, they are the only remaining tenant. They have about 10% of the building.

The customer said that things were catastrophic until the 4th quarter of this year, when they picked back up a bit. This quarter has been about the same but they said that demand is still very unsteady, so they have no real confidence.

When I walked through to the conference room, you could see that they laid off about half the company last year. They said they have no plans to hire anyone any time soon, but that business isn't getting any worse for now. It has stabilized at a low level, and they sounded a bit surprised that it had.

There isn't much reason to start a business right now: it's tough to get anyone to buy and the customers are worried you'll fail if conditions turn down again, so they aren't real interested in buying products from a startup. Starting a business is always a risky proposition: having the headwind of worried customers makes it that much harder.

My entrepreneur friends who are between gigs are either vacationing for 2010 (the most common destination is Spain), or starting up something in Asia.

Posted by: tipster at February 11, 2010 12:16 PM

@EBGuy: Actually 2004 is significant because that was the year that the program was changed to disallow majority VC-owned firms from participating. A company in New Mexico that was partially owned by AIG's Swiss insurance arm had landed some big NIH SBIR contracts and then people complained that a small-business program was, essentially, being used to fund a subsidiary of AIG. Which is definitely one way of looking at it.

In any case, since the VC-owned companies were pushed out of SBIR (for now), and that's the bulk of Silicon Valley startup activity, that explains the drop.

The rest of us (the bootstrappers like myself) naturally benefit somewhat from reduced competition, but you can only write so many proposals in a day... hard to make up the slack. We're trying, though!

Posted by: Jimmy (No Longer Bitter) at February 11, 2010 1:22 PM

Jimmy - do you have any pointers (websites) to get up to speed on applying for SBIR grants ? I took a swag at applying for a TSWG grant a few years ago, but am just plain too naive when it comes to acquiring government grants.

As for Silicon Valley becoming "affordable", do note that SV is no longer compared to other USA locales, but some very low cost centers in developing nations now. I know for sure that wages have really grown in white collar China and India over the last 2 years, but they're still a quarter of equivalent salaries here in the USA.

Posted by: The Milkshake of Despair at February 11, 2010 2:37 PM

No websites. Best bet is to hire a proposal writer (cost around $2k for a Phase I) or try some of the SBIR conferences (the National SBIR Conference for example is coming up in a couple months).

Or just go to www.dodsbir.com and start writing! That's what I did.

Posted by: Jimmy (No Longer Bitter) at February 11, 2010 3:56 PM

Eh, I've tried to outsource even basic chemical manufacture to China. It sucks. Even with a native Chinese-speaking consultant to work with the contractors. I've been moving all chemical & bio experiments back to...Michigan...and Alabama...and Sunnyvale.

But seriously. There are a ton of way way way more productive folks here, and 'in-sourcing' locations in Michigan, St. Louis, etc. Set yourself up in super cheap SV/East Bay office space and contract out work to out-of-work white collar guys in Michigan (who will work for $50K/year and are way more than 2X productive as a Chinaman or Indian for $25K/year), and get to town.

Posted by: David at February 11, 2010 9:51 PM

I wanna get me some $50k/year engineers in Michigan!! Where do you find them? Craigslist?

Posted by: Jimmy (Bitter Renter) at February 12, 2010 6:41 AM

while I think SV is always going to have ups and downs, I sorta laugh when folks start indicating that 'this time it's different / it's not coming back'. There was a great WSJ article back in 2001 after the downfall of the .com boom about how folks said it's all coming to an end. The article proceeded to find previous years where the same was true, only to find some new technology come along and create another resurgence (ex, in 1992, SV chip manufacturers were struggling with Japan/Korea's huge jump into chip manufacturing). Anyway, the article just pointed out that there will be ups/downs and no one should be able to point and say 'yep, it's not coming back'. You still have great universities, you still have great weather, you still have risk-taking folks coming here, and after they get here and create something, they tend to not want to leave.

tipster, here's an article on one area that is having no trouble being entrepreneurial.
http://online.wsj.com/article/SB125796886127143907.html

What I love about this example is how even though costs could be cheaper elsewhere, 45% or so of iphone development is still to be found in SV (next largest area is nyc area at like 14%). Not sure if SF is included, but if not, that % is likely higher. Again, would anyone 4-5 yrs ago be able to predict this new little industry?

I would say though: I agree that SV may not need all this commercial real estate space - while new companies will grow here all the time, it seems more and more folks work from home or the increased efficiency requires less office space.

Posted by: DanRH at February 12, 2010 11:07 AM

I know of one SV startup that was killed by a single real estate decision. During the office space crunch of the dot com boom, they signed a long lease on an office building that was under construction. But before the building was ready for occupancy, the bust had hit. This startup still remained relatively healthy by shedding about 30% of the workforce, but they no longer needed the new building. Their landlord would not let them off of the hook and their lease obligations drained their remaining balance. Without those lease obligations they would have survived the bust.

The lesson is that during a boom that causes a RE crunch - look towards creative solutions like telecommuting to get you over the hump. Committing to lease an unbuilt building takes on too much risk.

Posted by: The Milkshake of Despair at February 12, 2010 11:40 AM

^^^ I forgot to mention that the building-of-death mentioned above still remains unoccupied almost a decade later which is a shame because it is in a great location.

Posted by: The Milkshake of Despair at February 12, 2010 11:42 AM

"tipster, here's an article on one area that is having no trouble being entrepreneurial."

Yes, I fully agree. These guys are making small fortunes. From the article:

"They work on their iPhone business in their free time from one of their apartments, but said they hope to eventually turn it into a full-time business."

WOW, Dan RH!!!! SF real estate should come zooming back if a bunch of unemployed kids are writing apps for $1.99 in their spare time from an apartment. And they *hope* to turn it into a business. Boy, you sure got me!!! Things are BOOMING!!! Man, that is absolute success, in my book!!!

And 45% of the iPhone development is done in SV!!!! That has got to mean about 20-40 people. WOwiee. The thousands manufacturing it are in China but a couple of dozen developers of one of the few most successful products are right here in Cupertino. Boy, you sure got me! For every iPhone there is a Palm Treo waiting to die, but no matter.

Thanks for that helpful information. Really great to have that information for us.

Posted by: tipster at February 12, 2010 12:53 PM

tipster, give me a break, that was just one example. But i don't get your logic. You seem to say that if anyone is hiring in SV, it doesn't matter to SF real estate. But if SV is struggling, it does?

And while you dismiss this article, your once-a-year meeting as well as your buddies traveling through Spain is a better indication?

Also, not sure if you can actually read the full article but it goes on to talk about the mobile-phone advertising company (about 80-100 people, located in San Mateo or so) that got snatched up by Google recently. That company had purchased one of these small iphone developer companies that you are dismissing. So yes, some folks are making some good money. AND those folks might also be just the type to move/buy into SF (young, etc.).

Posted by: DanRH at February 12, 2010 1:47 PM

tipster, maybe you shouldn't comment on technology?

apple has sold more than 50M app-capable devices (iPhone and iPod Touch). although app sales are hard to estimate, they are certainly running above the $500M/year level. that's a lot of scratch for 20-40 people living their moms' basements and coding in their pajamas to divide up, but, having written the 150,000 apps that are now available in the store, I guess they deserve it.

as for dan's retort, the company was admob, purchased for $750M in november. that is one of 50 or more deals google will do over the next year. today, for example, the bought ardvark for $50M. after ad mob, Apple acquired quattro for $275M. that closed last month, raising the valuation of every mobile ad/location/search based service.

it is undeniable, that there are many companies fighting to hang on. veoh last the battle yesterday and the environment has sucked for 18 months now. vcs are struggling too and the 10-year return numbers are not pretty. but, the companies that are doing well (apple, google, oracle, cisco, facebook, twitter, ...) are doing very well and can't grow fast enough. expect much more m&a activity this year, and not at firesale prices.

Posted by: steve at February 12, 2010 2:50 PM

on un- and under-emplyoment, an interesting study out yesterday from northeastern university. they divided households into deciles based on 2008 family income and then examined their current un- and under-employment status.

for the top decile, household income above $138K/year, the under-employment rate is a shockingly low 1.6%. I'm sure it is higher here in the valley, but still. they conclude:

The incidence of underemployment problems in the fourth quarter of 2009 was 13 times higher among those workers in the bottom household income decile as opposed to those residing in the top decile of the income distribution (20.6% vs. 1.6%). These stark findings clearly reveal that the economic costs of underemployment in the current U.S. economy were disproportionately borne by workers at the lower end of the income distributions.

http://www.clms.neu.edu/publication/documents/Labor_Underutilization_Problems_of_U.pdf

Posted by: steve at February 12, 2010 3:08 PM

You can cite all the studies you want. When Wilson Sonsini, the biggest law firm in Silicon Valley continues to lay off staffers, things aren't exactly improving in Silicon Valley.

Posted by: tipster at February 12, 2010 4:35 PM

tippy, any idea what a parter at wilson made last year -- one of the worst years for tech ever? what do you think he pulled down over the past 10? don't forget to include his piece of the investment fund, and think carefully before you embarrass yourself again. the ignorance of your iphone app comments still have me laughing.

Posted by: steve at February 12, 2010 4:48 PM

Steve,

Any idea what some dot com millionaires made the last year before the bubble burst? Knowing that told you nothing about the bust in progress. What was a better indicator of whether things were still collapsing when the bubble burst was whether they were laying off staff.

Sonsini is the biggest firm, and plugged into the boards of directors of a lot of firms in Silicon Valley. If they are laying off, then their information tells them that silicon valley business is still shrinking and they need to downsize. If it were coming back anytime soon, they wouldn't continue to lay off.

What the partners made in years past is as irrelevant as what the founders of pets.com made before the bubble popped. They made a lot of money. It still popped. During the bust, they kept laying off.

They aren't the only ones having trouble. Howrey, a large east coast tech law firm also laid off another 8 percent or so, and asked some people to go part time (see link below). Again, if they saw things coming back, they wouldn't be laying off. Instead, they probably see what we see in our business directed at Silicon Valley, business in general has leveled off at a much lower level, but is still declining slightly, will probably continue to do so as the "stimulus" effects wear off, and there is no recovery in sight.

Posted by: tipster at February 13, 2010 8:45 AM

tipster, I understand the frustrations many on this site have in engaging you. when you are in negative spin mode, you refuse to be reasonable.

after correcting all of your misstatements about the mobile app economy, I wrote:

it is undeniable, that there are many companies fighting to hang on. veoh lost the battle yesterday and the environment has sucked for 18 months now. vcs are struggling too and the 10-year return numbers are not pretty. but, the companies that are doing well (apple, google, oracle, cisco, facebook, twitter, ...) are doing very well and can't grow fast enough. expect much more m&a activity this year, and not at firesale prices.

to refute this (and I don't understand why you would want to refute this -- seems balanced and accurate to me), you didn't talk about apple, google, oracle, cisco, facebook or twitter, but picked WSGR. so goes wilson, so goes the valley? ok, fine, but in trumpeting the dire news you failed to qualify it with some relevant information:

1) WSGR's layoff was less than 5% of the company -- 20 total staffers
2) WSGR is now paying bonuses
3) the average WSGR equity parter made ~ $900K in 2009. down from 2008, but stil...

pets.com, seriously? besides, if companies are spending less on outside counsel, I view that as a positive for the economy.

more importantly, you brought this up in the context of the northeastern report concerning the inequitable distribution of impact of our current economic problems. the rich are ok, the poor and lower middle class are getting crushed. if you dig deeper, you could argue that the wilson example supports that viewpoint:

January 20, 2010 - Wilson cut secretaries
Wilson Sonsini laid off 20 staff nationwide on Wednesday, most of them secretaries, a firm spokeswoman confirmed in an email. http://legalpad.typepad.com/my_weblog/2010/01/layoffs-2010-wilson-sonsini-cuts-20-staffers.html

January 25, 2010 - Wilson pays bonuses
In recognition of our attorneys’ hard work and dedication over the past year, we are pleased to announce the firm’s year-end merit bonuses for non-member attorneys, as well as the associate salary schedule for the new fiscal year beginning on February 1, 2010
http://abovethelaw.com/2010/01/wilson_sonsini_salary_bonus_watch.php

Posted by: steve at February 13, 2010 11:03 AM

Steve,

Your civility is refreshing.

The reason one picks Sonsini is that they get their business from a wide variety of silicon valley businesses, like several of my businesses. One can always cherry pick a dozen companies who are doing well. Big deal. No one is arguing that every firm in the valley is doing terribly.

But when a large business who makes their money off a wide variety of SV tech companies is laying off, it means A) things are getting worse, not better and B) they don't see it getting better in the near term (i.e. 6 months) because if they did, most firms recognize that the cost of recruiting and training employees doesn't justify letting them go for a month problem.

Sonsini sees this as lasting longer. That's my only point. Is it "only X%". I'm sure it is. But if things were poised for a rebound, there wouldn't be layoffs at all. Their actions are very consistent with what I am seeing, demand is dropping slightly, not by a huge amount, but it has dropped off from years past dramatically and is not coming back any time soon.

WSGR does merger and acquisition work. If that were booming, they would just shift people in to that. So it isn't booming.

As for companies who can't grow fast enough, they need to balance out the thousands who are closing up shop. It is FUNDED startups that drive the fortunes of the valley, not the handful of large companies you've listed. See my name link for yet another article that states that funding is back to 1998 levels, about 1/5 of what it was in 2000, and is continuing to erode. It is that money that gets spent at outside law firms.

The large companies have their own legal staffs to do their legal work. Their lawyers aren't making $900K: they make 1/3 of that. If a few large companies are growing and venture funded companies are shrinking, there will be a handful more $300K jobs and many fewer $900K jobs. That doesn't bode well for the upper end of local real estate.

Posted by: tipster at February 13, 2010 11:57 AM

tipster,

1) agree that VCs are in trouble
2) agree that valley economy will be basically flat over the next year
3) agree that for every company doing fine one or more is in deep trouble
4) disagree that M&A activity won't be much bigger in 2010 than in 2009. google alone has annouced that they want to do 50 deals, and APPL MSFT won't set on their cash forever. and, of course, CSCO is CSCO, meaning they are good for 15+ major deals, easy
5) also disagree that big companies (AAPL, GOOG, ORCL, etc) are irrelevant outide of M&A activity. with AAPL, ESPP is the story. with GOOG, it is last year's repricing which will free up about $2B in newly created employee wealth come March. with ORCL it is the massive bonuses they pay

I suspect your business gives you decent insight into employer sentiment. while it is nothing like the invincible days of 2007, wouldn't you agree that it is more positive now than last spring or summer (with the obvious caveat that there are fewer companies to poll than a year ago and VCs don't have as much cash to save existing ones or create new one)?

anyway, it will be a long time for crappy SOMA condos sell for $1000 sq ft, and we both agree that is a good thing.

btw, this is what WSGR said in their layoff memo. granted, it too is spin:

technology has become more advanced and has streamlined the way we all work. While there are many benefits to this, it also presents some challenges to our historic staffing models. Accordingly, after a long and thorough analysis, we have concluded that these changes have made it necessary to downsize the ranks of our staff by approximately 20 employees nationwide, primarily in the secretarial area.

sounds like they are using better software these days.

Posted by: steve at February 13, 2010 2:23 PM

Yes, the world is not ending like it was then. Business spending is up a bit from the trough of almost nothing.

Yes, it has largely flattened at a much lower level. It is declining still, but only by a small amount.

Acquisitions by large companies looking to buy on the cheap are going to be common. The investors will lose their shirts but will be happy to get out from a company that is bleeding their cash dry.

Note that the announcements of the value of the acquisitions frequently include lengthy time periods (3-5 years) and significant sweeteners for performance that are tiered. "If your money losing POS $5M company can generate $500 Trillion in sales, we'll pay an extra $250M, so lets announce the sale as a $251M deal." Ok I exaggerate, but you get the idea. Very frequently the investors are happy to get the $1M for a company they were about to shut down anyway, so they go ahead with it, but the headline number is an extreme long shot performance bonus that is rarely realized. Every real estate agent salivates at the prospect of 50 people each getting $5M, but the reality is they usually just end up with a job, and maybe $20K in stock options from the acquiring company. Not chump change but not the $5M it looks like.

If your company gets bought by RSA or some others, you don't even end up with a job. They acquire the company, offshore the development work and lay everyone off within a year.

So do I agree that some big companies with a lot of cash are going to acquire smaller companies on the cheap while valuations are low and new money is nearly impossible to find? You can pretty much count on it.

Posted by: tipster at February 14, 2010 9:58 AM

On the subject of acquisitions, I've heard from various people a multiple like 5-10X EBITDA can be expected. Is that approximately accurate for small tech companies? Does anyone know in detail?

Posted by: Jimmy (No Longer Bitter) at February 14, 2010 10:12 AM

tipster, we're all waiting for a single example (sourced, of course) of what you're talking about - with similar numbers (looks like 5 mil each, end up being $20k each).

Oh - and, "some guy you work with" or "some people that you know" or "some clients you met with last week" do not qualify as sources.

Posted by: anon at February 14, 2010 3:27 PM

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