High in the Valley

The US economy may be reeling from the subprime crisis, but the mood is buoyant in technology's heartland, writes Karlin Lillingtonin Silicon Valley.

The United States may be facing into rocky economic waters, but the mood here in technology's heartland is buoyant. Fresh opportunities and growing markets in new sectors, such as Web 2.0 social-networking technologies and green technology, are creating a general buzz.

Economists and onlookers say Valley optimism is based on a solid foundation of good trade figures, availability of capital and jobs growth vitality.

Even as former US Federal Reserve chairman Alan Greenspan this week predicted that the chance of a recession in the US was up to 50 per cent, several economists and reports indicated that California had only been mildly buffeted by the current troubles, which were partially caused by subprime lending.

And the San Francisco Bay Area, powered by healthy demand for technology products in the wider global economy, is seen as the healthiest part of the state. University of California, Los Angeles (UCLA) economist Ryan Ratcliff described the Bay Area economy as the "bright spot in California" because of increased demand for information and communication technologies.

Last month, venture capital investor Keith Benjamin of Levensohn Venture Partners even predicted that the subprime downturn could actually benefit the tech sector by pushing investor cash back into technology shares.

Many Valley companies are turning in good results. Technology bellwether Intel, for example, is predicting that sales should be about 12 per cent higher this year than last year.

Economists say a major plus for the region is that the heavily globalised Valley economy is not reliant on the weakening US for growth.

This is in stark contrast to 2000-2001, when the collapse of the dotcoms, followed by the technology industry overall, meant that Silicon Valley - where one in three employees work in the technology industry - led the downturn and was viciously pummelled.

This time around, studies including the UCLA's Anderson Forecast report and the University of the Pacific's California and Metro report are quietly confident for the state as whole, with UCLA predicting that California's general economy will be "sluggish" but won't go into recession.

Northern California, with its healthy tech sector, is underpinning growth in the state as a whole, economists say. By contrast, southern California, a major centre for the mortgage industry, is suffering.

"Certainly, the sense that I get here is there's no talk of recession. It's just not being mentioned," says David Smith, who heads Enterprise Ireland's Silicon Valley office in Palo Alto.

"When we're talking to companies, they're saying how much venture capital money there is. The view is that there's never been so much money around in six or seven years."

Venture funding is definitely at its highest level since the 2001 downturn and, with 60 per cent of all venture capital raised in the US going to Silicon Valley companies, that's good news for the region.

Corporate venture capital investments (money from the investment arms of large corporations) are particularly strong. These were up 30 per cent to $1.3 billion (€932 million) in the first half of the year, according the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. Most of that funding is going towards software, biotech, medical device and manufacturing companies.

"There's a very buoyant mood here now. Look at venture investment. We're seeing a resurgence in technology," agrees Jane Evans-Ryan, a communications specialist who focuses on the semiconductor industry.

Originally from Ireland, Evans-Ryan has worked in Silicon Valley for two decades. She also points to fresh interest in initial public offerings (IPOs), in particular the stellar debut of virtualisation software company VMWare, the biggest public offering since Google's IPO.

Silicon Valley and the rest of the Bay Area are also maintaining better jobs growth figures than the rest of the state.

Although the University of the Pacific report predicts that the region will shed about 6,500 jobs over the next two years, a larger number will be gained across other sectors, it says. Overall, jobs growth is expected to be about 1.1 per cent in the Valley, with unemployment remaining less than 5 per cent, the report says.

More casual gauges, like heavier traffic on the roads and busier restaurants, also tend to indicate a stronger economy, says Evans-Ryan.

"It all feels very positive again," she says. "We all learned a lesson after 2001 - you need a business plan and you need real products, not vapourware. Now there's a very pragmatic view that's prevailing here."

But not everyone sees a silver lining for technology in the cloud of the wider US economy. According to columnist Anne Zelenka with San Francisco analysis website GigaOM: "In an increasingly interlinked economy, tech start-ups and the venture capitalists that fund them stand at risk."

She notes in a recent column that "the web start-up economy is vulnerable" due to basics such as a decision by advertisers to cut spending. Half of Nielsen's top 10 web advertising spenders in July were mortgage and credit-related marketers, she says.