U.S. News

Best of Times in Silicon Valley

Kevin Maney, Portfolio.com

Tim O’Reilly stood onstage in cargo pants, unshaven, a lumpy jacket sagging off his shoulders, and tried to rally about a thousand A-list tech players at a swanky San Francisco conference called the Web 2.0 Summit. In the audience sat many of the same entrepreneurs and venture capitalists who got financially walloped nearly a decade ago when the likes of Pets.com, Webvan, and Flooz circled the drain.

Sure, the economy stinks, O’Reilly acknowledged. But “many of our great companies did not start because there was a big pot of gold at the end of the rainbow,” he preached. “I feel like we’re at one of those inflection points where there are enormous problems to be solved—enormous opportunities.”

We should all be thankful that in the worst of times, a certain Silicon Valley breed remains undaunted, even a touch oblivious. I asked entrepreneur and angel investor Marc Andreessen whether the economic meltdown makes conditions horrible or favorable for starting a technology company. “It’s a great time to launch a high-quality startup and a terrible time to launch ­a low-quality startup—but then, that’s ­always true,” he replied in an email. He added a smiley face.

Much of America is looking at the economy with apprehension, terrified of seeing the return of breadlines or, worse, generic beer. Yet somebody will eventually have to lead the way out. Silicon Valley stands at the ready. If you want to find a ray of optimism, don’t look to Detroit, New York, or Washington. Instead, parachute into Palo Alto.

This hopeful feeling in tech land isn’t just the product of hubris or whatever the programmers are smoking in the parking lot. In a twisted way, when the economy tanks, conditions in Silicon Valley and other tech communities actually become more advantageous for starting and building companies. Look at the fresh-baked startup Glassdoor, a sort of TripAdvisor for job seekers. Launched in June, the site allows employees of any company to anonymously post comments about their work environment, share salary information, and even rate the C.E.O.? (Steve Jobs has a 90 percent approval rating; Motorola C.E.O. Greg Brown, 10 percent. Tell you anything?) Glassdoor sheds light on important information that used to be hidden—a category of innovation that’s catnip to V.C.’s. Potential investors were also comforted by the résumés of co-founders Robert Hohman, who had been president of discount-travel site Hotwire, and Rich Barton, who started Expedia.

Glassdoor began looking for second-round funding in September, during the height of the credit crunch—timing that would seem atrocious in any other industry. “The day we made our first pitch to venture capital partners was a day the market dropped almost 1,000 points,” Hohman says. But in late October, when most consumers couldn’t get a car loan, Glassdoor landed a $6.5 million investment from Sutter Hill Ventures, which has backed Palm and Shutterfly, among other companies. That gives Glassdoor the ability to take advantage of the crappy economy. As weaker outfits go belly-up, they unload laptops and office furniture at fire-sale prices—to the benefit of newbies like Glassdoor. They also cut staffing. Companies from Yahoo to Hewlett-Packard have let go of thousands of talented people. (Glassdoor snagged two key Yahoo refugees.)

That $6.5 million will sustain Glassdoor’s 12 full-time employees through a hard year or two. And though the site will rely mostly on ads for revenue, if sponsors retreat, Glassdoor has the cash to keep building an audience. “It’s all happiness right here,” Hohman says with unabashed glee.

Now, it’s true that tech investors have become skittish. In the third quarter of 2008, V.C.’s invested 7 percent less than in the same quarter of the previous year, and they’re expected to invest much less in 2009. Money is drying up for marginal startups. But if an experienced businessperson pitches a startup that looks as though it will succeed, angel investors and venture capitalists will write a check, even in these times.

All in all, companies that begin during bad times tend to be more purposeful and solid and have more potential to make a lasting impact than the tsunami of businesses that form during boom times. History has proved that bad economies can produce great companies. H.P. formed in 1939, during the Great Depression. Microsoft launched in 1975—in an economy so rotten that Time ran a cover story headlined “Can Capitalism Survive?” Cisco Systems started in 1984, just as the U.S. was coming out of a period of sky-high interest rates and inflation. In the wreckage of the dotcom bust and the 9/11 terrorist attacks, the tech industry cooked up LinkedIn, MySpace, Six Apart, Vonage, and Wikipedia.

During a recession, Silicon Valley doesn’t curl up into a fetal position and pout. It continues to take chances, throwing sparks at kindling, knowing that something will catch fire. It’s the U.S. economy’s secret weapon.

Anyway, who else are we going to count on? General Motors?