90 miles from Ahrendt’s new office in San Francisco. As if the four-hour round-trip commute wasn’t grueling enough, Ahrendt’s company, an e-commerce food start-up, began to unravel two months after his arrival. His pay was sliced from $75,000 to $35,000. In return, he received extra stock options, but as the company started laying off workers, those appeared to be worth slightly less than the coupon section in the Sunday paper. So Ahrendt quit and for six months took a job closer to his new home–tending bar at the Turlock Bowl O Rama. “They didn’t know what the Internet was and couldn’t relate to it,” he says of the farmers he shared his story with. “It was a real change of pace.”
As the year winds down, Silicon Valley is already coping with a massive New Year’s hangover. Since March, the once helium-fueled Nasdaq has popped, plummeting by 47 percent and scratching $3 trillion of wealth off the books. According to dot-com tracking site Webmergers.com, 130 Net start-ups have floated to the top of the fishbowl since January, and 31,000 dot-com workers have been laid off. Net CEO ousters drove a 59 percent jump in the rate of chief-executive layoffs last month. Even the Internet’s lifeblood–venture capital–is moving elsewhere. For the final quarter of the year, venture dollars flowing to Internet-specific firms are expected to fall 62 percent to $4.5 billion, from $11.9 billion for the same period a year earlier, according to survey firm Venture Economics.
Among the Valley’s elite, there’s little agreement as to what went wrong, or who’s at fault. Harrowed entrepreneurs blame the current bear market for valuing even promising start-ups at bargain-basement levels and scaring off new investors. Meanwhile, venture capitalists and investment bankers acknowledge they got a bit carried away, funding four online pet-food sellers, five online pharmacies and countless jewelry and luxury-items stores. All the closings and depressing stock numbers have muted the Valley’s famous hype machine and unleashed something truly novel among the digirati: humility. In a sharp reversal of the Zeitgeist, the “we’re changing the world, dude” attitude of last year has faded, and Valley chatter now revolves around how to survive in an unforgiving world.
But some argue that the turmoil is an inevitable step in the Internet’s evolution. The Net will ultimately have its biggest impact in the next few years on the internal operations of major corporations like General Motors and General Electric, fundamentally changing the way they make products and serve customers. This, Valley thinkers believe, is the next wave of a revolution that started strong but took a wrong turn somewhere near furniture retail sites. “It’s like someone invented gunpowder and most companies still haven’t figured out the battle tactics to take that into account,” says Valley wunderkind Marc Andreessen, the cofounder of Netscape and, more recently, Internet consulting firm Loudcloud.
For now, though, the Valley is licking its wounds, and the contrast with the pre-crash revelry is stark. Before the crash, dot-coms and their execs spent lavishly on parties, such as the March wedding of one start-up founder who flew Elton John and his piano in on two different jets to perform (the exec’s company, e-consulting firm Scient, recently laid off 460 employees, one fourth of its staff). Dot-coms also dumped millions on ad blitzes, including those eminently forgettable $2 million-a-pop Super Bowl ads. Since the crash, the airwaves have been nearly dot-com free, and the most popular soirees are the monthly “pink slip” parties for laid-off workers in New York and San Francisco. In the past few years, countless sites like IPO.com were created to celebrate the almost instantaneous creation of wealth. This year, the requisite morning visit is to Web pages like F–kedCompany.com and Secretcellars.com, a wine retailer that recently staged a contest for the most pathetic dot-com odyssey.
The dot-bomb shakeout, which started in the e-commerce sector, has now extended to the entire spectrum of Web businesses aimed at consumers. Many sites that rely on advertising are now sliding toward insolvency. The average cost of a banner ad this year plunged when advertisers began demanding prices based on the number of users who click on a banner, which tends to fall below one half of 1 percent. (More people respond to direct mail than click on a banner ad.) That’s hastened the decline of start-ups like search engine Ask Jeeves, which claims to answer plainly worded questions on the Net. Two years ago it sent a butler around to media offices with free pizza. This month it announced lower revenue projections, saw its stock clipped to less than $4 a share (from a high of $139) and laid off 180 employees. The company is now trying to sell its technology to businesses.
But corporations have proved to be lousy saviors for dot-coms. There were surprisingly few acquisitions of Net start-ups by big business this year, as traditional CEOs figured those Net functions could be built cheaply from scratch. And the so-called business-to-business (B2B) market was another Silicon Valley fad that immolated in 2000. The idea was that start-ups could provide an efficient online way for businesses to deal with suppliers and customers. But the hundreds of B2B start-ups that got funding weren’t able to lure customers to the Net fast enough to make money. Two once vaunted exchanges, serving the life-science and medical industries, Chemdex and Promedix, recently shut down, and VerticalNet, which runs exchanges across 58 industries, has seen its stock free-fall from $148 to $8.
Among the ranks of once optimistic entrepreneurs, reaction falls somewhere between denial and anger. Mark Goldston, CEO of NetZero, a two-year-old start-up that offers consumers Net access free of charge, says that public markets were comfortable with business plans that called for firms to spend fast and furiously for three to five years. Only then would they have to worry about profits. But that view suddenly changed after the March market crash, when investors began to focus more on “burn rate” than projected profits. If the companies “had known all these gas stations along the way would be shut down, we would have never driven 95 miles per hour,” says Goldston, who lost $230 million in wealth this year as his company’s stock fell from $40 to about $1. “We would have shut the air off and driven 35 to preserve fuel.” Other entrepreneurs blame the venture capitalists who urged companies to “get big quick,” then refused to back up their wisdom with cash after the market tanked and their start-ups ran out of money. “They gave a lot of bad advice,” says Patrick Byrne, CEO of Web retailer Overstock.com.
Most VCs gamely accept the criticism, and say that this is how Silicon Valley’s brand of capitalism works–it has always overinvested in hot new categories. “We’re the same group that brought you 60 disk companies, and over 100 mini-computer companies,” says Joe Schoendorf of Accel Partners in Palo Alto. One or two of the best companies will survive each mania, he says, and the dot-com boom will be no different. According to Roger McNamee of Integral Capital Partners, the mistake this time around was believing “silly” concepts like Internet time. “We all forgot that behavior doesn’t change overnight.” This is why we saw such logic-defying start-ups like Mylackey.com, which let Web users order up everything from car washes to dog-walking, and BBQ.com, the online store for all things grilling. And it’s why very few new consumer-oriented dot-coms are being started in garages around the Valley today.
Ironically, the real-world companies that quaked in their boots when the Net came along are now embracing it. That’s where Valleyites see hope for the future. Large corporations will transform themselves into e-businesses, using Internet technology to do everything from manage customer relationships to allow employees to collaborate online. Ostentatious Valley billionaire Larry Ellison, the CEO of business-software maker Oracle, claims he wrangled $1 billion in savings at his company last year by deft use of the Net. For example, Oracle used Net technology to replace its 97 disparate internal e-mail systems around the world with one central e-mail system, saving about $30 million a year.
Big corporations are also adopting the Net as a buying tool, and they have the deep pockets to get exchanges up and running that the first B2Bs lacked. This year, Ford, GM and DaimlerChrysler teamed up to form Covisint, which plans to conduct online auctions for auto parts. The companies estimate that the exchange could do $240 billion a year in transactions, and reduce the cost of making a car by up to 14 percent. The automakers are so enamored of the prospect of cutting costs while owning a piece of a high-growth Internet company that recently they announced a second joint venture, this one aimed at streamlining the ordering process between dealerships and repair shops. “The Internet and e-commerce will help us transform the auto business,” says Ford CEO Jacques Nasser. “The potential is huge.”
Next year Silicon Valley will focus on nurturing this transition within the business world. Venture capitalists say that investments will be aimed at start-ups with technology that makes networks run faster and provides sturdier and more secure platforms for companies to operate online. That’s why the Valley’s enthusiasm has been rechanneled toward companies like business-software makers CommerceOne and Ariba, and perennial favorite Cisco, the equipment maker. There’s also continued interest in applications that spur the use of Web-enabled cell phones, to bring America’s wireless obsession up to par with Europe’s and Asia’s. No, it’s not as sexy as selling sofas online, building new search engines or setting up community sites for a discussion of the best digital cameras. But Silicon Valley has been down that road before, and it ends, bleakly, at the Bowl O Rama.
