The Wall Street Journal has published a feature article today (yes, subscription required) on the growing influx of experienced industry professionals moving into Silicon Valley.
On the surface, the article suggests that the good times have returned to the Valley, that it is once again “a land of opportunity.” However, the article raises a lot questions. By the end of it, you wonder whether the Valley’s current hiring binge will end in tears of joy or sadness for the professional migrants who are following their aspirations and dreams west.
The story begins by introducing three technology professionals, all based elsewhere in the USA, who each decide, for one reason or another, to relocate to the Valley. As each explains his decisions for making the move, the reader notes the enthusiasm and the excitement that each man feels. The companies and technologies to which they are drawn seem promising, and each man looks forward to career satisfaction and future riches.
And there’s the rub. The more I read the story, and the more it became apparent that these men (all three were men) were drawn to startups or smaller firms in the Valley by the lure of potential IPO wealth, the more I began to feel that their stories were not likely to end happily.
As noted on this site yesterday, the technology IPO has become more legendary than real, a relic of a past era that many of us now have great difficulty believing existed. Oh, but it did happen. The historical record proves it. The problem is, those times are not returning, certainly not on anything approaching the larger-the-life scale that held sway through the mid 1990s and into the year 2000 . . . before it all came crashing down.
Apparently, though, people still believe in the dream. It beckons even now. Unfortunately, for some that dream might become a nightmare.
According to data presented in the WSJ article, Silicon Valley lost 185,000 jobs, nearly 20 percent of its total workforce, between 2001 and 2005. In 2006, state economists are projecting a net inflow of people for the first time in six years.
The article posits that the source of the new jobs isn’t the technology industry’s establishment, companies such as Cisco, Intel, or Sun Microsystems, which are running leaner and meaner than ever before, or — in the notable cases of Intel and Sun — shedding significant numbers of employees in the Valley and elsewhere. Instead, the new jobs are being created at startups as well as at small and midsize companies.
Unfortunately, those companies cannot find enough local talent to fill roles that require experienced or extremely specialized professionals. Hence, the need for talent from outside the area, and hence the migration wave to the Valley.
Increased salary and the shimmering promise of stock options are what draws these prospective employees. Even though the proliferation of stock-option backdating scandals, and the stricter accounting rules that require the rigorous recording of all option grants as operating expenses, has cast a pall over the practice at publicly listed vendors, private startups are less reticent about doling out stock options to new hires.
Along with the promise of option-related riches and higher salaries, Silicon Valley also has a dark side. Professional migrants quickly learn that the Valley is an expensive place in which to live.
In June, as noted in the article, the median cost of a home in San Mateo County was $940,000, four times the national median of $231,500, according to the California Association of Retailers.
Many people who move to the Valley must trade down in terms of quality of life as they wait for those options to become worth something. They sell big homes back east or in the midwest, which they sometimes bought and sold for a fraction of the cost of their new homes in the Valley. The new houses, while more expensive, often are smaller and less impressive than what they left behind.
Meanwhile, we see just a trickle of IPOs occurring now, and the prospects for a near-term increase aren’t good. The harsh reality is that the vast majority of professional migrants who come to the Valley this time won’t work for companies that achieve IPOs. Too many discouraging factors exist today that did not exist during the boom days. Those were irrationally exuberant times, and the investors active in the markets today are too sober to indulge in reality distortion on that scale again. They remember, all too well, how it ended last time.
At the same time, it appears we’re heading for a VC shakeout. Fewer and fewer VC firms are accounting for more and more of the funds that go into the industry. Many of the larger VC firms are looking as closely at investments in emerging markets such as India and China than at prospective investment vehicles closer to home.
VCs with stakes in many Valley startup firms, meanwhile, are realizing that those companies will need more investment capital than initially assumed. Why? Because those companies are remaining private longer than expected, unable to find an acceptable exit on the public markets.
Acquisitions, too, are less frequent and more judicious than they were during the frenzied buying sprees that characterized the boom years. Big companies shop more carefully, with more discretion and discipline than they demonstrated during the most extravagant periods of the 90s.
Industry consolidations will continue to occur, of course, but don’t count on the acquirers to lose all perspective and reason. Buys will be selective, and rigorously vetted by thorough due diligence before they take place. I cant imagine, for example, the AOL-Time Warner merger occurring now. There’ll still be the occasional strategic head-scratcher, acquisitions that boggle the mind and defy business logic, but they will be few and far between.
At the end of the WSJ feature article, we learn that nothing has gone according to plan for one of the men who took the plunge and moved to the Valley. His wife and kids, who were supposed to move in with him after a few months, still live on the east coast. He had great difficulty selling his home in the Washington, D.C. area, and eventually was forced to sell it at a substantially lower price than anticipated. He and his wife also have decided, after having a close look at housing prices in the Bay Area, that they will rent a house rather buy one, at least for the time being.
He works for Sling Media, a startup company that probably has a better chance than most of finding a successful exit. I hope it happens for him, because he’s gone through a lot, and risked quite a bit, to make the move west.