Dot.coms sober up

Early enthusiasm has become a more sober optimism

By BBC News Online's Steve Schifferes in Silicon Valley

Of all the high-tech sectors in Silicon Valley, the one that has been most severely hit by the economic downturn - and the change in investor perceptions - is the world of dot.coms, the internet companies that were going to change the world.

Already nearly 200 internet companies in Silicon Valley have gone bust, and many of the remaining ones are laying off workers - even big companies like Altavista and Amazon.

And funding for new dot.com companies is hard to secure, as venture capitalists try to limit their losses.

The carnage is particularly severe for those dot.coms who were trying to sell directly to the consumer - in sharp contrast to a year ago, when 60% of all venture capital investment in Silicon Valley went into internet companies, many of whom had lavish marketing and advertising budgets.

In the words of one former dot.com executive who has now joined Hewlett-Packard, when money became free then investment decisions become silly.

At a small internet bookseller, Alibritis, based in Berkeley, managing director Marty Manley has to be much more careful about keeping his costs under control.

John Hunt, Obongo CE, is putting a brave face on the situation

With no easy access to further funds, he has cut back his workforce from 140 to 110 - but sales are holding up well. His service links used and rare book dealers to help people find out-of-print books.

New Realism at Obongo

The dot.com failures have had a sobering effect on those who remain in the sector.

At Obongo, a small internet start-up company in Redwood which is 18 months old, British chief executive John Hunt is putting a brave face on the situation.

The company develops the software to create e-wallets, where customers can enter all the details necessary to make purchases over the internet one time, and then are able to order easily without form-filling from different retailers.

He says that it may be a good thing that the froth has gone out of the dot.com world, and that sobriety and a good business model are now seen as essential for success.

Mr Hunt, who arrived two years ago in Silicon Valley, has no intention of returning to Britain. He believes that his company will become profitable within the next two years.

And - perhaps boldly - he intends to raise more capital for his company in the next three months, after previously securing $25m from two venture capital firms, including Sequoia.

Obongo also made a major - and timely - strategic decision early in its career to change its business model.

Instead of trying to sell or give away its software directly to consumers, (a B2C model), it decided to try to sell a package deal to the financial services industry itself - which could then give away the product to its customers (a B2B model).

Obongo has now secured a deal with the largest US consumer bank, Citibank, and is confident that other big banks will soon become its clients. Mr Hunt says the role of his venture capital partners was vital in helping to secure some of those contracts.

But he says that at least one venture capital firm now is less able to offer help, as it is pre-occupied with sorting out the "sick and needy" among its other internet start-up firms to ensure they do not collapse.

Easing the recruitment crisis

Obongo's 80 workers soldier on in a non-descript warehouse just off Silicon Valley's main freeway, Route 101.

Like many companies, everything about it is very new. They have occupied their current premises for less than a year, and the partitions between cubicles still look like they could be re-arranged in a few hours if someone else was to occupy the building.

The company draws its workforce from many nationalities, partly the product of an earlier merger with a rival US firm started by engineers from India.

Adam Gold - finance director, Obongo: companies are set up very quickly.

Adam Gold, another Brit who is the company's finance director, said he was amazed how quickly companies can be set up here.

The legal framework, finding an office, and furnishing it, can all be completed within days rather than the weeks or months it would take in the UK.

Mr Hunt says that, if the internet slowdown has a bright side, it has made it easier for him to recruit staff and obtain professional services.

Terra Malcolm, the company's new media relations manager, is a case in point. She moved from New York to California to join a new dot.com start-up company, Spa.com, which had the misfortune to go to venture capitalists in May - just after the stock market crash.

Her company ran out of cash in the autumn - but within a few weeks of leaving that job, she had been hired by Obongo.

Not all former dot.com workers are so lucky. In the freezing rain in San Francisco, dozens of former dot.com employees were queuing up at an internet chat café in the Castro district where some internet companies were holding a job fair to look for new recruits.

Most believed they could still get work, but they were realistic about what sort of job they might get. And company recruiters were now more selective, demanding relevant experience before considering applicants.

The end of the dot.com boom may be a necessary shake-out of a relatively small sector, but it has cast its shadow far wider over the whole of Silicon Valley.

Many venture capitalists in particular are now pre-occupied with sorting out the carnage, and outside investors have now become nervous about the whole high-tech sector.

But like many others in Silicon Valley, the internet sector says it is not afraid to learn from its failures and take the risks that will lead to ultimate success.