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Friday, 23 November, 2001, 11:40 GMT
Fear and slowdown in the valley
By Maggie Shiels in San Francisco
Silicon Valley is in a state of paralysis that is expected to linger through to next year.
The evidence comes in a number of surveys illustrating that the high tech industry is in a funk that it cannot seem to shake off.
And the impact of 11 September has further weakened an already faltering economy.
Brett Weiss is the chief executive and founder of a start-up called Remedy Interactive, a web-based consultancy located just north of San Francisco.
He has seen first hand how the business world has changed in the last two months.
"I think people are slower to move forward because of the general atmosphere psychologically," Mr Weiss says, the stars and stripes displayed prominently on his office wall.
"It's frustrating because you know you have a valuable business proposition, a valuable business model that works, that's been proven and yet you still have investors who move so much slower today.
"We see that on a regular basis after 11 September."
Funding dries up
A survey by venture capital research firm Venture Economics confirms Mr Weiss's experience.
The company says that venture capitalists invested just $2.4bn into Bay area start-ups during July, August and September, 27% less than during the previous three months, and a massive 74% down on the same period last year.
And the funding outlook shows no sign of improving just yet, according to a study by consulting firm Deloitte & Touche.
In a poll of 68 venture capitalists, Deloitte & Touche revealed that the terrorist attacks have cast a shadow over VC sentiment stretching well into the New Year.
Fifty-two percent of respondents expected the economy to deteriorate further in the next six months, while 54% predicted that average exit valuations - the money raised by selling or floating start-up companies - would decline during the same period.
Dot.com valuations collapse
In the troubled dot.com sector, companies are "morphing madly" in order to stay in the game claims, says Tim Miller, president of Webmergers.com, a hub for buyers and sellers of Internet properties.
Webmergers.com's most recent research shows that in October, buyers spent $2.5bn acquiring 118 internet properties.
With company valuations now vastly reduced, buyers logged only four deals in the $100m plus category.
The average deal fetched just $20m.
"We believe it is a veritable end of the year clearance sale out there right now," declares Tim Miller.
"It's the rummage sale of the century. And some smart buyers like IBM, Seibel Systems, Peoplesoft and others are selectively snapping up some of these juicy morsels that are in this very core marketplace of productivity enhancing applications."
On the jobs front, silicon Valley unemployment is, at nearly 6%, rising faster than in any other US metropolitan area, and remains at its highest level in seven years.
In the last four months, an estimated 40,000 Silicon Valley workers have lost jobs with the effects of 11 September biting particularly hard in the high tech and dot.com sector.
Some $14m in retraining grants, announced this week, will bring some relief.
California Governor Gray Davis says it's a priority of his to deal with the casualties of the economic fallout of 11 September.
The jobs market gives a clear indication of just how things have changed from the dizzying heights of the dot.com boom.
This year high-tech legend Cisco Systems announced 8,000 job cuts, its first staff lay-offs ever.
Hewlett Packard, another industry giant, is being forced to cut 7,000 jobs in response to the downturn in the high tech sector.
In 2000, with unemployment at a record low of 2%, workers jumped from one hot start-up to another every six to nine months.
But with secure jobs now increasingly scarce, the balance of power has shifted back in employers' favour.
Remedy Interactive's Brett Weiss confirms that the downturn in the jobs market has been beneficial for his company.
"We are able to get quality talent at much more reasonable prices than we could before," he says.
"We are finding people going back to basics in regards to the work ethic and what they value in a company.
"It used to be 'show me the gold, show me the stock options and a package that will make me rich in six months'.
" Now it's 'do you have a valuable business proposition'."
While analysts are confident the US economy will bounce back next year, few believe the Bay Area will be the driving force.
Robert Parry, president of the Federal Reserve Bank of San Francisco, says that for this prediction to be proven wrong, "we've got to see high tech have a significant turnaround."
That does not look like happening any time soon.
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