Palo Alto Weekly

Cover Story - February 12, 2010

Disturbing trends darken Silicon Valley outlook

'Index of Silicon Valley' report shows unprecedented challenges for recovery of 'innovation economy' in the region

by Jay Thorwaldson

Russ Hancock doesn't make predictions.

But as CEO of Joint Venture Silicon Valley, Hancock doesn't like what this year's "Index of Silicon Valley" portends for the valley's potential recovery from the current economic hole.

Key findings indicate the valley may not be able to regain its worldwide reputation as "the epicenter of innovation," Hancock said in an interview with the Weekly.

He said the Index — to be discussed Friday (Feb. 12) at a conference in San Jose — shows disturbing signs of weakness in core areas that have made Silicon Valley a byword in technological innovation for decades.

"Two years ago we said, 'There's bad weather out there, but we may be OK,'" Hancock said of past Index findings.

"Last year we said, 'No, it's hit.' The storm winds hit and had gale force.

"This year it's not entirely clear that we will be the world's perceived epicenter of innovation," Hancock said.

Not only has the valley lost 90,000 jobs between the second quarter of 2008 and 2009, pushing employment back to 2005 levels "when we just climbed out of the dot.com thing," but it now has 11 percent unemployment compared to the 10 percent national average.

In addition to that possibly short-term statistic, there has been a serious erosion of the middle-income population. Despite an overall average income that is 50 percent higher than the national average, the median per-capita income is $87,000, meaning there is a growing "hourglass economy," Hancock said.

More than 44 percent of adults make more than $100,000, twice the national average of 22 percent. But a large number of people make less than $35,000 a year, even though that category shrank by 2 percent in recent years, he said.

Yet the middle-income range shrank by 6 percent between 2002 and 2008, Hancock said.

"We're losing the middle class, like Manhattan."

The implications of the shrinkage are far-ranging, he said.

"Fewer people are carrying health insurance, which they typically get from their employers. But employers want contract workers, or the so-called 'consultant' <0x0214> which often means they don't have a full-time job."

And one in four firms have no employees, with one person or partners doing home-based work.

Firms are increasingly reducing their employee counts by "networking outside the region, mostly outside the country — to India, China, Taiwan, Israel, Ireland."

This creates an odd paradox of "companies thriving, doing well on the stock market, but the head count is not growing," Hancock said.

"This has never happened before."

As for Silicon Valley being the "innovation economy," the belief may be right, but there are disturbing signs in that area also, Hancock said.

Applications for new patents are down slightly for the second year in a row, and are down nationwide as well.

"Venture capital is our 'secret sauce,' but that is down for the third year in a row.

"Something is going on. Venture capital hasn't made money in about 10 years," industry-wide, he said.

Initial public offerings shriveled to one in 2009 and two in 2008, he said, adding quickly that that may change: "Word is that a bunch of people are putting (IPO) papers together for 2010."

One trend is that today's young entrepreneurs "don't need an IPO to have a life-changing event," such as a multi-million-dollar buy-out.

Hancock said there are positive signs, however.

"We still have amazing assets," he said, citing strong global connections to other growing economies; high numbers of scientists and engineers still residing and working in the valley; and a historic pace of innovation going back more than 60 years, from defense to space to the Internet.

Nationally there is much buzz about so-called "cleantech" industries such as solar or wind power and other renewable energy sources, or new ways to conserve energy and reduce pollution, the Index reports.

But a close look at federal spending or investment indicates much of it is going elsewhere than to Silicon Valley, such as to Huntsville, Ala., and other places.

The reason Silicon Valley may not be getting its full share is not favoritism or social-engineering as much as because the other areas have aligned their interest groups into a cohesive single voice of government policymakers, business leaders, educators and community organizations.

Silicon Valley, while it has strong legislative leadership, is "scattered" into separate groups, Hancock said, citing another longstanding tradition of valley history.

Watch it online

Russell Hancock, CEO of Joint Venture: Silicon Valley Network, talks about the Index of Silicon Valley report in a video posted on Palo Alto Online.

Weekly Editor Jay Thorwaldson can be e-mailed at jthorwaldson@paweekly.com.

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