Silicon Valley startups show first signs of life

After three years of recession, Silicon Valley is showing signs of economic recovery. But will the area that is best known for its innovation and start-up companies ever be the same?

'You have to be borderline nuts to start a company from scratch,' says Ron Palmeri. 'Those are true entrepreneurs. I share that character flaw.'

And he isn't joking as he talks about the required skill set to build a Silicon Valley start-up. As the executive vice president for San Francisco-based supplier Grand Central, Palmeri knows what he is talking about. He is a 12-year veteran of 'The Valley' and now with his second start-up.

Grand Central is on its way to becoming another Silicon Valley success story. The company goes after the fast-growing market of hosted enterprise applications, specialising in connecting different software suites in the enterprise or between vendors.

The company was founded in 2000 at the height of the internet boom, and Palmeri has seen corporate budgets freeze and employees run for cover to large corporations where they would make more money and have less of a risk of being laid off.

The proof that Silicon Valley is getting back on its feet isn't just based on companies starting to buy his services. Grand Central is receiving CVs from skilled workers who feel the storm is over and are ready to leave the safe haven of the large corporation, even if that means a pay cut. 'I now see some really smart innovators coming out from under the rocks,' says Palmeri.

Economic data is showing some mixed signs, but Silicon Valley appears to be on its way to recovering from the bursting of the internet and telecoms bubbles. The National Venture Capital (VC) Association reported in April that last year, investors were showing positive returns for the first time since 2000. Profitability of VC firms is for Silicon Valley what the canary used to be for mineworkers. With the VCs making money, new companies will be funded and start hiring.

On the flipside, anyone driving through Silicon Valley will still notice a large amount of 'office space for rent' signs and empty parking lots. Commercial rents for research and development office space have plummeted as much as 80 per cent since 2000, according to data from US estate agency Colliers/Parrish.

And since the peak of the internet hype in early 2001, the region has lost 21 percent of jobs - around 300,000 - according to data from the California Employment Development Department. Most of those were lost in hardware and software development.

But no one will even consider writing off Silicon Valley as the world's centre of innovation and as the incubator for start-up companies. Anyone that has been around long enough will tell you that the meltdown of the past years wasn't that much different from earlier recessions. It's a cleansing process where the gold seekers leave while true techies weather the storm.

'The great depression didn't affect the Moore's Law curve. Innovation just continued,' says Steve Jurvetson, managing director of Draper Fisher Jurvetson, one of the largest VC investment firms in Silicon Valley and the leading investor in companies such as Hotmail and Interwoven.

It's a challenge for any start-up to come up with new applications before anyone else does. Although the Valley is still leading in that race of innovation, Jurvetsen sees its role diminishing. In the last decade, many regions have developed competing centres of innovation. And after a highly successful start-up, its workers will often start companies of their own elsewhere. Once you've done it once, 'the mind blocks are gone,' says Jurvetson.

'What you have here in the Valley are the management teams and the network effect. But innovative ideas happen everywhere,' he says.

What is Silicon Valley?

Silicon Valley doesn't exist as an official region. The area some 40 miles south of San Francisco doesn't show on any map. The Valley is credited with the birth of the high tech sector after Bill Hewlett and David Packard ma nufactured their first oscillator in a local garage in 1939, launching HP and the myth of the garage start-up. Today the Valley houses the headquarters of technology giants such as Apple, Cisco, eBay, Google, Intel, Oracle, Sun Microsystems and Yahoo!