Santa Clara Valley Historical Association

The millennium dawned brightly. The effects of the Y2K bug were slight to none. Optimism about the future still seemed high. But there had been a few dark clouds earlier, and by the end of 2000 they were developing into a full-fledged storm.

During the previous five years, there had been occasional warnings from analysts that what went up inevitably had to come down. These were swept aside by rising expectations, by stock market prices that continued to climb, by the rush of companies getting venture capital funding if their names ended in "dot-com." There had been warnings that new companies without solid business practices or solid profits had to fail. These also were swept aside as "old economy." The "new economy," some said, now held sway and if some dot-com companies weren't yet profitable, the ever-surging growth of the Internet soon would make them so.

But not even a gold rush mentality could repeal the laws of gravity or basic economics. As 2000 progressed, investors fearful about a lack of short-term profits began getting nervous and backing out. As more and more fled, a stock market roller coaster began, with the most common direction being down.

As CNET.com summed up at year's end, "It was a tough year for technology. Investors fled the online shopping sector . . . leaving Web companies to go belly-up and giving traditional retailers a leg up. After starting 2000 with strong sales, computer makers were blindsided by soft demand in the second quarter and the collapse of growth during the Christmas holidays. The 451 IPOs in 2000 (posted) an average loss of 15 percent by mid-December, compared with an average gain of 194 percent in 1999. Venture capitalists are still flush with cash, but they have become highly skeptical of most business plans and don't think many start-ups are worthy of their money."

Explanations were sought. CNN.com ascribed the dot-com implosion to "a combination of poor business planning, intense competition and weak advertising markets (that) pushed scores of dot-com companies to the brink, wiping out billions of dollars in market capitalization and sending share prices tumbling."

Most emblematic of the collapse was Pets.com, launched as an online business selling pet supplies and accessories direct to customers. Its striking commercial featuring a sock-puppet dog captivated Super Bowl television viewers in January. The company went public in February, but never managed to attain the critical mass of customers sufficient to support an ambitious business plan. By November, with venture capitalists declining further funding, Pets.com closed its doors. Its stock, which had sold for $11 per share in February, was worth 19 cents at the time of liquidation.

A similar fate would await Webvan, a Foster City-based online credit-and-delivery grocery business. It, too, had ambitious aspirations, but a lack of management experience in the supermarket industry hampered those efforts, as did lavish spending, which far exceeded sales growth. Webvan reportedly contracted for $1 billion worth of warehouses, bought 30 powerful Sun Microsystems servers, dozens of Compaq computers and several Cisco Systems routers, more than eighty 21-inch color monitors and more than 100 Herman Miller chairs topping $800 each. The company ran out of money in 2001 and donated its stores of non-perishable foodstuffs to local food banks.

Webvan's collapse wasn't the only bad news of 2001. Even before the terrorist attacks of Sept. 11 weakened an already shaky economy, most of the high-tech industry was caught in a slump of unprecedented severity. Revenues for the 2,400 member companies of Semiconductor Equipment and Materials International saw revenues plunge more than 30 percent from the previous year. Dataquest said the chip sector had suffered "the worst industry decline in the history of the market." Even market leader Intel saw a revenue drop of more than 22 percent, and it was estimated that the semiconductor industry worldwide had lost $100 billion. Personal computer sales fell for only the second time ever. Palm reported a 44 percent decline after celebrating four consecutive quarters of 100 percent revenue growth a year earlier. Cisco Systems posted its first quarterly loss in 11 years as a public company. Sun Microsystems had a yearly revenue plunge of 43 percent. Exodus Communications was forced into Chapter 11 bankruptcy protection.

Carnage from the dot-com meltdown was everywhere. News.com summed up the ensuing blame game by ascribing the collapse to "day traders who gambled on obscure companies, mid-level engineers who cashed in stock options and retired at 29, Wall Street analysts who preached 'eyeballs, stickiness and price-to-sales ratios,' forecasting companies that predicted exponential growth and business publications that canonized the rich and gave others hope of striking similar fortunes."

Even through the gloom, though, there were some possibly positive notes.

Apple Computer had taken a big loss in January 2001, but quickly adjusted and got back in the black for the rest of the year, aided by the introduction in October of a new product, the iPod. The tiny personal digital music player, a Mac-compatible device with a 5 GB hard drive, was said by Steve Jobs to put "1,000 songs in your pocket."

The widespread industry contraction pushed Hewlett-Packard and Compaq together, although heirs of HP's founders came out against the deal and worried it would undermine the legendary "HP Way" corporate culture.

And tough times could toughen already solid companies. Even before the height of the crash. Adobe Systems had faced declining revenues and begun restructuring. Losses at Cisco and Sun, among others, were prompts for them to change.

This was Silicon Valley, after all, where failure — even a big failure — is not the black mark it would be elsewhere and where resiliency, adaptability and problem-solving are a way of life. The valley had gone through up-and-down cycles before. This was one more.

Read how Cycles are a Way of Life in Silicon Valley

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