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Born Again

Silicon Valley, the site of busted dot-com dreams, is bustling once more as entrepreneurs focus on business' I.T. infrastructures

Venture capitalist Ann Winblad's office sits on the edge of South Park, a leafy urban oasis in an industrial area of San Francisco and the frequent site of exuberant launch parties in the dot-com boom years.

It's an exciting time to be auditioning innovation, says Winblad of Hummer Winblad Venture Partners.

"It's an exciting time to be auditioning innovation," says Winblad of Hummer Winblad Venture Partners.

Photo by Jeffery Newbury
The mood back then sometimes went beyond exuberance and into manic territory. Such as the time a stranger, claiming an emergency, talked his way past a security guard at Hummer Winblad Venture Partners. His business plan was later found taped to the men's room wall. "I don't want those days of the plan on the restroom wall to come back," Winblad says with a laugh.

The giddy days in the greater San Francisco Bay Area are gone. But Silicon Valley is back, and it just might be more relevant to business-technology managers than ever, as it hosts a new crop of startup vendors that are more focused, more globally connected, and more disciplined than their predecessors. Their work is centered on creating better, faster, and cheaper IT infrastructures. Among the highlights are startups developing software as a service, data security technologies, and virtualization software.

"Higher-quality companies are getting to the starting line," Winblad says of the new startups. "We're in a very vibrant cycle right now. It's an exciting time to be auditioning innovation."

This part of Northern California is historically the country's most important region for technology development. Ten to 15 years ago, San Jose and its neighboring cities were the headquarters for computer and chip manufacturers--hence the name Silicon Valley. Today that designation extends to any tech development on the 60-mile strip of land that starts in San Jose and travels north, ending near the Golden Gate Bridge.

Winblad's firm helped launch 11 Valley startups in the past 14 months, including ActiveGrid Inc., which introduced an application server for grid computing in April, and Five9 Inc., whose virtual-call-center software automatically routes calls to centers with available capacity. And earlier investments seem to be paying off. Voltage Security Inc., funded three years ago by Hummer Winblad and Morgenthaler Ventures, is seeing its encryption software being bought by major companies such as Fujitsu and Siemens, says Rishi Kacker, one of Voltage's co-founders.

The recovery is visible in the South Park neighborhood next to Winblad's office, where the groups of software-startup employees congregating at lunchtime have grown in recent months, and the din at Caffe Centro has risen, with a line of software developers, VCs, and young business executives once again snaking out the door. It can be seen in the cities just south of San Francisco, such as Burlingame, Palo Alto, and Menlo Park, where venture-capital firms are investing more in new companies than they did last year. Menlo Park also is the site of IBM's venture-capital unit, which encourages selected startups to explore technology areas that complement its product lines. (For more details about IBM's VC unit, see story, "Big Names Keep An Eye On Small Startups.)

Hangouts like Buck's are again filled with the sound of venture capitalists talking about deals.

Hangouts like Buck's are again filled with the sound of venture capitalists talking about deals.

Photo by Jeffery Newbury
At Buck's--a restaurant in Woodside, a hamlet close to Menlo Park--the VCs again "are talking about the new half-billion-dollar fund they just created," says owner Jamis MacNiven.

Nationwide, venture-capital investments increased $1.5 billion last year to $20.4 billion--the first annual uptick since the peak year of 2000, when investments hit $94.6 billion before plummeting over the next several years, according to VentureOne, Ernst & Young's venture-capital advisory group. Last year, Silicon Valley got nearly 30% of VC money, compared with 14% in 1995 and 35% in the aberrant year of 2000.

Silicon Valley is holding its lead as the most popular place to launch technology ideas. Vehicle-choked roads, a skyrocketing cost of living, and one of the lowest-ranked state public-school systems in the nation haven't discouraged the Valley's bright-eyed entrepreneurs: In 2004, Silicon Valley established 157 new venture-backed companies, compared with 54 in New England, 39 in the New York metropolitan area, 30 in Washington state, and 28 in Texas, VentureOne says. These startups are grounded in fields ranging from IT to medical devices, but of these, Silicon Valley has the highest percentage of technology startups.

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