Tech Bust 2.0? Maybe Not

If you've been following the NASDAQ lately, you know the tech-heavy stock index is flirting with the number 5,000. The last -- and only -- time it hit that level was in the year 2000, the peak of the dot-com bubble.

Then came the giant sucking sound, as company after company collapsed and many tech workers picked up and left. Santa Clara County lost about 12,500 residents in one year and San Francisco nearly that many.

To understand why that happened -- and whether we're in for a repeat -- let's take a quick trip back to that giddy, effervescent era.

Britney Spears' "Oops! ... I Did it Again"  played over and over on the radio. President Bill Clinton declared the state of the union the "strongest it's ever been." And America's favorite TV pitchman was a sock puppet -- the manic mascot for Pets.com,  a new pet food and supply delivery company based in San Francisco.

The multimillion-dollar commercials made the puppet so popular that he appeared on prime-time talk shows and even had his own balloon in the Macy's Thanksgiving Day Parade. But Pets.com imploded the same year it went public. Today, at the Computer History Museum in Mountain View, the sock puppet sits in a glass case in an exhibit on the dot-com boom and bust.

“It’s a really cute character," said Marc Weber, the founding curator of the museum's Internet history program. "But they spent so much money on these kinds of things that there was less left over for actually building a viable business."

Pets.com is a prime example of the sort of magical thinking that led to so many dot-com failures and sent the NASDAQ plunging almost 80 percent in two years.

“During the boom, a lot of companies didn’t have a concrete idea of how they would actually make money," Weber explains. "So the business model -- if you want to call it that -- was to build a brand, get more and more eyeballs coming to your site, and look for more investment."

These were the early days of Internet commerce -- basically, uncharted territory. Excitement over the mere potential of the Web swept up both seasoned investors and the eager young college and business school graduates who flocked to the Bay Area for jobs.

Pennsylvania resident Jessica Downey said she was just 23 when a startup technology magazine lured her to San Francisco.

"We had huge launch parties," Downey recalled. "There were runway models and sword swallowers. It was completely surreal and unbelievable."

But the magazine went bust about seven months after it launched, Downey said.  Bay Area rents plummeted as she and thousands of other unemployed tech workers headed back home.

"Going across 80, you would pass five or six other Ryder Trucks going back to the East Coast," she said. "There just weren't jobs."

Bubble 2.0?

The jobs are back. So is heavy venture capital investment in tech.

But are we on the verge of another massive industrywide bust?

"Today is different," said Stephen Levy, director of the Center for the Continuing Study of the California Economy, a nonpartisan think tank based in Palo Alto.

Levy has been studying the state's boom-bust cycles for more than 40 years and is considered a leading thinker on the issue.

It has taken companies like Apple and Google and LinkedIn and eBay years and years to build a customer base, he explained. "They have real sales and products and profits," he added.

Across the tech spectrum, the growth is more robust and solidly founded. For the most part, startups have real business plans, which investors scrutinize with a much more skeptical eye than they did in the Pets.com era.  And, even if there were a crash, tech now overlaps with so many other business sectors that it's too diverse and complex to bring down in one fell swoop.

Levy said he's not worried about a sudden burst. What does keep him up at night is the state of the Bay Area's infrastructure.

"I worry that we're not going to build enough housing, that we're not going to increase transportation capacity either on the roads or Caltrain or BART,"  Levy said. "I worry that companies that want to be here won't be able to because we can't or are not willing to house the growth."

So, if you're among those hoping to see your rents drop suddenly like they did back in 2001, sorry to burst your bubble. Perhaps the better question is whether the tech industry will outgrow the Bay Area, prompting the next generation of companies to take their talent — and their tax dollars — somewhere else.

Curious about the boom/bust cycle that is reshaping the Bay Area? Check out our Boomtown series.