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How bad was it? San Jose 49th in small biz "vitality"
By Raksha Varma
January 20, 2006

A just-released study that ranked San Jose 49th out of 50 metropolitan areas in terms of small business vitality in 2003 provides perspective on just how far Silicon Valley's economy sank before bouncing back to life.

The study uses an index based on 12 criteria that American City Business Journals, publisher of the San Jose Business Journal, created to assess the top 50 U.S. markets. The small business snapshot relied on the latest federal figures -- 2003 statistics released by the U.S. Census Bureau in late 2005.

"If you look at 2003 -- it's not the best indicator of where San Jose's economy is headed," says Seshan Rammohan, executive director of The Indus Entrepreneurs, a Santa Clara-based global nonprofit of Indian entrepreneurs.

"At the end of 2000, a large chunk of businesses were closed," recalls Mr. Rammohan. "San Jose -- in addition to the neighboring communities -- all suffered after the bust. In 2004, there was an increase in VC funding, especially in the life sciences."

A range of figures was used in the study -- from the number of businesses with fewer than 99 workers in a market to the rate of change in population, private-sector employment and private-sector payrolls.

Although San Jose faced an uphill battle after the dot-com bust, which resulted in the loss of about 200,000 jobs, markets outside Silicon Valley flourished. The study highlights Miami, Las Vegas and Orlando as the top three markets to breed a small business in 2003. While these areas were prime spots for small business (for a multitude of reasons, such as the dollars that tourists pour into these locales), Mr. Rammohan says these areas ranked higher because "San Jose's economy took a plunge."

Shortly after the bust, he says, many abandoned San Jose to pursue opportunities in other parts of the country, such as Southern California, Atlanta and Texas, or abroad in burgeoning markets like India and China. As start-ups failed, the small businesses that supported them -- Realtors, office suppliers and others -- did too, he added.

San Jose's poor ranking also mirrored the losses suffered by venture capitalists as start-ups failed after the bust. Tom Shields, an early-stage VC, said "a lot of pessimism" contributed to the shortage of funding after the bust.

"Start-ups also failed after the bust because no one backed them," says Mr. Shields, managing director of Woodside Fund in Redwood Shores. "In the last two years, it's changed as more early-stage firms become confident -- and yes, migrate to start-ups."

As start-ups began to operate (and get funding) again in early 2004, more jobs trailed into San Jose and its neighboring communities. In 2002 and 2003, for example, the unemployment rate sky-rocketed to 8.5 percent (it was just 3.2 percent in 2000) in San Jose, Sunnyvale and Santa Clara, the Bureau of Labor Statistics reported. But in 2004, the rate dropped to 6.7 percent and, most recently, 5.3 percent in the last quarter of 2005.

"As VC continues to fund small businesses, you'll see the region's economy rebound," said Alexander Field, a professor of economics at Santa Clara University. "But it's going to take the next business peak to compare San Jose to its neighbors -- and to the effects of the IT boom and bust that took it to the bottom of the pack."



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