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Innovation Economy

The tech bust: 10 years after

Today’s business landscape is marked by leaner firms — and more focused growth

By Scott Kirsner
Globe Correspondent / February 20, 2011

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A decade ago, as a recruiter for a data storage company called StorageNetworks Inc., Jason Jacobs was flying around the country to help his employer open field offices. “We were hiring six or 10 people every week, and at one point, I was living out in San Mateo for a month to get our West Coast office opened,’’ he recalls. “It was a crazy time.’’

The Waltham company, founded in 1998 to help fast-growing dot-coms and big corporate customers deal with the explosion of data, went public at just two years old, without ever having turned a profit. Its shares began trading on the Nasdaq stock market at $27 and ended their first day at $90.

“I was a year out of college, and on paper, I was worth several hundred thousand dollars,’’ says Jacobs. “We all thought we were going to be millionaires.’’ But in July 2001, Jacobs was laid off, as StorageNetworks eliminated 220 of its 670 jobs. By 2003, the company was liquidating assets, and its stock was worthless.

Looking back 10 years to the waning days of the dot-com frenzy, 2001 seems to mark a phase shift for the Massachusetts tech sector.

Overnight successes like StorageNetworks and Sycamore Networks Inc. were crumbling like sandcastles at high tide. (Sycamore, a maker of networking equipment, lives on in Chelmsford but with a quarter of the employees it had then and a stock worth far less.) The biggest technology company ever built in Massachusetts, Digital Equipment Corp., had been sold to Compaq Computer Corp. in 1998, which in turn was sold to Hewlett-Packard in 2001.

Lycos Inc., part of the first wave of Internet portals, had been sold to a Spanish telecommunications company for $12.5 billion. CMGI Inc., the publicly traded Internet holding company in Andover, was about to abandon its $114 million deal to name the New England Patriots’ new stadium CMGI Field as its balance sheet deteriorated.

Rapid evolution is encoded in the DNA of the tech industry, but it’s still surprising to look back at a list of the state’s biggest employers from 2001 and see how big CMGI was (5,718 employees). Arch Wireless Inc., a Westborough paging company, had 8,350 employees. It no longer has an office here and employs only nine people in Massachusetts, following a 2004 merger. Polaroid Corp. had 8,865 people on its payroll. Defense contractor Raytheon Co. had almost 20,000 more employees globally than it does today.

Today’s tech sector, in a word, is smaller. Tech employment in Massachusetts was hit harder than the rest of the country, with 47,000 jobs vanishing from 2001 to 2009, according the Bureau of Labor Statistics. The two industries that suffered the most were computer and communications equipment manufacturing, where half of the jobs disappeared.

But in the shadow of that decline, employment in software and information technology — services such as getting databases to talk to each other or designing websites — has been growing.

The size of the average tech company, meanwhile, has been getting smaller. State data show that even as tech employment contracted, the number of companies increased. The average employment of an information technology company was 24 in 2000; by 2008, it was 17.

Consolidation has undoubtedly wrung thousands of tech jobs from the state’s economy. Local companies snapped up by buyers like IBM, Cisco Systems, or Oracle Corp., for instance, may no longer need as large a sales and marketing staff, as those functions get taken over by the new parent. Sometimes, companies are acquired for product lines alone, with the people who developed them sent packing.

Ted Equi, part of the Digital Equipment team that developed what was once the world’s fastest microchip, says, “When I started at Digital, the company did the product concept, design, R&D, manufacturing, and shipping of chips in one facility, in Hudson.’’ When Digital was sold, he says, “the center of gravity moved to Compaq’s headquarters, which was Houston.’’ Equi now works at MIT.

Today’s tech companies can set up shop without buying as much equipment or hiring as many people. CloudTree Inc., a Waltham start-up developing features to help wireless companies retain subscribers, has about half a dozen employees but owns no hardware, aside from employees’ laptops. The company, which has raised just over $1 million, develops and tests its software on servers that it accesses remotely, paying by the hour, instead of buying the gear itself. “It’s so capital efficient,’’ says Kurt Dobbins, a cofounder.

Compare that to Dobbins’s dot-com era company, Ellacoya Networks Inc., which needed 225 employees and $145 million in venture capital.

Drug development and scientific research represented two bright spots for the Massachusetts tech sector over the last decade. (The government’s data wonks consider these industries part of high tech.) Employment in scientific research and pharmaceuticals rose 33 and 24 percent, respectively, between 2001 and 2009, according to the Bureau of Labor Statistics. But pharma is still relatively small, employing only about 10,000 people in the state.

Two other technology subsectors called crucial to the state’s future are even smaller. The Entertainment Software Association last year estimated there were about 1,300 jobs developing video games in the state. And when the Massachusetts Technology Leadership Council, a trade group, tallied robotics jobs in 2009, it found about 2,500. The state’s biggest robotics company, iRobot Corp. in Bedford, which makes products like the $450 Scooba floor-washing robot, has about 650 employees.

The local venture capital industry, which supplies the financial fuel that gets young companies through their first few laps, has gotten smaller, too. “I can think of a dozen firms that were active in 2001 and aren’t active now,’’ says Jeffrey Bussgang, an investor at Boston’s Flybridge Capital Partners and author of the recent book “Mastering the VC Game.’’

When the economy began to recover from the 2001 recession, says Ross Gittell, a professor at the University of New Hampshire, much of the tech manufacturing done in this country began to shift to the Far East. Incredibly, a single Taiwanese company, Foxconn Technology Group, recently announced plans to increase its workforce by 400,000 this year. (Foxconn makes Apple’s iPhone, among other products.)

David Hayes, president of the Cambridge recruiting firm HireMinds LLC, observes that many people were sucked into the tech job market at the height of the dot-com craze by generous salaries, signing bonuses, and lavish perks. Some of those people “were laid off and have never found their way back into the tech field,’’ he says. The 2011 job market, he says, is characterized by smaller companies in social media, software-as-a-service (Internet-based applications paid for on a subscription basis), and companies developing analytical tools.

Some people working in Internet start-ups a decade ago have found their way into the pharmaceutical industry. Programmer Simon Rakov was laid off in 2002 and spent five months looking for his next job before being hired by AstraZeneca PLC, a British company with operations in Waltham. He took a biochemistry course so he “could at least speak the same language as everyone else,’’ he says.

Even David Wetherell, the CMGI founder who once had one of the hottest hands in Internet investing, has since moved from the Web to the wet lab. Wetherell runs a Connecticut venture capital firm called GBP Capital, which has backed companies working on arterial stents, vaccines, and cancer treatments.

Jason Jacobs, the former StorageNetworks recruiter, was only unemployed for a couple months before finding his next job, working in sales for an e-learning company. Then, in 2008, he supervised the development of one of the first fitness-related iPhone apps published through Apple’s online iTunes Store.

RunKeeper enables runners, cyclists, and even cross-country skiers to keep track of stats like average speed, and broadcast their progress in a race live on the Internet. (The app is free, but the company sells a $5-a-month subscription to its website that offers additional services, such as advice on marathon training.)

The company has raised about $1.5 million and has 11 employees in Boston’s South End. Jacobs says his team built the first version of the RunKeeper app for “well under $50,000, and a lot of sweat equity.’’

“We’ve taken a really lean, thoughtful approach,’’ says Jacobs, who looks back at the dot-com era as a time when companies were encouraged to envision exponential growth but often had trouble building enduring businesses. “But we have humongous ambitions,’’ Jacobs says. “We believe we can build a big business, with hundreds of employees, around collecting and making sense of information about exercise and people’s health.’’

Without venture capitalists and stock market investors funneling money into Massachusetts start-ups the way they did in the late 1990s and early 2000s, the local tech scene isn’t seeing many “Chia Pet’’-type companies, which spring from nowhere to IPO to several hundred employees seemingly overnight. The industry’s future seems dependent on smaller companies like RunKeeper or CloudTree, experimenting in niches that could turn into big markets someday, and planning on slower growth.

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.