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Silicon Valley sees the upside in the downturn

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Bring it on. So says Keith Rabois, vice president of strategy and business development at hot Internet start-up Slide.

He’s not afraid of the economic slowdown that has put a damper on once ebullient venture capitalists who are seeing their young companies producing lots of frills and no bills. ‘I don’t believe the cycle of innovation is ever done. The best time to start a company is in an economic recession,’ he told me a few months ago.

In fact, Slide is counting on it. The San Francisco company, which makes entertaining features for social networking sites called widgets, recently lapped up $50 million in funding at at a valuation of a cool $500 million. That means Slide has a giant war chest to not only ride out tough times, but to use them to their advantage.

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As other start-ups begin their inevitable decline, Rabois and Slide’s founder and chief executive, Max Levchin, hope to recruit talented engineers and interesting technologies. For example, one of Slide’s most successful widgets is Super Poke, invented by three young Microsoft engineers from Seattle in their spare time. Levchin recruited the engineers and bought the widget.

‘I do believe that people may become more risk averse as the economy becomes more difficult. Generally entrepreneurial risk-taking requires a fair amount of confidence. I am hoping at Slide that a lot of the potential entrepreneurs decide to come work for us because we have capital,’ Rabois said. ‘That was the genesis of the last round of financing, to hire as many as we could in advance of the market becoming more difficult.’

Of course, Levchin is the poster boy ...

... for this second coming of the Internet -- dubbed Web 2.0. Last month at an industry confab, the Web 2.0 Expo in San Francisco, he drew a huge crowd. Hands clasped, eyes blinking into blinding lights, Levchin looked far more uncomfortable than in the image flashed on a large screen -- him smiling on the cover of business magazine Portfolio, balancing a giant light bulb on his forehead under the caption ‘Brilliant!’

‘It’s incredibly embarrassing and also pressure-full and all sorts of other emotional things which I’m not all that good at expressing,’ Levchin said. ‘One, to be on a cover. Two, to be a poster boy.’

A co-founder of PayPal, the online payment service that EBay bought in 2002 for $1.54 billion, Levchin has developed a cult following whose slogan is ‘Don’t bet against Max.’ That happens when your company gets a valuation of more than a half-billion dollars and claims to have figured out how advertisers can engage with consumers on social networks. He mentioned as an example a promotional tie-in with last year’s hit movie ‘Juno’: a virtual pregnancy test that 370,000 people used.

The young, rich but unassuming tycoon was born and raised in Kiev, Ukraine, a Jew living under Soviet rule for 16 years until his family moved to the United States. At the conference he had the rapt attention of hundreds of expectant entrepreneurs who want desperately to be just like him.

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Being a poster boy can be a weighty responsibility as the economy teeters on the edge. Levchin cautioned the crowd that his first four start-ups failed miserably, destroying his credit history. But, he said, he never lost his maniacal intensity. Starting companies is what he is driven to do, Levchin said, emotion creeping into his voice. ‘I love it. It’s what I live for.’

Levchin calls it ‘drive,’ the obsessive trait that pushed Jackson Pollock to splash paint on canvases. It’s what he has and it’s what he looks for in others. It’s also what will carry Slide through an economic slowdown.

Another proponent of the silver lining in economic storm clouds is Auren Hoffman, founder of Rapleaf. He says downturns help innovators. In a blog post, he opined:

The last downturn in 2001-2003 was instructive. 2001 was the breakout year for Google. Companies had to look for a more effective way to advertise and they found that buying leads on search engines was measurable, easy, and highly profitable (especially back then when the cost per click was lower). Linux also took off in 2001. Companies couldn’t afford to buy powerful Sun servers anymore yet they couldn’t afford not to do anything. So companies experimented with Linux on used Intel boxes and found that it performed quite well. And then the unexpected happened ... other companies, like IBM, observed this trend and started investing in Linux to promote their own solutions. MySQL was the same story. The free database solution was more appealing then MS SQL Server for the low-end market and Oracle for the mid-range market. We’ll see something similar happen in the next downturn ... innovations that are having trouble getting wide adoption today will take off.

-- Jessica Guynn

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