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Danger Signs for the Silicon Valley

Will the next great tech company join Apple, HP, Google or Intel in claiming Silicon Valley as its birthplace? A new report brings the odds of that happening down several pegs from what most observers would have thought likely as recently as a few years ago.

The preamble to the annual Index of Silicon Valley states "The Silicon Valley has entered a new era of uncertainty, with a set of vulnerabilities that could compromise our long-term prosperity. Our continued ability to import and develop talent, fund innovation, and rely on state government for overall support are seriously in question. We are a region at risk."

The report also warned Silicon Valley is "disinvesting in education and we're not cultivating talent" and that a recommitment to investment in education is needed.

The Index and accompanying analysis with a call to action was prepared by the Joint Venture Silicon Valley Network and the Silicon Valley Community Foundation.

The report lays bare many reasons for concern, start with the region lost roughly 90,000 jobs between the second quarter of 2008 and 2009, bringing total employment down to 2005 levels.

Office vacancy rates are at the highest rate since 1998. The continued decrease in demand for commercial real estate combined with the creation of 1.7 million square feet of new commercial space have driven commercial vacancies up 33 percent in 2009 over 2008.

Total venture capital investment was also down in 2009 (though an uptick in activity was reported in the third quarter). The report (available here in PDF format) said growing areas of investment are in Industrial/Energy, Media & Entertainment, Biotechnology, and Medical Devices, which are gaining at the expense of tech.

On the plus side, jobs at jobs at Silicon Valley businesses that provide products and services designed to reduce our dependence on fossil fuels and other "core green economy" jobs increased eight percent between 2007 and 2008. In fact, the report suggests this transition to green may be one of the ways for the region to bounce back.

"I think the assessment is very realistic," said Tim Bajarin, a tech consultant to numerous Silicon Valley firms for decades. "The bad economy has hurt most regions and Silicon Valley's been slow to recover. That's not news. Jobs take time to come back after any recession."

But there are plenty of bright spots, he added. "This is still the center of activity for a lot of semiconductor research. The PC segment's been down but now showing signs of growth. Semiconductors are looking better and the growth in netbooks and smartphones benefit companies like Intel and Apple over time."

Bajarin isn't sure the next great tech firm will emerge from Silicon Valley, as he notes one of the biggest recent high growth success stories, Facebook, actually moved to the Valley from Massachusetts, where it was formed.

"They realized this was the hot spot for talent," said Bajarin, who heads Silicon Valley-based Creative Strategies. "The next big company may not come from a garage in Silicon Valley, but history suggests the venture capital will come from here and companies that are growing eventually find their way here because of all the talent."

David Needle is the West Coast bureau chief at InternetNews.com, the news service of Internet.com, the network for technology professionals.