Something
Ventured:
April 4th, 2003
By Brent
Holliday
Greenstone
Venture Partners
"From
nine till five I have to spend my time at work,
The job is very boring, I'm an office clerk,
The only thing that helps pass the time away,
Is knowing I'll be back at Echo Beach some day" -
Martha And The Muffins, Echo Beach
How
the waves of hype and anti-hype cynicism have affected
early stage investors ability to time things right:
1996 - "I don't believe that the Internet will ramp
according to the forecaster's predictions. And what is
your business model anyway? We'll pass." Oops.
Missed the frenzy.
2000 - "You're opportunity is not in a hot area of
technology (B2B, optical, etc.) that we are
concentrating on right now, so we will pass." Oops.
Didn't see the downturn coming.
2003 - "That sector has been really beat up. No one
is buying right now. It has a sick value chain. We'll
pass." Oops? Is the timing right?
It
seems to me that there continue to be many mini-bubbles
within the larger bubble of technology in the past few
years. These boomlets have come and gone and continue to
this day, despite the overall climate (can anyone say
WiFi?). As the amount of available capital surged in the
late 90's, the sheer number of companies funded to go
after a new market opportunity doomed everyone in that
new segment because a nascent industry cannot support 15
companies doing essentially the same thing. Hype became
the parasite that killed its hosts.
Want
an easy scapegoat? Blame the VCs. Too much money chasing
too many companies in a declining overall economy adds
up to a big fat zero. One mantra among the more
conservative VCs was, "if it's on the cover of Red
Herring, it's too late to invest.". {In a
deliciously ironic twist, Red Herring is now in the
trash bin} But most of the VCs were not conservative and
put the money out there whenever they felt the pressure
of the hype. If VCs were the sheep following the herd,
well, the herd had a bit of famine lately. The good news
now, I guess, is there are fewer sheep.
But
all of this money, chasing all of this innovation over
the past four or five years has led to some real
advancement. It is so easy to be cynical when you see
companies with $95M invested and zero revenue being sold
for $4M in scrap equipment. But not every dollar was
pissed away on Herman Miller chairs and first class
plane tickets. A lot of very smart and dedicated people
created some very useful stuff. Some of it has found
customers in the worst overall market conditions in a
generation.
I was
in San Jose this week attending a joint Voice Over the
Net (VON) and Fast Net broadband access conference. It
struck me as I spoke to vendors, customers and analysts
that here was an example of the reality after the
hype... the hype echo. Voice over IP and Broadband
Access. These are victims of the hype machine and
subsequent failure to live up to expectations. These
concepts were a bit ahead of their time for a variety of
reasons, which is, of course, easy to say in hindsight.
Voice over IP will dominate analog voice. We will all
have our 50MB/s connection to the home. It is a question
of when, not if.
There
has been enough carnage in these tech sectors (and many
others) that the customer base can now support the few
companies left. The last man standing theory appears to
be working, especially for those that have grabbed
intellectual property and know-how from companies that
have run out of time and money. In speaking to VoIP
companies about the VON show, some mentioned that last
spring there were still too many booths and not enough
customers. The result was that only 25% of booths were
even occupied on the final day. The companies just gave
up and went home. Now, a smaller show, a few more
customers and voila… optimism abounds again.
The
innovation of the past couple of years has allowed VoIP
to improve so much that the talk of the show was the
company that wasn't even there. The dramatic success of Vonage
was on everyone's lips. They sell voice over broadband
(cable modem or DSL) at a flat all-you-can-eat price
with free long distance in Canada and the US. It works
with your existing phone, too. You don't need a fancy
new SIP phone. The really cool part is that you can get
a phone number from anywhere if you don't want to keep
your own. For instance, one guy gave his mother in
Sweden a New York City phone number that she answers
over her cable modem connection to the Net. He dials a
local number in Manhattan and chats with his Mom 4,000
miles away.
Over
at the broadband access conference, the reports of DSL's
demise in the US, when compared to the cable modem
dominance, appear to have been greatly exaggerated.
Companies left standing to sell to the telcos are
finding increasing net additions that are passing the
growth of cable modem subscribers. The innovations of
the past few years have extended reach, simplified
installation and provisioning and lowered overall cost
for the telcos. Many charred bodies of companies that
made some of that innovation lie on the side of the
road. But the industry appears to have turned a corner
and the hype of video over IP may finally be closer to
mass market reality.
When
the cable company can do voice and the telco can give
you TV content, we will have a very interesting world as
consumers, don't you think?
The
challenge going forward is to avoid the hype-bust-hype
echo cycle of innovation and progress that has been a
fixture of the technology industry. There are enough
cynics from the most recent downturn to keep the hype of
any new thing from getting "breathless". Even
the current WiFi hype has been muted somewhat. Maybe we
are learning.
The
really good news about the hype echo in some industries
is that it creates new opportunities to invest for VCs
and for real companies to grow as the benefactors of all
the work done before them. So, you might be the last man
standing from the original hype or you could be the new
kid on the block that timed the real evolution of the
market just right. Either way, you are bound to make
some hay. And the investors should be learning from past
mis-judgements to help make some hay with you.
Random
Thoughts –
- Something
Ventured = Weblog? - Maybe I'm just a little
slow. It struck me the other day that my 5 years of
archived rants, raves and sometimes philosophical
wanderings here on T-Net are a primitive form of weblog.
I don't use the format that a typical weblog does, but I
do print the responses and my responses to those
responses and so on. The reason it struck me is that
August Capital started VentureBlog
the other day as a semi-real time forum of life as a VC.
In fact, another VC, named Tim Oren, has had one going
for a while at PacificaVC.
I wonder if these guys can concentrate on their day jobs
if these things get popular... but for now, they are
great fun and have lots of useful information from a
uniquely VC perspective.
Letters
From Last Time –
The rant
against there being serious damage to Canadian - US
business relations sparked some commentary. All the
headlines in Canada continue to be counter to my claims
that there will be no long term damage, but I'm sticking
to my guns (so to speak). After all, we have an imminent
regime change here in Canada, too.
Brent:
Your column this week struck a chord and, I believe, was
right on. I was arguing this topic with members of my
family over the dinner table on Sunday and the point I
kept trying to hammer home is that economics will
continue to drive our relationship with the US, not
wartime backlash. It's about time we stopped our little
bout of navel-gazing and got on with business.
In fact, I've always thought the relationship between
our countries' leaders is more problematic than our
differing foreign policies. While Bush Sr. had a great
friendship with Mulroney, Bush Jr. and Chretien maintain
nothing more than a cool formality. If we think that
personalities and personal friendships don't matter in
politics, we're wrong.
Makes you wonder how much things will change when we get
a new leader.
Regards,
Andrea Carson
Brent
-
Good article! I've been "working with
Americans" for the last 4 years - and you are right
on about their main focus being the almighty
dollar...with a close second the almighty USA itself. If
something doesn't directly impact either of those golden
chalices...it won't cause a ripple in the American
psyche. I could bore you for hours with tales of my
discussions in airports with various Americans - there
is only one world, and it is the USA. As a matter of
fact, one American asked me what I thought the major
difference was between Canada and the USA...I replied
that "Canada sees itself as part of the global
community...the US sees itself as the global community,
with everyone else circling them" Surprisingly -
the American agreed!
Karen Neufeld
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).
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