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The Hype Echo
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

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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