Something Ventured:
April 16th, 2001
By Brent
Holliday
Greenstone
Venture Partners
"Big
money goes around the world
Big money give and take
Big money done a power of good
Big money make mistakes "
- Rush, The Big
Money
As
the clock keeps ticking towards the end of the tech
slump, I am concentrating a little harder on what the
technology markets are doing. We have come to such a
hard landing (kind of like the parachute not opening
actually) that is gets difficult to know what your
customers are really doing these days. Over the past two
weeks I have been focusing on the enterprise Information
Technology (IT) buying habits. The market for IT
spending by small, medium and large companies is
immense. But what are they spending their money on these
days? A few data points:
·
Most large companies (>1000 employees) spend, on
average, 3-5% of revenues on IT today (for our purposes
IT includes everything from networking to software to
printers to systems consulting).
· Sectors that spend more on IT than average, like
telecom and banking, have reduced spending the most in
the past few months, according to an Information Week
survey.
· GE's Jack Welch was quoted a few weeks ago saying
that now is the time for GE to sprint ahead of their
competitors by investing more in IT.
· Look at the stocks of the software/services IT
companies:
EDS's stock is up 37% since July 2000
IBM's stock is down 14% since July 2000 (50% of its
revenue is from hardware and falling fast. Software and
services will dominate IBM's future)
Microsoft is down 25% since July 2000
SAP is down 30% since July 2000
Siebel is down 54% since July 2000
Oracle is down 60% since July 2000
As a portfolio, the software/services heavyweights are
down 21%
· What about the hardware/networking IT companies?
Dell is down 41% since July 2000
Intel is down 57% since July 2000
Sun Microsystems is down 62% since July 2000
Cisco is down 72% since July 2000
Nortel is down 77% since July 2000
Lucent is down 86% since July 2000
3Com is down 92% since July 2000
As a portfolio, your hardware/networking portfolio is
down 70%
The
thing that jumps out at you 9 months after tech started
its meltdown is that only the folks at EDS have options
worth anything these days. The second thing that jumps
out is that the market has punished the hardware and
networking sectors by a factor of three over the
software and services companies. It's a trend folks.
Enterprises buy from these companies. The companies that
are consistently missing their numbers have been
punished the most. While there are a lot of things at
play here (Nortel and Lucent sell to telcos as well as
the enterprise; perhaps the networking stocks were far
more overvalued in the run-up; etc.), the conclusion
that I reach is that software and services are where the
buying is still happening.
I
had the good fortune to engage IT executives at large
(Fortune 100) and medium companies over the past
fortnight as part of a Greenstone strategy to get to the
bottom of this downturn and see where the buying is
still happening. We had some interesting meetings and I
want to share some of the larger trends with you. If you
are part of a start-up or are thinking of creating one
in the enterprise IT space, hopefully this will help.
I
think we can skip the background where the IT guys claim
that worker productivity and overall company efficiency
has been greatly enhanced by investment in IT over the
past 10 to 15 years. The Internet has had a huge impact,
but more on that in a minute. While we have all been
living the hype of the past few years, the big companies
have been building big software projects. The Fortune
100 IT exec claimed one billion spent in implementing
SAP worldwide over the past 8 years. That's a billion
with a 'b'. The medium sized company IT folks had
similar stories, one with Peoplesoft and another with a
Lotus Notes and custom billing and accounting software
rollout. All of them claimed that they were seeing
return on that investment in terms of efficiency gain.
The Fortune 100 company has their IT shop set up as a
profit center, selling services internally, and they
claim to have made money on that billion dollar spend
already.
Interesting
sidebar on the Fortune 100 company: They spent about 2%
of revenues on IT last year. That's US$480M on IT!!!
About 4% of that, or US$20M was spent on e-business or
Internet related stuff, like the corporate web site. If
they doubled their spending on IT, assuming that the
reasons for doing so would improve the company's
efficiency down the road, they would be near a billion
in spending. That's big dough for outside companies to
get their mitts on.
Since
we have a few companies in the enterprise software space
(in which I include Internet-enabled software or
services), I focused most of the discussion around
software. As mentioned already, large-scale PC rollouts
and networking expenditures are being cut most in
enterprises, while software and services hang on. So,
it's relevant for me to focus on software for your
benefit as well.
The
picture that is emerging from the enterprise is that
many of the internal software systems have either been
built or are will be built using the help of the big
names (Microsoft, SAP, Siebel,etc.). It is more than
likely that the enterprise resource planning system, the
internal messaging systems, the customer relationship
management systems and the accounting/billing systems
are already installed or will be very soon. If you are a
company just starting today that is looking to go inside
the company and replace any of these systems, you will
have a very hard time. I have heard many a plan talk of
the ability to use the power of the Internet to deliver
major software systems through the Application Service
Provider (ASP) model. Core software systems are tough to
swap out. The money has been spent by these companies
and the employees have been trained. In other words, the
switching costs are enormous. Even if your software is
robust and less expensive, the enterprise is not
interested. If money is being spent, the big names will
eat all of the market inside the enterprise. The folks I
met over the past few weeks practically stapled this
message to my forehead. Software inside the enterprise
is not for beginners anymore.
Connecting
the enterprise inside (inside the firewall) to the
outside (customers, suppliers, mobile workers, financial
services, government) is a hot area right now. This is
where the action is for the newer companies and the
up-and-comers. Spending continues to happen here and my
small group of IT executives strongly agreed. They point
out that new data sharing standards like XML and its
many business variations are very new, but very
promising. Any manner of supply chain or external
billing/account management system using the power of the
new Internet standards is hot. Network security tops
almost everyone's list as a key spending area.
Protection of the internal operations of the company is
an increasing pain as the points of connectivity to the
public Internet increase in every enterprise. Mobile
worker applications and infrastructure are selling well.
E-learning and corporate training through the Internet
are still areas that show promising return on the IT
investment. Think of applications or infrastructure that
map the external trends for business today:
Globalization, consolidating markets, increased customer
awareness and outsourcing of IT services. When you think
of the medium sized enterprise, any sign of a slowing
market and the need for downsizing means that the IT
staff gets axed. The medium sized IT executives were
acutely aware of the need for outsourced IT management
and looking for ways to decrease the internal need for
company guys that upgrade software and troubleshoot
networks for a living.
The
IT executives everywhere are swamped. Hundreds of
companies try to sell them software or services every
year. They cannot possibly meet every potential
supplier. So, as a start-up, you have to get creative to
even get in the door to make a sale. One solution is to
make your product inherently viral. If your product is
working for a supplier in helping it do business with
its customer base, without needing to go inside the
customer, then make it so that the whole chain runs
smoother if everyone is connected. A little nudge from a
strong supplier might get you a hundred more sales if it
improves everyone's business. Think of it as a hub and
spoke model, where the positive effect of your software
increases with every user. A similar way into a larger
enterprise is to convince a point supplier of the
benefit of your software and let them sell it. For
example, you sell a sophisticated account management and
bill processing software for enterprises. Sell a bank on
your e-business enabled software so that they can use it
to standardize a large customer on their credit cards
and take the expense management cost away from the
enterprise. Either sell the enterprise your software
after the bank sells them on it or run the expense
management as a service. This real world example is how
a smaller software company made a huge sale to the
Fortune 100 company. They actually only sold a module
that plugged into the Fortune 100's internal ERP system.
They ran the rest of the expense management as a service
to the bank, who in turn got a huge account with the
Fortune 100 company. Everyone was happy and the smaller
software company can claim a large bank and a Fortune
100 company as customers.
A
final point, but is a biggie. The consensus emerging is
that you need to pick a vertical industry or two and try
to own them if you are a start-up. The broad horizontal
application company, like SAP, Oracle or Microsoft is a
pipe dream for a small company. You may get there
someday. You may create a whole new class of software
and dominate the world in it. But you will only get
financed and off the ground in the first place if you
can dominate a vertical market. The IT executives like
the sales pitch from a person that knows their industry
inside out. They love it when the person knows their
pain. Your only problem is to convince everyone in that
vertical to buy, when competition is a natural force
against giving everyone the edge that your software
creates. Nonetheless, you stand a better chance at
revenue when you have a product that requires less
adaptation.
Every
industry is different and 100 IT executives from a
variety of industries would give you 100 different views
of the world for selling IT to them. It takes far more
research and understanding of the markets to find a
unique product in a hot market. It takes incredible
people to build the product and sell it a million times.
None of that ever changes. But today, the enterprise IT
market is telling us a few new things and we had better
listen if we want to make a buck in the next year or so.
Random
Thoughts -
-
A few weeks ago, eight to be exact, I went out on a big
limb and suggested that April 15th is when you should
set your investment alarm to wake up again. Based on
data that I had gathered that week at a technology
investment bank's annual gabfest, I thought that our
downturn was a year long, starting last October. The
market is smarter than all of us, but historically it
predicted the good news in the industry (i.e. breaking
out of a slump) 6 months before it actually happened in
the real world. Therefore, I fearlessly predicted that
the bottom would be around now. Since then, I have
become more of a slow recovery fan. It is true that the
market actually went up on bad news last week for the
first time. Another sign of the bottom is when Dell,
Motorola and others say that things continue to be bad
and the market jumps up. So, to be a fence sitter, I
will gladly take the accolades if I did in fact predict
the upswing in April (1 week late but who's counting).
However, I have now set my sights on early 2002 before
we actually see a consistent climb out of the woods. It
will take that long to work out all of the kinks in the
economy, I think.
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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