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Rational Exuberance
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
August 16th, 2002

By Brent Holliday
Greenstone Venture Partners


"Hey, hey, my, my,
Rock and roll will never die." - Neil Young, Hey, Hey, My, My (Into The Black)

Today is the 25th anniversary of the alleged death of the King of Rock 'n Roll. From all that we have been hearing lately, the technology industry, especially information technology and communications, has expired as well. Like Elvis, there are many who believe that technology hasn't really died, it's just gone into hiding. But it's hard to keep the faith in light of media bombardment to the contrary.

Here are some examples of recent comments and facts that make us wonder if we shouldn't go into the flower business:

David Faber of CNBC is one of a chorus of people that are questioning whether there was much, if any, value created during the tech boom of the late 1990's. With Worldcom and the rest of the telecom sector unraveling, the incredible debt levels achieved for things like 3G licenses, restatements of technology company earnings that have been announced and those yet to be announced, David is wondering if we didn't just have a massive Ponzi scheme fraud perpetrated on the public. He is looking for an analysis of restated earnings from all companies in technology and telecommunications so that we can understand what the real growth was.

There is a talk radio show on CNET radio (the all-technology station broadcast in the Bay Area and Boston and on the web) about the stock market, called Stock Talk. This is a show with an audience made up of certified tech junkies. The host spends all three hours every day telling these people that technology is NOT a place to put their money. On CNET! The advertisers on CNET sell the latest in Palm accessories and 802.11 cards. And the guy is telling the listeners that tech sucks! I wince every time I hear the CNET announcer in his best monster truck radio voice say, "Where does the money go when it leaves technology? Rob Black knows. This is Stock Talk" I can just see the product manager from Siebel, stalled in traffic on the 101 listening to his fix of technology radio with tears welling up in his eyes when he hears that. I'm surprised the suicide rate hasn't tripled there. Rob likes to tell his listeners that they need a "12 Step" program to wean out of technology as an investment. To wit, if you are still holding Nortel stock that you bought at $80, how long would you have to hold it to make your money back? If you bought CP Ships tomorrow, you might make 20% on your money in the next year or two. Will Nortel do that?

The tech heavy NASDAQ has had nearly 30% of its listed companies drop below $1 and be de-listed to the OTC BB or SM markets, the USA equivalent of the TSX venture exchange. Bu-bye tech companies that can't make money but made it public during the bubble.

Ottawa released figures showing that its local technology employment dropped 33% in one year. Vancouver continues to shed jobs too, the latest and saddest being the 290 Motorola people that sprung from one of first great technology success stories, MDI.

Many analysts and reports recently are revising their estimates of spending on information technology for 2003. The consensus seems to be that 2003 will be much like 2002, with dismal overall spending. Companies are making do with existing software and hardware. CIOs are being rewarded for NOT spending their budgets. A local company with a new wireless network product was told by every customer that they should come back next year. Every customer.

The latest Canadian VC investment numbers are in and the June 30th quarter saw only $416 million invested in 188 start-ups. 1998 was the last time we saw investment this low and it may dip lower in Q3 2002. It's no better in the US, where 1998 levels are also being reached again.

>From 1995-2000 in the US, 14,463 technology companies were funded. 978 went public. 1,529 were acquired and only 1,180 went out of business (in that time frame ending Dec 31, 2000). That left 10,776 early stage technology companies backed by VCs on January 1st, 2001. Remember that during this incredibly hot time period, only 15% "exited". With no IPO market to speak of and very little M&A since the beginning of 2001, where do you think most of these companies are today? If they are alive, they have to be funded by their VCs or get cash flow positive fast. Any wonder why VCs haven't been pouring more money into new companies? There are too many to start with...


One of the big down cycles of Rock 'n Roll was the early 60's, when the spark left the music scene due to a big crash. Not unlike the double crash of dot-com hysteria and telecom spending in 2000, the day the music died was February 5th, 1959. The plane crash that killed Buddy Holly, Ritchie Valens and the Big Bopper took the wind out of the phenomenon and many predicted that Rock 'n Roll was dead. With all of the bad publicity for technology these days, you'd think we were listening to Frankie Valli and Paul Anka. Yikes. Even Elvis started crooning and making bad movies. It was as depressing to listen to the radio as it is today to listen to CNBC.

From a basement in Heidleberg, Germany, the new new thing emerged and Rock 'n Roll never looked back. It took 4 teenage mopheads from Liverpool to give it back the spark with their new sound built on the foundations of the 1st rockers in the 50's.

So where are the Beatles in technology? Who's gonna save us? Ahem, who's gonna hold our haaaaand?

OK, I'm being a bit dramatic. Locally, there are some successes in this down market. Some companies are growing and still hiring. Imagine, for a minute, that you have money, profits and foresee growth in the next year in your tech business. Look at the available talent that you can hire! Look at the cost of purchasing used equipment from failed or downsizing companies! Look at the cost of renting office space! Look at the incredible intellectual assets sitting on shelves in wound up or distressed companies that can be purchased! If you can make hay when the sun is not shining, you may own the farm when the sun comes out again.

For the majority of us, the times are not rosy and we look for reasons of hope. OK, here you go. Pray to the Buddha of technology and repeat after me:

  1. All critical systems for operating and interconnecting companies large and small are now based on technology. The paper ledger does not exist any more. We don't communicate by mail. Technology is ubiquitous.

  2. The enterprise will buy technology in heaps in 2004 and 2005 - Why? Upgrade cycles. The current stuff will be too old by then and PCs, printers, LAN gear and other networking gear will surge. Accordingly, semiconductors, network processors and components will surge. Then software applications will follow.

  3. Operational cost and complexity of business operations will drive systems integration, services, hardware and software that lowers both. It's a far more complicated, globally-trading world out there. The mantra of the enterprise is not growth, but lean operations. Growth comes later.

  4. Dynamic demand drives real-time systems: The winning companies in the future will know what their customer want and when and then provide smart pricing and delivery services. This goes for utilities, networks, grocery stores and restaurants. It's universal.

  5. As Vinod Khosla at Kleiner Perkins keeps chanting (Is he our Buddha? No, too thin.): IT spending is 0.5 - 1 % of sales today. It is conceivable that it grows to 3.5% for all of the above reasons. That's hundreds of billions in spending that does not exist today.


Sticking to my metaphor, all of the above reasons will lead technology to better days, kind of like when grunge music coming out of Seattle in the early 90's turned Rock 'n Roll back to its roots and away from MTV polished hair bands of the 80's. It will be a nice change for the industry, but not the Beatles kind of resurgence. For that to happen, we need the new new thing.

There was the spreadsheet. There was client/server computing. There was the Internet. All worthy of Beatle-esque stature. What will be the huge growth driver of the late 00's... or will there be one? Stay tuned, and keep the faith.

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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