August 16th, 2002
hey, my, my,
Rock and roll will never die." - Neil Young, Hey,
Hey, My, My (Into The Black)
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.
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.
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...
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.
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.
where are the Beatles in technology? Who's gonna save
us? Ahem, who's gonna hold our haaaaand?
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.
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:
- 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
- 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
- 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.
- 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.
- 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
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
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
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
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