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

Something Ventured:
December 10th, 2004


By Brent Holliday
Greenstone Venture Partners

 

2005 Arrives

 

"Is something wrong, she said,
Of course there is,
You're still alive, she said..." - Pearl Jam, Alive

In my final column for 2004 (because I won't be publishing on Christmas Eve) I think I'll stick with the somewhat cliché "fearless predictions" mixed with a "wish list" theme. The summary for 2004 is that the world of technology is back to normal. After 3 years of ridiculous excess and 3 years of pain, the business of being in technology feels about right again. Normal growth patterns, normal cyclicality, normal risk factors and normal returns on investment. In a word... yeah, well, you get the picture.

To start, let's look at some data -

The biggest effect of any macroeconomic number for any of you in the technology business in 2005 will be the Canadian dollar. Your US$ sales are 14% less in CDN since June. Even though we are currently at $0.82 US, most are predicting that we will average $0.85 US through 2005 with the US economy remaining lukewarm and a continued policy of letting the US dollar freefall. Meanwhile, despite a very recent slide, the CDN$ has picked up a few percent against the Euro. Perhaps Euro denominated sales in the massive European economy are a focus for 2005?

A trend in Canadian venture capital investment in start-ups has been more dollars invested in the first 9 months (over 2003) but in fewer companies. This means larger amounts of capital per deal which is a good trend. The more we put behind our entrepreneurs, the better chance of winning against typically better funded US competitors. We'll see if it holds over the fourth quarter and into next year. In the US, VC investment was flat to down in the 3rd quarter after an eight quarter in a row recovery. Interestingly, the levels that the US has appeared to flatten around are those of 1997/98. In both Canada and the US, life sciences related deals are soaking up more money than they used to (in the late 90's it was dominated by IT), but IT is still the main place VCs put their money at the early stage.

Where is the growth in IT and Communications in 2005? Well, the pundits predicted IT spending would be up 4-5% in 2004 and it looks like 3% growth is likely. That is below GDP growth showing that IT spending did not pick up as quickly as many had thought. In 2005, prognosticators have said the replacement cycles, security and wireless/mobility will drive IT spending up 5% in 2005, according to Gartner. Other surveys of IT executives indicate that wireless/mobility spending will be up a whopping 36% in 2005 in the enterprise. The consumer wireless market will be sizzling as well, with Gartner saying a continued double digit growth rate for handhelds (phones and PDAs) after a sizzling 26% rise this year. The hottest sector to be in other than wireless devices and applications is security which IDC says will power job growth as well as sales in the enterprise.

In a case of the industry getting too far ahead of itself when seeing numbers like the ones in the wireless industry, semiconductor demand will likely see a 2% decrease next year, wiping out earlier predictions of 7.6% increases. The reason is mainly that supply in the wireless sector has become too bloated as many vendors chased the handset market. The sheer volume of baseband and application co-processors in the wireless market helped swamp some growth expectations in other chip sectors. The cascade of slower chip sales affects the semiconductor equipment companies and the electronic design software companies and so on. This is regular cyclical behaviour of this market and it not a harbinger of bad times in general.

The telecommunications equipment business is still nowhere near robust, except of course, in wireless equipment (Sprint just announced US$3B in upgrades to 3G networks over the next couple of years). The growth in demand for higher bandwidth items and the bottlenecks growing into the networks lead me to believe that the nuclear winter in this sector is over. Rogers and Telus will slug it out for the vaunted "triple play" of voice, video and data and VoIP access is growing like wildfire. Eventually the network upgrade spending will increase allowing companies that make the boxes and companies that make the components for the boxes to start to make money again.

Every technology cycle has its share of hype. The end of 2004 is not without its over-hyped technology sectors. Nanotechnology (which is a broadly defined area meaning many different things) is still high on the hype meter. I spent a couple of days in Edmonton where the highest concentration of facilities and minds in the nano/micro world is being assembled. There is exactly one company so far that has revenue with nano-machines or nano-materials and it is a company that sprays a coating on heavy pipes used in gas and oil extraction and refinement. Everything else out there is years from commercialization and those touting investments in this are need to be very, very patient.

Another area of ridiculous hype is the Internet software related to social networking and/or blogging. Social networking sites have blossomed everywhere on the Net. There use and value is directly positively correlated to whether or not you can get a date at the end of the interaction. Business networking sites are not entirely useful. File sharing tied to instant messaging is a non-starter because the largest instant messaging sites can co-opt whatever innovation you can come up with. And how many blogs do we need before the world is so inundated with un-verified "facts" and discussion that bloggers end up talking to no one. Is blogging important? Will social networking (other than looking for a date) be an important part of the Web? Yes on both. It's just that the hype levels around these areas is too high currently.

Which leads me to my final point of view for 2004: The 10th birthday of the World Wide Web. The W3C standards body just celebrated the 10th anniversary of their first meeting in late 1994. I downloaded the 0.8 beta release of Netscape at about the same time (it took be 2 hours on a 28.8 modem). To say that the world has been altered by our adoption of the web and e-mail messaging is certainly an understatement. Most of us base our business days around using the web and e-mail. The fax machine has become a paperweight.

Look at what has transpired in the time between 1,000 users of the web in 1994 to 750,000,000 users in 2004:

- E-commerce was created
- Push technology delivered information to the desktop
- 3D Web languages came and went
- Shockwave changed our view of the static web
- Thin clients were supposed to replace PCs
- An on-line auction site changed how we sell our stuff, hurting garage sales everywhere
- Broadband was created, wiping out a multi-billion dollar modem business
- Amazon.com sold a billion dollars worth of stuff through a web site, five years after selling zero
- Instant messaging captured the imagination of teenagers everywhere
- Internet advertising supports two of the world's most valuable companies: Yahoo and Google
- File sharing changed the music business forever
- Multiplayer gaming over the Internet is required of every game sold today
- Internet dating services are worth hundreds of millions of dollars
- Blogging sites become sources of leads for real world journalists (!)

Who knew?

Now what happens over the next 10 years as the Web saturates every part of the globe and touches all that we do? As we access the Internet with mobile devices at increased speeds, where do we find new useful applications? What will we do when access at home and the office is 10x faster than today?

I just wanted to leave you wondering as the year ends… It could be a pretty exciting time in 2005 and beyond.

Letters From Last Time –

Last column was on relatively poor hiring practices in start-ups:

Brent:

Whooooo - weeeee! You got this one right. Ouch. Ouch. Ouch…..I've lived it all.

Tom O'Flaherty

Hi Brent, always enjoy your articles.

Having been a recruiter and personally hired over 100 people in the past 5 years, I have also seen many mistakes that companies make.

Focusing on hard skills and less on attitude/personality.
Most people that don't work out are due to personality issues (either theirs or their managers). It was rare that I came across someone that had not been up to expectations hard skill-wise. Someone with a good attitude has probably done well where they have been and will continue to do well. Such a person will also make the effort to obtain the skills they need, and to work toward doing well in whatever they do. Skills can be learned, attitude is generally pretty hard-wired by the time someone is 18.

Relying on convoluted tests.
True, tests can show thinking patterns and certain key capabilities, but as described above, they do not show attitude and passion. They also tend to create a template for "desired" employees, but leave no room for mavericks, those who will break the mold, think outside the box, bring creative solutions forward or avoid the yes man mentality.

Relying solely on internal HR to screen candidates.
I would prefer to have someone with a broad range of experience in companies do the initial screening of potential employees as they really understand the business needs of a company. HR people just do HR their whole careers, they have not been in sales, or purchasing, or development. Hr should get involved later on in the process for reference checks, and subsequent hiring processes.

What do you think?

George Muenz

George:

You offer very salient points to the discussion. I agree whole-heartedly with all of your points. The part about just allowing dedicated HR people is particularly insightful. While they typically have the best processes for hiring, the screening needs to be done by engineers or business folks or both before hiring. Thanks for a great letter.

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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