Something
Ventured:
December 22nd, 2000
By Brent
Holliday
Greenstone
Venture Partners
You're
a sauerkraut and toadstool sandwich with arsenic
sauce...
I wouldn't touch you with a thirty-nine and a half foot
pole "–
You're a Mean One
Mr.Grinch, The Grinch Who Stole Christmas
"Two
thousand zero, zero
Party Over, Oops out of time,
Tonight I'm gonna party like it's 1999. "–
The Artist
(formerly known as Prince), 1999
Uncle.
UNCLE!
Last
year I scolded you all (actually, it was
self-flagellation as well) for thinking that you were
geniuses in the stock market. At this time last year,
the NASDAQ roared up 1000 points in 3 weeks over Xmas
and into the New Year. I said that a monkey could have
made 50% returns in the market for 1999. When hearing of
triple digit returns in venture capital circles, I often
heard that in a tornado, even turkeys can fly. Well, the
turkeys have come home to roost. The NASDAQ is half of
what it was in March at its peak. It's freaking ugly out
there. Has anyone looked outside? Is the sun still
coming up?
Welcome
to the Greenspan induced hangover after a wild economic
party. Prince penned an anthem back in 1983 for the
millennium blast last year. Now, in hindsight, the words
are more poignant. It was a party in 1999 and in 2000,
whoops, we are out of time. Hope you have photos...
Sector,
by hot sector, the technology industry is taking it on
the chin:
·
B2C is so, like, over, you know? The survivors of the
spring meltdown in B2C are now trying to get on the P2P
(path to profitability). That means that you are now a
service or software company and not a destination site.
EToys has stated that they will miss revenue estimates
for the busy holiday season. Barnes And Noble had an
outage for 3-4 hours yesterday because someone forgot to
pay the $35 fee to Network Solutions for their URL.
That's part of the new O2L category of on-line retailer.
That's Out To Lunch for those just catching the joke. A
recent Red Herring article quoted financial analysts
that had researched the money invested and burned by B2C
retailers and community/content sites and came up with
US$150 Billion. That's US$150 Billion spent trying to
make a "new" business model work. They
compared the money wasted to the Savings and Loan
scandal in the US banking system in the 80's. Where did
that $150 Billion go you might ask? That's a good segue
to my next sector:
·
The real beneficiaries of the massive investment and
hype were the magazines, advertisers, PR firms, HR
firms, law firms and accounting operations. These people
took the lion's share of that pile of invested money.
Red Herring went from a monthly pub that slipped nicely
in your briefcase to a bi-weekly boat anchor that made
your wife's Vogue magazine look like a Safeway flyer.
Lo, and behold the end of the cycle - Red Herring laid
of 180 people this week. Seems ad spending has decreased
a bit. Here's some spin for you: "The company said
the latest layoffs were part of a broad restructuring
aimed at improving overall efficiencies" Uh-huh.
Sounds strategic. Let me apply the bullshit filter.
"Tony and Jason made a boatload off all of that VC
money that went into the companies that were promoted by
us and advertised with us. Now, they are going to let
this sucker sell to the highest bidder and go to
Margaritaville." Look for consolidation in the
service sector in early 2001.
·
B2B was all the rage a year ago. On-line marketplaces
were theoretically a new massive money machine (20 times
the B2C market, screamed IDC et al). I have never seen a
plague come over a sector faster than B2B. By March
2000, Morgan Stanley reported over 110 newly created and
funded companies with US$1.5 Billion invested from VCs, all
in or around the wood products business. I remember
the pundits (including me) saying that there would be
room for only 2 or 3 winners in each major industry
category (chemicals, wood, steel, etc.). By May, the
realization came that even one per category couldn't
change the fundamental way business worked overnight.
And the marketplaces fell like dominoes as investment
dried up.
·
ASPs, in their myriad forms, have taken a flurry to the
solar plexus. The AHPs (Host) like US Internetworking,
HotOffice, etc. have been overrun by the bigger
co-location facilities (Exodus, now 360 Networks and
old, big telcos) and new breed of managed hosting
facilities (Loudcloud, Sitesmith, Bird on a Wire and
Round Heaven locally). HotOffice and some other
competitors shuttered their doors, Agilera and Applicast
ran into each other's skinny arms this week and US
Internetworking is a penny stock. The web application
developers are faring better because they are like
software companies in the pre-Internet days. They sell a
scalable product with a value proposition that people
pay for. Vertical solutions are the best way to give
value to a customer and extract money from them at this
dark time.
·
Wireless, the next big thing. It is the next big thing,
but next is the key word. How long until we get to
"next"? Does 3G mean that we have to wait 3
generations before it is rolled out? Revenues are in
short supply for the application vendors at the front
end. Infowave hires an industry veteran from Microsoft
and their stock promptly drops 10%. That sucks. 724
Solutions is in the low 30s, one eighth of its peak. I
was at the wireless IT show in October in Santa Clara
and there were 50 companies saying they did basically
the same thing: "Any data from any source to any
device over any network". Owen Nolan of the San
Jose Sharks was signing pucks in one of the 50 company's
booths. I told him that if he was at the show next year,
he would need a new gig because the company paying him
this time would be dead by then. He looked at me all
weird. (Note to self: try not to speak too fast or too
insightfully around a hockey player) Wireless is still
hot for back end software and hardware that gets the
promise of higher bandwidth. But hot is a relative term
in the overall tech markets these days.
·
Ahhh, the venerable optical networking sector. Surely
this is still investment nirvana? Everyone wants
bandwidth right? Rock star companies in this sector are
now suddenly looking like chumps. Foundry Network's
revenue shortfall today killed the entire market.
Extreme, Juniper, Sycamore and the big boys Cisco and
Nortel all got hammered. Hot up and comers, the latest
sure things, like Quantum Bridge, Tellium and Convergent
Networks have all filed to go public, but the whispers
are that the market malaise will cripple their ability
to get out. What does that do for the stomach acid of
the investors and management of the 500 or so brand
spanking new optical companies funded in the last year.
Oh dear God, what will we do if the sure thing ain't
sure anymore?
In
late November, when the NASDAQ was at 2500, an analyst
being interviewed on CNBC said that he would eat his
shoe if the market didn't gain back 10% by the end of
the year. That would be 2750. Today we are at 2350. Does
Heinz 57 make shoe leather taste any better?
OK,
OK, it's easy to be a cynic. I think you've come to
expect a little more optimism from me. I want to draw a
conclusion about the sector by sector look done here. In
each case, the sector became hot and then massive
over-investment occurred very rapidly resulting in way
too many companies fighting over early adopter market
scraps. This is what is happening. We are speeding up
the cycle.
The
reason for the quickening of the hot to not sector cycle
is the Internet. We have a communication medium that has
unleashed the ability to become informed and to be
conformed in a split second. We are the trigger-happy
generation of information consumers and we are flooded
with noise day in and day out. An example is the market
creaming Intel in early October. One analyst said that
he saw revenue shortfalls and a slowing chip sector.
Within minutes, a dozen information sources claimed that
they had discovered the same trend and you had a
stampede. Don't let the door hit your ass on the way out
of the chip sector. Looking back, Intel had their 3rd
quarter revenue growth slow by 1% sequentially. Read
that again. Their growth slowed. You may have taken
calculus in high school or university and recognize that
there is a derivative at work here. Slowing acceleration
means that the thing is still speeding up folks. (The
recent further meltdown in the stock is because they
expect their 4th quarter to be flat sequentially, but
still up 15% over last year's 4th quarter) Nortel was
similarly undressed, losing billions in market value
because the analysts were disappointed that it would not
grow at 120% this year. Only 90% growth is expected.
Only.
Contrary
to many pundits around, I don't believe that we are
slipping into a worldwide recession. I don't believe
that enterprises around the world will freeze budgets
for technology. I do believe that after the biggest
fastest ramp in market value in history there will be
some time to adjust to the massive over-investment. Case
in point is Cisco's announcement today of possible
massive write-downs of bad debt. What? Since when did
Cisco become a bank? I'll tell you since when. Since
everyone thought that the market would go up forever,
corporations formed venture arms and start-up assistance
programs that leased equipment to small, nimble
start-ups at cut rates. If these company's grow big,
they would do it with a stream of purchase orders from
their friends at Cisco. Now that every shop.com that had
a Cisco router for real cheap has gone belly-up, Cisco
is looking at bad debt piling up. Here's a tip - leave
the banking to the banks.
The
over investment was part of the big party. The
fundamentals of a healthy economy are still here. If
Nortel can still grow at 90% then we ain't dying people!
We will come out of this phase of readjustment in 6 to 8
months, I believe. Unless we start to all drink the same
economic Kool-Aid. If we all start to hear and read that
the dog days of inflation and recession are around the
corner, we might just self-prophesize it.
As
an entrepreneur in this low, low market and pessimistic
view of technology stocks (rightfully in some cases,
wrongly in others), you need to weather the storm. Have
a plan to get money from your customers over the next
year, because other sources may not be forthcoming. No
customers paying you yet? You might want to see if
Pivotal is hiring...
For
another view on the current conditions that I liked, try
James Fallows in the Industry Standard at: www.thestandard.com/article/display/0,1151,206
Letters
From Last Week -
Brent
Holliday:
I caught this article - Bill Gruver (SFU) sent it to me.
http://www.bctechnology.com/statics/bh-dec08
It says some things that I was being laughed at for 3 to
4 years ago - so I appreciate seeing somebody tell the
same story to the world. Too bad it's too late for me on
that particular issue.
I
am currently working in Western Mexico (Mazatlan area)
leading a software startup project for a mineral
exploration company - Geological analysis and ore
deposit modeling. They think they have an idea on a
system to assist field Geologists and Exploration
companies get more consistent results with their
exploration work - and since costs are high in this game
it's a worthwhile project with a worldwide market... I
have had a chance to meet some of the locals, and see
the software work that is being done here in Mexico. If
Canadians do not get off their butts and learn
something, the Mexicans will have their lunch (and
dinner too!)! The Mexicans work very hard and seem to
have "The Valley Entrepreneurs Ethic" hammered
into them from youth. Of course it also causes them
problems as they would rather have their own small
company than a huge company...
The
Mexicans work for less, work harder, and do more with
far less resources. When you are dealing with a business
that wants your money, you get service that is unheard
of in Canada. For example, the local bank manager set up
my foreign account personally - since my daughter
already had an account. The first time I did a
withdrawal - as opposed to using the cash machine - when
he saw me in the bank, he assisted me personally with
the paperwork. When I was updating my FM-3 visa to show
a new address, there was a monsoon rainstorm, the local
"Migracion" office quietly did all the copying
of documents - so we would not have to get wet in the
rain... Normally you have to go out, find a store that
will copy the documents etc. and pay for the copies...
When we ordered construction material - it arrived
before Jose could return from the lumberyard (it's a 10
minute walk to the lumberyard sales office). I could go
on - but I am sure you see the idea. Some of the big
companies have "typical employees" - but thank
god it isn't seen that much.
The
bottom line is that Canadian business owners should be
forced to work in Mexico for a year so they understand
customer service and the "Entrepreneurial
Spirit". Then we would take over the world -
because we have the raw materials and the market
position (geographically at least) to make it happen.
As
for goofy titles {ed.- from the Rich Karlgaard article
in Forbes} - I could not agree more. However, I was
there at the beginning of the "Micro Computer
explosion" - showing universities, oil companies,
mining companies and the big five accounting firms how
to exploit computers for a business advantage. All my
clients and other people in the company used to smirk
and call me a "Computer Evangelist" - and it
was true. Most of my work was in educating the client as
to what could be possible - whether it was hooking PC's
to Spectroscopes or telescopes, Lab analysis with Apples
and PC's - and showing them proper mathematical
techniques for small PC's and Apples, running Apple
Motherboards down oil well drill heads (To send back
drill data), doing tax returns on line (in 1981/82
eh?!), or hooking up province wide star networks -
before people really understood LANS and WANS
(1984-1988). So the goofy titles should be earned - not
given - at least that's my opinion.
Enough ranting - have fun and hope to hear from you
Dave Robinson
Amber Computer Systems Inc.
Dave:
I appreciate you writing from Mexico. You sent another
comment on a previous article that I will print another
time, where space and time permits. As for you comments
here, the stereotype that we have of Mexicans is
certainly just that, a perception. Your experience
speaks to a far more entrepreneurial group of people. I
have very little experience in Mexico, mostly near the
beaches and bars in Mazatlan, but I digress. I received
a huge response to the column that you read. It seems I
struck a nerve in telling Canadians about the
Californian way. I don't think we have to endorse their
way completely, but we need to apply more of their
thinking if we want to make successful companies. There
are many Canadians that think and work like they are in
the Valley. I'd like to think that I am one of them. It
sounds like your experience in Mexico has shown you a
better way to do business. I hope you succeed. Good luck
and thanks for the thoughtful 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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