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A Lump of Coal

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

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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