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

Something Ventured:
January 4th, 2002

By Brent Holliday
Greenstone Venture Partners

"So you think you can tell
Heaven from Hell
Blue skies from pain.
Can you tell a green field
from a cold steel rail?
A smile from a veil?
Do you think you can tell? "
- Pink Floyd, Wish You Were Here

Like many of you who worked their behinds off through the tumultuous year of 2001, I managed to escape for a few days over Christmas and just shut down. It was a good time to unplug and reflect a little on what happens next. It's like I just swam the length of the pool underwater and had five seconds to gasp for air before plunging back in for another length. I hope that somehow 2002 will be a shorter distance under the water than 2001...

What struck me through the mental decompression of the past two weeks was that predicting anything these days is a lot like my tee shots in golf: it could go anywhere from here, except backwards. So, rather than try and lay out educated guesses as to where we are going as a tech industry as most pundits do at this time of year, I thought I'd try a wish list instead. Wishes are easier and no one will look up your old columns and point out where you went wrong.

Wish #1 - Never Again, Not In My Lifetime:
First and foremost, I wouldn't wish 2001 on my worst enemy. Especially if you were in information technology or communications. It was the year of the disappointment. The big D. For investors, for entrepreneurs, for employees and for the economy in general. From a financial markets point of view, 2001 continued the plummet begun in 2000 to set new records in stock market futility. The NASDAQ actually hit 2900 in 2001. It also touched the 1400s in the September 11th aftermath. Although the markets seemed to have found their step lately, the reality is that we are all still underwater on our Nortel and JDS Uniphase shares. Consider this gem from the recent JDS Uniphase investor day: 2nd quarter revenue ending March 2002 will be US$280M and 3rd quarter will be US$238M according to the company estimates. This is a company that did US$3.2B in sales in fiscal 2001. They will be lucky to do US$1B in 2002. The whispers were that no one should expect them to sell US$3B again until 2005 or 2006.

Most smaller technology companies took a serious hit in growth this year. In 2001, the hockey stick projections were all thrown out. Hands up if your company still doesn't have 2002 sales estimates nailed down yet. If you work on commission this makes you very nervous. But predictions are nearly impossible. Sierra Wireless just missed their quarter by 40%! Do you think that their graphs for the quarter showed worst case and best case 80% apart

In the world of the start-up, 2001 was a wasteland. The numbers will roll in soon. Dramatic declines in funding and dramatic declines in new companies. Add into that the tremendous number of businesses that failed and the ones that are still around being skinnier in personnel and you get a tough, tough market for the entrepreneur.

The catastrophic events of 2001 were like a perfect storm. All of the confluences of nature, both probable and improbable, seemed to have washed ashore together. While business has cycles and economies have ebbed and flowed over time, I don't believe we are going to see as tough a year again. Not for a long, long time.

Wish #2 - Let The Corporations Spend Again
According to a recent Merrill Lynch CIO study from large American companies, corporate IT spending (includes networking and internetworking) declined by 1% last year. The study predicted that it would increase 2-3% this year. The areas that will receive the most attention are security and storage. That 2-3% might not seem like a lot, but it is billions. More importantly (and why I focus on these numbers a lot), improving sentiment towards spending and new projects means that the big companies are happier (Microsoft, Oracle, IBM, Cisco) and the little up-and-comers have a fighting chance. Optimism in spending means that more risks will be taken and new companies will have a chance to show their innovation and grab key customers. Oh, and happier big companies means they may be interested in buying some of the up-and-comers again.

In some ways the September 11th disaster and subsequent corporate shock waves might be the antithesis to the Y2K spending bubble. Corporate IT spending was very high in 1998 and 1999 leading up to the Y2K bug. As predicted, 2000 was slow as spending priorities were overhauled. What was not predicted was the slowing economy and then the screeching brakes of September and October 2001. The result is that IT spending and IT budgets have been very low, relatively speaking, over the past 24 months. Perhaps (we are wishing aren't we?) the bounce back in 2002 will be as significant as the retraction immediately after Jan 1 2000 as corporations look to improve productivity and reduce expense in the long run using IT.

Wish #3 - The Consumers Pay For Their Internet
Did you notice what happened in November and December? Have you tried to send a Blue Mountain Arts e-card or an eGreeting lately? Have you tried to hear a streaming sports broadcast? Have you gone to your Geocities homestead one day to find it no longer exists? What in the name of freeloading is going on here?

Like dominoes, the Internet services that fanned so many great dreams and billion dollar babies and then became the laughingstock of all business, have gone to a subscription business model. Advertising just doesn't work. Free stuff is almost non-existent. With the glaring exception of Gnutella, the Net has gone all pin-stripey and corporate, man. For almost 5 years, the pundits have said the Net must be free. Then, in an update of the 1974 Don McLean classic, February 20th 2001 was the day the music died when Napster lost its court case. And so, we get the notice on the egreetings.com site which says that their bankers (ummm, VCs) said that they had to get a real business model, so don't blame them that you have to pay $7 to get the really good stuff. A conspiracist would think that the clever people at Yahoo, AOL and Microsoft have given it to us all free just to get us hooked so that when subscription time came we would peel out our credit cards just to get it back. What would 40 million teenagers do without instant messaging? Do you think they would pay? Well, like, duh.

What consumers need to do is be willing to look at a monthly or annual amount that they can spend on this stuff and decide what is worth it. Is my own web site, with my own domain name for family photos and personal newsletter really worth $30 a month or $360 a year? Do I want to hear the seven or eight Canucks games that aren't on TV for $29 a year?

My wish is that the consumer does spend a few bucks and that we get what we pay for: higher quality content, better tools and a renewed interest in Internet services as a real business. What we need is smarter marketing people at the big Internet companies and access companies to start to intelligently bundle services into attractively priced packages.

Are you one of the overt pessimists? Still think that this on-line business model won't fly because people won't pay. Then you would be exactly like the people at the networks and large advertisers in the 1960's and early 70's who said that television will always be free like radio. No consumer will pay a company to pipe stations into their house that they can get with an antenna, they said. Who is bigger now? The networks or the cable companies?

Wish #4 - That BC Has More Wins in 2002
Gordon Campbell may have a bad year in 2002, but leaders are ultimately successful and respected when they stay the course and don't waver on the first hint of ill will. He needs to get the house in order before his government can help with spending. What we really need as a technology industry is a much better year than 2001. 360 Networks was the absolute worst performing stock on the TSE in 2001. Ouch, that's one of ours. PMC-Sierra, Sierra Wireless, CreoScitex and Pivotal have all taken serious body blows in the past 18 months. MDA has stuck in there, as has Ballard Power. QLT and Angiotech have had their violent swings, but are still doing OK. We lost all of Glenayre, part of JDS Uniphase and pieces of Redback, Nortel, Alcatel and Motorola in their massive downsizings. We lost a few start-ups and sold a few at OK values (NCompass Labs and Xcert to name a couple). But on the whole, we scored miserably in 2001 for the tech sector when compared to the rest of the economy. There's that disappointment word again.

We need a return to the heady days of 1999 when a string of successful IPOs and HotHaus being bought by Broadcom ushered in a new respect for BC and its technology industry. There are some solid companies lurking out there with huge potential and solid management. There are a few more with only the huge potential so far, but further out can be groundbreaking innovators. Having some new blood be recognized through clever promotion and solid performance will help lift all boats in BC. A few good stories about second and third time entrepreneurs starting the "new new thing" will certainly help the climate. This is bound to happen as optimism returns to the market.

It's time for BC to go to the next level and my wish is that 2002 begins that step forward.

Here's to 2002! May all of your wishes be true.

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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