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When Fear Turns to Greed
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
January 9th, 2004


By Brent Holliday
Greenstone Venture Partners

“It ain't much I'm asking

I heard him say

Gotta find me a future

Move out of my way

I want it all I want it all

I want it all and I want it now” – Queen, I Want It All

I see crumbling, dying poinsettias and icicle lights that need to be taken off the eaves and, like a Pavlovian dog, I sit at my computer and think of one word… predictions. Yes folks, it’s that time of year when we people with too much to say stick our necks out and tell you what we think will happen in the next 12 months.  You could read the rest of this column for details, but basically 2004 is when we move slowly but surely from fear to greed.

Before we go much further, I had a look back at the nearly six years of my columns and saw a few predictions here and there.  Like a sideshow psychic, I never really stuck my neck out too far and left lots of possibilities to be interpreted as “true”.  My absolute worst was the August 30th, 2001 column about how 2002 looked like it might finally show signs of a turnaround based on economic indicators of the day.  Here’s the best quote, “In reality it will be 2002 before we see some return to optimism and hope.”  Um, well, exactly 13 days after that brilliant insight, everything changed, making 2002 a year that “if it was a dog, you’d take it out back and shoot it.” (lifted from my Dec 20th, 2002 column).

As investors, in the stock market or in early stage companies, we have lived in the fear cycle since the dying days of 2000.  It’s been a long time since we have rubbed our hands together and smiled like Montgomery Burns.  Fear of investment is a good thing because it deflates the bubbles and keeps the balance when things get exuberant.  It forces discipline and process on the investors but it also makes for lots of cynicism and bad blood from those not getting financed or getting financed by giving up a pound or two of flesh.  In the public markets, any gains made in the past few years have been tempered by pessimism and fear that the bottom will fall out any minute.  The incredible volatility of technology stocks stays whether in a fear cycle (“sell because more bad news is just around the corner”) or in a greed cycle (“buy because there is always a greater fool than you”).

Now the NASDAQ is fresh off a 50% gain in one year, back to pre-9/11 levels and the bears are now harder and harder to find.  Most prognosticators have estimated that the tech stocks still have a 20-25% run up left in them in 2004.  IPOs are starting to fill the pipeline again.  Egads, they are actually hiring investment bankers on Wall Street again!  Where did all those starched and polished folks go for 2001, 2002 and 2003?  What’s next? Venture capital investment increasing?  Well, the VCs have not been stampeding in 2003, but are starting to show signs of making more and larger investments in 2004.

Enterprise spending on IT will increase significantly in 2004.  FINALLY!  As this reality sinks in during 2004 to add to the incredible surge in consumer technology spending that started in 2003 and the sales and profits grow under a lean and productive workforce, all the bears will disappear and the world will tip towards greed once again.  How fast will tech spending increase?  In what areas?  I’m glad you asked.

I sifted through reports this week from Goldman Sachs, Bear Stearns, Deutsche Bank Alex Brown and First Call and they all see the semiconductor sector (roughly 15% y/y sales growth) as the largest area of growth through 2004.  They all agree that the communications equipment sector will see the lowest growth (still a respectable 7-8% y/y growth).  Software, services and enterprise hardware (PCs etc.) sectors will all see double digit growth say most of the estimates I have seen.  This is a huge shift from the anemic 2003 enterprise spending and the huge drops of 2001 and 2002.

We are already starting to see the greed cycle evidence.  Who saw Research in Motion’s stock pop almost 50% in one day in December?  How is Sierra Wireless holding a 199 P/E ratio in this day and age?  When Nortel announced a big deal with Verizon, its stock jumped yesterday.  It wasn’t very long ago when any contract announcements of significant size were met with a yawn.  “Nortel will be out of business” is what many were saying 18 months ago.

The bad side of the greed cycle is irrationality, complacency and hubris, which we all saw last time around in the biggest meltdown ever.  Heading into a greed cycle though, everything seems rational (catching up with expectations, etc.) and people are working extra hard because they can see the success and taste the fruits of their labour.  This is a great time to be chasing the carrot. 

Greed is good.  It is much more fun than fear.  It means that people are generally more optimistic.  My trepidation with this cycle is that it can’t all get good again overnight.  The world is not ready for anything near what the 90’s wrought.  I expect that we will see a little of the 90’s over-exuberance some time in 2004 and a pull back is expected.  We will run ahead of our expectations and things will go into a lull again.  If you are looking to time things right for your business, then you should be making hay while the sun is shining now.  If the opportunity to take investment or take a decent price for your company comes along, don’t assume that the good times will keep rolling at anywhere near this new exciting pace.

If you are looking to get something started, this is the best time in 4 years to get going.  If you are just entering the market now for the first time, you are in luck.

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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