March 1st, 2002
it ain't gonna change overnight, no
And it ain't goin' away without a fight, no!
I ain't sayin' that I'm never gonna beg you
Oh, baby come back” – Van Halen, Aftershock
year ago, I came to the same conference that I am at
today in San Francisco. The Robertson Stephens Technology Conference is a 4 day
maelstrom of technology CEOs, public and private,
presenting 20 minute updates on the progress of their
company to a sea of VCs, fund managers and, inevitably,
looked back at what I wrote last year and some of the
trends that were happening.
In a nutshell, February 2001 was a time when
everyone was in complete shock.
The full extent of the telecom wreckage was just
dawning on everyone.
It was miserable, at best.
what just might become an annual event, I want to update
you on the trends that people were discussing here this
year. In a
sense I was just taking the temperature of the industry.
In a possible omen to good things, I should let
you know that the temperature was 21 degrees and sunny
all week long… Last year, I was busy making brazen predictions of a stock
market rebound after mid-April.
For a while I looked like some sort of market
maven with the NASDAQ bottoming out at 1620 on April 5th
and racing back to 2200 by June. The true bottom ended up being 1420 on September 20th
and we are only at 1750 today.
So don’t bet the farm on my short term
term trends are safer bets.
Here are five areas that I concentrated on at the
Spending Recovery – Like a broken record, I keep
coming back to this IT spending by the enterprise thing.
When will the enterprise ramp its spending on PCs,
servers, networking gear, software infrastructure,
applications and services? Consider this:
biggest bubble in PC sales was in late 1998 and
early 1999 when the enterprises stocked up or
upgraded for Y2K.
The average shelf life of a PC in a company
is 3.5 to 3.8 years according to a recent CIO
means that we are likely to see a second order
bubble in PC sales as the upgrade cycle begins anew
in late 2002 through 2003.
For those of you developing for Win2000 or
XP, there will be a concomitant rise in the OS sales
as companies go through that upgrade.
IT downturn of 2000 and 2001 was caused by the Y2K
hangover, combined with the dotcom and telecom
spending was reduced as business, in general,
a funny thing happened on the way to downsizing the
company. The IT department didn’t scale down very well.
Here’s why: 70% of IT budgets in 2001 were for non-discretionary
fixed costs (meaning that people in IT and the
maintenance of IT were things that absolutely had to
be a part of the budget to keep the IT wheels
10% of the IT budget in the enterprise was allocated
for software licenses, which can be discretionary
(“I don’t have to buy new software this year”,
for example). Think
of how much money is being spent on service,
maintenance and hardware, if only 10% is software.
report that, for the most part, after 14 years of
spending internal software projects are by-and-large
is a huge product cycle lull in enterprise
applications for behind the firewall. Most feel that now is the time to lower spending and
reap the rewards of all of the development and
But outside the firewall, that’s another
on that in the section below.
summary is that IT spending should pick up in the 2H of
2002 as the upgrade cycle is forced upon IT managers.
But the other reason spending will increase is
that CIOs want to make IT budgets more flexible.
In other words they want to be able to throttle
it better to suit the cycles of the economy. This means that they will spend more some money soon on
upgrading the software and infrastructure that will, in
the end, drive costs of running IT down.
The trend toward outsourcing will gain steam as
and IPOs – There was a brief shining light of hope
among investment bankers and VCs two weeks ago when
Paypal went public on the NASDAQ and shot up 50% on the
first day of trading.
Could it be?
A company that lost $140M last year with revenues
of $16M and a business model that makes no sense
whatsoever does a moonshot IPO.
Let me hear you scream Onvia!!!
C’mon baby, Daddy needs a new pair of shoes!
the word on the street now is that PYPL will be an
scuttlebutt here is that Salomon Smith Barney underwrote
the IPO after every other bank said no.
There is a palpable fear here that you will be
tarred with a certain brush if you promote and sell
un-profitable companies in this day and age.
No, there will be no mad rush to get IPOs listed
as in 1998 just because PYPL made it out the door
quarters of growing profit is a bare minimum to get the
bankers to think IPO at this point.
Unless you area biotech company, then you can go
public on a genomics patent and a couple of beakers.
It’s their silly season now.
in general is picking up.
At least half a dozen private companies here
announced rounds that had closed in the last two months.
Significant amounts are being placed at the later
the start-up stage less money is going into deals than
used to be that a team and an idea would get you $20M to
get started in the Silicon Valley. Now its back to a more reasonable $4-5M in most of the A
rounds being done.
Don’t expect wild fluctuations in valuation or
amounts of money being invested over the next few years.
It will be a slow growth in number of deals and
amount of money.
Communications – I must have seen 15 public
company CEOs in the components or system vendors for
communications all say that they have seen the bottom
and it is now. So
they are a confident bunch.
Looking forward is anyone’s guess and as
Corning said, “we just don’t know how long we will
be at the bottom”.
The CFO of JDS Uniphase said we could quote him
on his guidance for Q3 of this year.
So I will. He
said, “It will be below, the same or above our Q2
number which we are comfortable with.”
Well, that’s certainty for you.
there is cautious hope in IT infrastructure and
software, then there is serious praying in the optical
completely avoided the discussion about its numbers or
its lingering $8 share price by sending some buffoon in
to talk about their new religion in products for the
metro area network.
The private companies put on brave faces about
their multiservice edge switches, superior transport
silicon and way better optical GigE transceivers.
But at the end of the day, the inventory glut is
still in the market and the customers have shrunk to a
few crusty old telecom companies who are looking at only
one thing: reduce the cost of my network. Hardly a rallying cry for the new, new thing isn’t it?
As one analyst put it, “We used to be on
Internet time, now we are on CFO time.”
year is still a write off for most sectors of optical
communications. There is life in the metro area, which is why Nortel talked
for 20 minutes about it.
But the consensus seems to be that 2003 will be
the start of better things for companies like JDS-Uniphase,
PMC-Sierra and Nortel.
- If there is a shining light in telecom spending, it is
in wireless as widespread network upgrades to GPRS and
1xRTT (about 1/3 of 3G, which would be 1G, but 1xRTT
sounds cooler) abound.
A new generation of handsets to take full
advantage of these new networks will be rolling out
bodes well for the infrastructure players in wireless:
chips, sub-systems, base station technologies and access
might think that the application developers for the
enterprise and consumer apps would benefit as well.
The jury is still out there.
you make software solutions for network management,
quality assurance or provisioning (stuff that reduces
the costs or increases the efficiencies for the service
providers) then you are in for a good year and the long
term prospects are bullish.
If you are making applications or gateways for
corporate data (in other words you are selling to the
enterprise) you are in for a long because you fall into
that enterprise IT spend that we already talked about. The
survivors that are around and have traction in 2003 will
likely do well as the promise of wireless mobile workers
finally begins to match the hype. Security will be hot in the wireless space, especially
802.11a/b and Bluetooth.
analysts seemed very bullish on the consumer
applications, citing the Japanese DoCoMo and European
SMS (short message service) success among consumers,
especially young ones.
I don’t share their enthusiasm for consumer
apps because I don’t think that there is a sustainable
business model for a stand alone wireless
game/chat/music application company.
Software - As mentioned, the emphasis for
enterprises is outside the four walls.
The gang at Crystal Decisions or Pivotal would no
doubt disagree with the observation that the internal
build out is by and large done, but the analysts claim
that there is no new compelling reason to invest in the
the four walls, supply chain communication, integration,
logistics and fulfillment are the order of the day.
Groupware is getting a new life with remote teams
and extranets looking to make the enterprise more
connected to its employees, consultants and partners. Overlaying this need is security once again.
really big debate today is the adoption of web services.
There is substance to this hype as Microsoft with
its .NET and Sun with its J2EE try and become the
platform of choice. This is not a revolution and it’s not complex.
It’s an evolution from the myriad of web based
technologies that are in use today (application servers
and their connections to databases are still the method
for creating web based functionality).
The move to web services is all about cost and
a standardized set of connectors and simpler, better
abstracted code, the world of application creation,
integration and delivery moves from the domain of the
bearded, open-toed sandal software gurus to the
corporate IT worker.
Of course there will be religious wars over .NET
and J2EE, but that’s an unavoidable side show.
service providers and outsourcers will flourish short
term as the need for movement to web services hits a
fever pitch. Long
term, the promise of web services is shorter development
cycles and ease of use which means that the consultants
will have to find new fertile ground besides application
integration and maintenance.
the general thinking from the people that pay attention
to these things 24 hours a day.
There is obviously a lot more detail and specific
niches and areas to be exploited that don’t fit these
trends. But no matter what you are doing, it helps to
stick your finger up and find out which way the wind is
blowing once in a while.
The Told You So Files:
The final 2001 numbers for VC investment came in
last week. As predicted right here, the second half of the year was
dismal in Canada as our investment retraction followed
the US by about 6 months.
In BC, the whole year showed $465M CDN invested
in technology companies.
As you will recall, the first 3 quarters of 2001
showed $420M invested.
That means that 90% of the money was invested
before Sep 30th.
The trend to watch is the quarter over quarter
improvement because going from $170M invested in the
summer of 2001 to $45M invested in the fall is a pretty
big drop. Somewhat
akin to the huge drop in the US, delayed by about 6
From Last Time –
always, another insightful column....Re your
comments on shutting down TechBC and the need to double
the number of IT / Engineering grads, I think if you dig
a little deeper you'll find that TechBC is in fact not
closing but carry-on operations as a satellite
campus of SFU. Also, at least from what I'm hearing from inside
this institution, that the Double the Opportunity is
still slated to happen.....
I did here that the TechBC grads were moving over to SFU.
But that hasn’t stopped the grumbling about
lost opportunities to develop a centre of excellence in
Surrey or the fact that most of the students are unhappy
with the move. There
wasn’t much in the latest budget about direct double
the pipeline stuff.
But I guess the government had a few other issues
to deal with first.
Thanks for the letter and I hope everyone ends up
with a good education from SFU.
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
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