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Take This Job And Covet
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
November 9th, 2001


By Brent Holliday
Greenstone Venture Partners

"He's noble enough to know what's right
But weak enough not to choose it,
He's wise enough to win the world
But fool enough to lose it,
He's a new world man "
- Rush, New World Man

In the technology and related job markets, the recession whirlpool that started in the dotcom sector, grabbed onto the telecom services and equipment sectors, extended into the real world and sucked everything into it on September 11th, has caused much pain.

All in the last 8 weeks:

· Banking and Finance: Merrill Lynch wants out of Canada jeopardizing >1,000 jobs - CIBC laid off 3,000 people - JP Morgan Chase is cutting 8,000 jobs etc., etc.

· Dotcom Deadpool: Christianity.com went to a better world - Egghead.com broke - eCal.com is toast - xDrive.com is in park - Even bellwether Homestore.com, mildly profitable this year, shed 700 jobs.

· Tech Media: Upside Magazine stopped printing - The Industry Standard lost its heartbeat - Red Herring, which used to have a deep archive on their web site, is a mere wisp of its former self.

· Recruiting Firms: In an ironic twist… Heidrick & Struggles, Hall-Kinion and other massive search firms in the US shed employees themselves. Do they get free placement service I wonder?

· Telecom: Ameritech announced 10,000 jobs - Sprint shed 6,000 jobs - But my favourite was the following headline from October 19th: "360networks posts $63 million negative revenues in Q2" Yeah, read that again. Re-negotiated contracts caused them to re-state their accounting. And they fired just about everyone.

Some more anecdotal evidence from my inbox shows an increasing amount of people's resumes. It is getting really ugly out there. And it was all confirmed when I received this bit of news just today from Information Week:

IT unemployment has reached unprecedented levels as companies facing tough economic times let go of skilled professionals who were highly sought after just a few years ago.

In October, unemployment remained at 5% of the IT workforce, matching the September rate, the highest unemployment rate for those months since the last recession, when it reached a decades-old high of 4.3% in September 1991, according to U.S. Bureau of Labor Statistics figures released Wednesday. A year ago, IT unemployment stood at 1.7% in September and 2.6% in October. The IT labor force last month approached record levels of 2.94 million workers, with 147,000 of them out of work and looking for jobs.

The September IT unemployment rate of 5% exceeded the overall jobless rate by 0.3 percentage points--the first time that has happened since the bureau began tracking IT unemployment in 1963. Last month, the IT unemployment rate stood 0.4 percentage points lower than the overall rate of 5.4%. By comparison, annualized IT unemployment rates since 1963 has averaged 4 percentage points lower than that of the overall workforce.

What struck me most was not the fact that it's harder to find a job in IT today than in all other sectors, but that it has absolutely skyrocketed in one month. It is shocking how fast the job market has soured. But what's more shocking to most people out there is how slow it will be coming back. This is a long slow climb. We are still not completely through the hangover from the 1998-2000 party.

Here are some things that will happen now that the street is filled with knowledge workers:

1) School is sexy again - time to go back and finish that Master's degree or become a high school teacher. There is no place better to hide in a brutal recession than in the halls of academia. Keg parties, intramural sports and late night cramming for exams or papers. There is no life better. The only drag is that you make no money and live in a rat-hole or, worse, at home with the 'rents.

2) Brain Drain becomes a non-issue - I can't tell you how many Canucks living the American technology dream are headed this way. In general, this is a very good thing for us. They bring a lot of experience and tactics back to some of our technology companies here. And they can sell their bungalow in San Mateo or Kirkland and buy a palace here because they make 40% on the exchange. The downside is that there just may not be as many spots for them to fill unless they are bringing truly unique knowledge to bear.

3) Consultants R Us - The fancy word for unemployed, multiple degree holder is "consultant". Research, strategy and other value-add odd jobs will have to sustain a lot of people for a while. Some will band together and form larger unemployed talent pools. Kind of like I did with some fellow MBAs in 1994 coming out of the last recession. I'll give you a tip for your business plan: Don't rely on the earliest stage companies as your clientele... they don't pay that well.

This will be a very difficult time for a lot of people. Those of us still doing what we were doing 6 months ago are very grateful to have our jobs. The only bright news that I can think of is that the larger tech companies have probably cut too deep and will hire back some people in the near future.

In the start-up world, the companies are staying very lean, looking to stretch their money out as long as possible. Businesses will grow only when they can match new expenses to new revenue. Gone are the days of the "first to market" and "brand, brand, brand" along with the associated wild spending. So, the early stage companies will not absorb a lot of the new unemployed. At least not for a while.

One thing you might want to do is write a book or a screenplay about all of the craziness that you just endured over the past 5 years. Or better yet, go on a speaking tour and tell "standing room only" crowds how NOT to create a billion dollar business. That might work.

Random Thoughts -

- Canadian VC Drops in Q3 - Spending in Canadian start-ups dropped from $1.4 B in Q2 to $1.2 B in the quarter ended September 30th. This is entirely predictable given the climate. The number of deals dropped even further than the amount invested, indicating more money into less deals. This means that the preference for VCs is to put money into later stage companies, which typically require more dough.

What would be much more interesting would be the statistics on valuations, which I have seen tumbling throughout 2001. Companies that raised enough money in 1999 or 2000 and are just now running out of cash are doomed to the "down round" if they are not cash flow positive. The "down round" means that, at a lower offering price of shares, investors wear black hats and claim their anti-dilution rights. The result is that they remain whole or somewhere near whole and the founders and employees get squished. It is painful, it is ugly and the lawyers make money papering re-capitalizations and reverse splits trying to make the company look normal again for a future investor. As the valuations stabilize in the market and the all of the companies funded before 2001 go kaput or raise their "down rounds", we will see sunnier days and more congenial relationships between investor and entrepreneur. It's always better when things go up.

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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