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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