The State of The High Tech Industry
The State of The High Tech Industry
The New York Software
Industry Association (NYSIA)
holds monthly general meetings, in which a panel
of experts on a given topic holds a conversation, followed by a Q&A
session
from the audience. Last night (October 20, 2008) the topic
was The State of The High Tech Industry. The venue was a meeting
room provided by JP Morgan-Chase at their World Headquarters in
Midtown, NYC
I took extensive notes during the discussion and offer them here for your edification and comment.
Howard Greenstein,
President of The Harbrooke Group and Director of Programs and Special Interest
Groups for NYSIA, moderated the panel. Howard always does an
excellent job, and last night he assembled a group of movers and shakers in the
NY Techosphere, guiding and participating with them in a fascinating
conversation.
The panelists :
* Gerry Cohen, President & CEO,
Information Builders Inc.
* Steve Hamm, Senior Writer, Business Week
* Dwight Merriman, Chairman, AlleyCorp, and
CEO, 10gen
* Fred Wilson, Co-Founder and Partner, Union SquareVentures
My notes from the session:
Howard Greenstein
introduced the panelists and described the topic: A discussion of the current
economic climate as it effects the software industry, and relevant concerns. To
begin Howard asked for opening statements from the panelists.
Fred: We face difficult
times ahead but weíre not there quite yet.
Technology represents a growth sector and it has been so for a long time. While it will be slower and more challenging
to generate revenue, players in the field will need to think hard about
spending. Thereís plenty of opportunities,
to create business in host of tech
sectors in the long term, on which he is bullish; for the short term he is cautious.
Dwight: From his
perspective at AlleyCorp, an investor in a half dozen startups. He sees little,
if any, impact yet from the downturn. It
is too soon to have trickled out, and in these cases it is hard to predict the future.
Gerry: Having been thru
many downturn cycles, there are certain truths that always apply to the economics
of software. They always have a significant
maintenance revenue base (e.g., Oracle).
For new sales it is always possible to upgrade existing customers. And as companies consolidate, the opportunity
for pure new business and services
revenues increase. Some sectors are
doing well these days despite the downturn: agriculture is doing well, food services
are in a good place now (people always
need to eat!). The new business sector
is, of course, much harder at this moment.
Steve: We need to compare
now to the 2001-2 recession. That was
boom/bust of tech (overcapacity & hype) so there were many
valuations and demand based on BS. Tech sales in that
downturn went down 17% and stayed down 6 or 7 quarters. This time
tech is not bleeding from a boom &
bust economy. Of late the Enterprise has seen wise
and judicous activity: CIOs constrained by CEOs
who have demanded that spending be curtailed to bring costs down.
Expenditures on Business Intelligence or
other bigger immediate payoffs are not at risk.
So no terrible calamity should be expected in tech.
Howard suggested that some
are taking the approach of ìcut once, cut hard.î In this case, whatís the "stop the bleeding" strategy?
Fred:
The financing environment will change for small companies. The
amount of dollars out there, and valuatons will be lower. The
time it takes to close will be longer. Thus operating plans predicated
on readily available capital make less sense. Companies must have
an operating or business plan less accelerated, with less
spending. Companies must build revenues faster. Re-evaluate
the hiring plans ñ does it make sense? Thatís the message Sequoia
is now sending. Costs of developing software are way down.
Dwight is doing it with about 10 people in these positions. Dev
costs are no longer high, so get it right before asking for the check.
Dwight: It is cheaper today to build & try things, in the early
stages. 10gen's people payroll is tiny; this makes costs
lower. Moores Law means we can be more efficient. In 1999
Double Click spent $100M on capex. This is no longer necessary in
the current market, given the progress and available tools.
Now with fewer datapoints to indicate problems, sales will likely
lag a bit. Yet, he notes, Shopwiki (one of their companies) sees no effect yet on commissions. E-commerce site are still seeing
good sales, as seen at a clearance channel. Silicon Alley
Insider (also in Dwight's portfolio) sells advertising, no negative impact seen there yet.
Could be in the brand advertising space there will be a slowdown.
Search is measureable, less so in brand advertising. Internet
advertising takes shares away from legacy/traditional ad outlets.
This may have an effect on both models.
Steve: There have been almost no Tech IPOs this year, probably
will see very few next year. Burn rate is very low for small
companies. So perhaps small companies should NOT take VC $, they
should go it alone. Valuations have been hammered down already,
so VCs may not get the excess they need to make the model work.
Gerry: Recently saw a published list of 10 CIO suggestions. Among
other things it said to trim IT staff by 10%. This is a stupid
thing to say to CIOs. At an analyst meeting it was suggested that CIOs
review their portfolio of applications and cut them by a third.
This would yield cost savings on industrial apps. The analyst
company, Gerry noted, is frequently wrong. 10% can be squeezed
out, but a third is too much.
Howard asked what will tech people need to do when budgets are tight?
Fred: Take focus on the the rest of the world, look at the big
trends. Parts of the world are growing at 3 or 4 times the pace
of the United States. China, India and Brazil are expanding
rapidly. For software and webware it is easy to service entire
world. Sales & support not as easy, but product remains
needed and is easily distributed within the technology sector.
Steve: Consider the opportunity: in the last recession versus what's
next. Disruptive technologies and business models that were
immature are now proven. Look at Virtualization, offshore
outsourcing, Open Source (which has faded a bit) Cloud Computing (SAAS)
all of which are now proven to be effective in the front office and
inventive supply chain areas. Disruptive, yet at low cost low and
requiring less upfront capital, these are tech opportunity and growth
areas
Dwight: it is early (now) in SAAS or Platform as a Service (the
cloud). Now there is no thinking about physical machines ñ SAS.
Amazon EC2, virualization machines vs virtual machines ñ MAKES ALL THAT
DISAPPEAR (caps mine to indicate Dwight's verbal stress).
So now is the time to make apps so that they just work. The
beginning of a downturn is a good time to get started. Earlier
means they will need less capital to get started. Opportunity
costs are lower.
Gerry ñ asked for a show of hands: how many people in the audience are
involved in Cloud, or Software as a Service? (About 10 hands went
up.) THESE ARE MAGIC WORDS (his verbal emphasis) "Cloud" and "SaaS" These are now super competitive areas, many are out there working at it.
Howard asked for comment on the the opportunities in disruptive technologies.
Steve: There's lots of activity, but it is coming on strong and the
arena is crowded. Finding a place for a small company may
be difficult There are voids, though: widget companies, iPhone
app companies, wrinkles on Social Networking . . .these areas present
low costs to stay in business. But these are low opportunity areas,
too. To build a company with a future is not just a little
thing.
Fred: a One-Man-Show works in these areas. One or two man teams
building apps can work. A great thing about the tech biz today: a
one person consultant can make it; or a one or two person group making
software that other people use. Create an iPhone app or other
such app, license it out or sell it and a good living can be made for a
small or one person shop.
Howard noted that this is similar to the 1970s when PCs first came
out. Loads of small apps by small or one-person shops provided
income and sustenance for a good many up and coming, smaller groups.
Things are cyclical. He continued, here we are @ Chase headquarters in
NYC. NY is not always so easy a place to do business.
Regarding value and costs in other markets, what are the NY
advantages? How does this have impact on a small company or a
start up in NY?
Fred: You donít need your entire work force in NY. He can think
of 16 companies based in NY, half of which have their entire
engineering team here, the other half have them located
elsewhere. India is home to many engineering teams, also Minsk in
Belarus. Some companies split engineering teams, here and
elsewhere. In some cases around the US, not all are necessarily
offshore. NY, Fred noted, is easy to travel in & out
of. Ease of travel and the cost of living in NY is
comparable to SFO, Seattle, Boston. There's great public
transportation, so getting in and out (from the metro area or from
elsewhere) is very easy.
Gerry: NYC has the largest number of IT people working in any city in
the US. Given the banks, financial service and Wall Street
companies, et al. The FIRE group (Finance, Insurance, Real Estate)
and then IT Services companies themselves. City services employ
many IT people. Next come Information Service companies.
There are many jobs and there is great economic incentive in IT in NY.
Fred: Mike Bloomberg made his name here. When he left Salamon Bros he
built Bloomberg. In fact, he was Gerryís client when he was a VP
at Salamon. Even back then he wanted one mini computer per desk,
he thought that up in the early 70s.
Gerry was at Salamon 69 & 70
and remembers Bloomberg from then, and his ideas.
Dwight re: NY: he was in Atlanta when they began with
DoubleClick. They needed to decide where to go, and chose NY as a tech
oriented site, versus Silicon Valley. They key was that their
advertising customers were in NY. They could get great engineers
in any large metro area, yes. And great engineering talent was
available in NY. Massive competition exists out there for
resources. There's no particular Silver Bullet for being in
Silicon Valley.
Steve and Gerry both mentioned that in NY there are resources in
certain business categories. Fashion is here, as are other
industries, right at hand with regard to selling and interacting and
learning operational skills.
Fred: Google's engineering
office in NY (including DoubleClick) ñ has
750 people. This is the 2nd largest of their teams.
Anecdotal but not verified, is that many of those 750 were subsequently
fully
vested on option grants. And when this happened some 100+ of
those engineers trickled off to go elsewhere. With options
exercised,
they headed out to other places, start ups, new vistas. This made
more talent available.
Fred continued: The same goes for investment banks. Quit Wall
Street, join a start up. This means , of course, hugely different
compensation structure and business culture. Ex Wall Streeters
maybe not the best fit for small firms or start-ups. The point is
that there are many people available who are strong quantitatively in
math, and can create algorhythms and processes that work, and do
so rapidly. The talent pool for this sort of individual is vast in NY.
A Q&A session followed, which will appear in a subsequent post.
