The economy is roaring. Growth in gross domestic product is literally on fire – up 7.2% in the second quarter, now up 8.3% in the third quarter. It’s booming again. Or is it?
If it is, don’t tell all of those Silicon Valley engineers still out of work, or the biz dev and marketing tech guys who’ve found jobs somewhere but at a haircut of 40% or more off their previous salaries. And don’t tell all those investment bankers still waiting to pitch new IPOs or structure some strategically large M&A transactions.
And definitely don’t mention it to those folks arguing that jobs should be staying here in the U.S. when companies large and small are exporting entire divisions (read: Microsoft, Dell, et al) to India and Asia. And for sure don’t even whisper it to venture capitalists, because if there is indeed a boom, then we should be first in line at the exit doors, awaiting liquidity opportunities.
Such is the nature of the false starts we’ve come to expect over the last three years, and I suspect 2004 will be much of the same; though perhaps with a bit more of a security cushion that the worst is over for VCs, for tech and for the bankers, engineers and vendors who all make their livings complimentary to our universe. If there’s a message for 2004 it’s expect things to get better, but don’t set those expectations too high.
I see 2004 in half-year scenarios. The first half will be long on hope but short on substance. Overcapacity within the tech sector will still largely exist, adding further pricing pressure on the hardware side, particularly in telecom. Earnings will reveal that they do not justify the bid-up expectations of a market that cruised 30% higher in 2003. Terrorist disruptions will become more the norm than the exception, but the U.S. and world economies will learn to ignore them, or at least tolerate them.
We will still be in Iraq, as is evident from the looks of things in December, and this will play heavily into how much money the government must use to continue funding a war increasingly seen as unpopular by the American public. Economically, this will cause the Administration to be in military spending mode, creating uncertainty regarding ever- expanding deficits in the way of a static or perhaps weakening dollar.
Wall Street won’t love it, but it won’t hate it either, again ignoring the economic consequences of such spending at the expense of deficits until it feels it will start to come back and haunt us. What it will do, however, is keep a lid on the IPO market as we’ve never seen before. Investment banking underwriters will continue to starve and not even blockbuster IPOs – like Google and Salesforce.com – will be able to make it out the door.
As slim as balance sheets were for those companies that went public during the boom, that is how fat balance sheets must now be in order to merely sell new deals to the public markets. The IPO window will stay largely shut through the second quarter and open ever so slightly in the second half of the year, but only for companies with truly solid financials. The market will be willing to take more risk as the year goes on.
We’ll see a true rebound in the economy in the second half of 2004 and this time the rebound will have legs. What we’ve been seeing for at least two quarters is an economy roaring along at the behest of monetary and fiscal policies that have primed the pump as never before. As the onetime Bush administration tax cuts wear off and military spending should theoretically level off, the economy will have to sink or swim on its own. A jobless recovery will finally add jobs, though they will be at far lower wages than most wage-earners had been used to. The markets will stay lukewarm as financial scandals fade into the past, but not far enough to lure back all the investors who’ve been burned.
Finally, by year-end, the venture capital shakeout will near it’s long awaited conclusion, though 25% or more of the firms in the industry will still die or find themselves significantly restructured in 2004 (a good thing for LPs and those firms still standing). The remaining firms that need to raise funds will have done so, or they will be in the market pitching niche-focused funds to a narrower but more willing group of institutional investors. Our feet will indeed be held to the fire.
If you’re looking for massive innovation to return to tech you’ll have to look past 2004. For as much as it will slowly creep back into the Valley it will reappear through a garden hose rather than a fire hose.
Three areas of no-brainer investment and opportunity will emerge: wireless, security and energy technologies. Wireless capacity is already at its limits and applications – particularly delivered to carriers through ASP models. Upfront service provider capital expenditures will be nearly zero and will expand as handset and laptop sales boom with wireless capabilities.
Security innovations and investment at all levels within the enterprise will continue to be stepped up, though particularly important in the areas of wireless LANs. Innovations in energy technologies will move beyond just fuel cells, solar cells and wind power, as VCs understand that the energy grid needs its own technology solutions with regard to transmission security and more efficient levels of monitoring and distribution.
The nano-buzz will finally subside. The venture-backed science experiments will continue to raise rounds, as nano-focused VCs defend their positions, but as the bloom comes off the rose, nano-business plans and power points better have commercially viable (and profitable) applications within two to three years of funding or they’ll be tossed back out onto Sand Hill Road.
Shelfware will continue to be digested throughout 2004 as savvy corporate customers come to understand just how much they overpaid for software and services during the boom and refuse to be suckers twice over. The entire former enterprise software business model will have already been laid to rest and in its place corporations will require clear returns on investment before they plunk down any money at all for new applications. Buying hosted software, often by third-party vendors, will become the red-hot trend (almost the rule), as it is seen as the best path to lower total cost of ownership and means to kill once and for all nasty integration costs.
Enterprise-class distributed security, reliable bandwidth (QoS) and a new generation of enterprise apps adapted for this world will all be winners in 2004 due to this wave. One such winner embodying this trend is Charter-backed Talaris Corp., which will emerge from nowhere in 2004 to become a much discussed – and mimicked? – Web-services-focused private company.
We’ve already proposed in two previous columns that internationalization has become, and will continue to become, the dominant factor within the entire arena of company creation. The trend will truly take hold in 2004. The media will shine their bright lights upon this next step in globalization, not only for all of the domestic jobs lost to international markets, but for all of the opportunities that the rest of the world represents, as companies look for growth opportunities far outside the U.S.
If General Motors can look at China as a blank canvas, so can every technology company on the planet. India will not only be a fountain of technology development, but an equally important market for technology demand. The consequences for technology companies and venture capitalists will be palpable. Companies had either better prepare to sell into those markets, or as we’ve suggested before, look to build their companies in whole or part from the ground up in those geographic regions.
As we’ve also noted, this is no easy task, and investors had better be on the ground with knowledgeable “tour guides” to keep them out of trouble, though they can’t ignore the opportunity for fear of getting it wrong.
Our firm, in particular, is looking to India as a sweet spot for all new companies and even for some of our portfolio companies. Though we accept that we don’t know all of the ins and outs of doing business in India and Asia, you can bet we’re piling on the frequent flier miles trying to figure it all out.
On a final note, I know that I may get more than half of the above predictions wrong. It won’t be the first time -no portfolio cracks, please! I am certain of one thing: In 2004, there will definitely be another first-timer Super Bowl Champion (you heard it here first: the Carolina Panthers), because it sure ain’t going to be my beloved Oakland Raiders.
Ravi Chiruvolu, a general partner of Charter Venture Capital, is a regular technology columnist for VCJ. If you’d like to send him feedback or ideas, email him at