This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Five Things You Can Expect After the Tech Wreck

The question arises from time to time as to whether Silicon Valley will survive the latest tech wreck. Of course it will, though it will emerge with a slightly different look. Here are five suggestions of what to expect during the long, slow recovery.

The death of baseball metaphors. Venture capitalist John Doerr got headlines recently for apologizing for having called the Internet the largest legal creation of wealth in the history of the planet. He's now added a parenthetical "and evaporation" to his famous saying.

But the metaphor I always associate with Doerr is his oft-repeated belief that we were only in the second inning of the Internet. That always presumed that the Internet was a ballgame. Now we know the Internet isn't a game or a revolution. It's an enabling technology, sometimes a distribution mechanism.

What inning are we in? Who cares? Perhaps a literary metaphor is more apt. We're currently in the denouement of the Internet period, the final outcome of one helluva dramatic event. After the dead bodies are picked up off the stage, the actors who remain will have to roll up their sleeves and rebuild. Which leads to...

Mercenaries go home. The fortune seekers who arrived too late in Silicon Valley are mostly ready to pack it in by now and are on their way either home or to the next boom town. That'll help in all sorts of ways, like lower housing prices, less traffic, an easier time getting a table at a restaurant and a generally higher level of civility.

But there's a more serious upshot. Long-term thinking will re-enter the lexicon. Ted Tobiason, a tech-oriented investment banker with Robertson Stephens in San Francisco, notes that he recently had dinner with a handful of physicists in Silicon Valley, and the talk turned to product development and company formation. "People were talking about time frames that I'm just not accustomed to talking about," he said. The group was talking about five-year plans, a "quantum leap," says Tobiason.

One group that hates long-term thinking, no matter how much it protests to the contrary, is Wall Street. Working on a short-term cycle means the Street makes more money. Watch for the big New York-based investment bankers who built up such large operations in Menlo Park and Palo Alto, Calif., over the last five years to gradually scale back their operations, a process that's already begun.

Metric compression. Once upon a time the only financial metric that mattered, in Silicon Valley and everywhere else, was earnings. Then came page views. And amount of money raised. And aggregate number of years experience of the management team. And so on. This seems silly now. But the metric inflation had a meaningful impact on how companies were formed. "Companies were getting built based on the one metric they thought Wall Street would pay for: revenues," says Michael Kwatinetz, formerly a research analyst and now a venture capitalist in San Francisco.

No longer. Revenues in the absence of a business plan aren't enough. Webvan collected about $240 million of revenue over the last 12 months it reported them. Its operating losses were $475 million on those sales. CarsDirect.com, a Pasadena start-up hatched in the investment crucible of discredited incubator idealab!, actually filed to go public with negative gross margins. That's right, it was selling cars for less money than it cost to acquire them. That was the epitome of the Internet bubble.

Now companies will follow the more traditional approach: Build a product, then market it, then sell your shares to the public if you need to raise more capital.

Goodbye guidance. There was a time when companies just commented quietly to analysts on Wall Street's expectations for their financial results. Then, after passage of the Private Securities Litigation Reform Act of 1995, a few bold companies, notably Intel (INTC), began publishing their so-called guidance in their quarterly earnings announcements. Now, after Regulation FD, all companies simply say what they expect on a conference call and leave it at that.

But a new trend is developing: No guidance at all. Santa Clara, Calif.-based communications chipmaker PMC-Sierra (PMCS) began to set the tone earlier this year when it repeatedly whined that it had "no visibility" on its performance for the rest of the year. Then Corning (GLW), by meaninglessly saying it expected a recovery within 12 to 18 months, essentially turned off the guidance spigot.

And this week, companies like Sun Microsystems (EMC), EMC (EMC) and Nortel Networks (NT) took things a step further by saying absolutely nothing about the future. Sun, for example, said it won't talk about expectations until its midquarter update in August.

Outgoing Nortel CEO John Roth said in a statement Thursday: "We do not expect meaningful growth in spending to occur before the second half of 2002. As a result, our visibility continues to be limited for the near term and we will not provide guidance for the third quarter or full-year 2001 at this time."

This is good development. Detailed guidance from companies made professional investors lazy. Everyone had the same guidance, and so everyone was completely shocked when the guidance changed. Now analysts who model well because they make the correct assumptions will have an edge over those who assume badly.

Hello individual industries. When I first got to Silicon Valley in 1997, I earnestly set out to learn about the semiconductor, enterprise software, disk drive and networking industries. Within two years I was spending considerable time writing about retailing, financial services, insurance and the like. Of course, it was all about the "Internet," a catch-all expression as misleading then as "genomics" is today.

Now, "business skills and experience count again," says Janice Roberts, a venture capitalist with the Mayfield Fund and formerly a top dealmaker for fallen networking-equipment maker 3Com (COMS).

The upshot of this is that no longer will executives who've worked primarily for software companies presume to know something about the grocery industry, to choose one example. And the whole Silicon Valley subspecialty of "business development" likely will evaporate, too. When experienced executives want to do a deal, they'll call up the companies with whom they want to do it and make it happen.

In keeping with TSC's editorial policy, Adam Lashinsky doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, frequently guest hosts the TechTV cable television news show Silicon Spin, and is a regular commentator on public radio's Marketplace program. He welcomes your feedback and invites you to send it to Adam Lashinsky.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs