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
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