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Five Reasons We're Not In A Tech Boom

Posted by Eric Chabrow
May 01, 2006

Bob Williams sure looks like someone out of the last Internet bubble. He's a general partner at Bay Partners, where four of the five companies the venture capital firm invested in last quarter are Internet-based. Last week, his firm backed a Microsoft spin-off called Wallop, hitching on to the online social networking craze that brought MySpace.com a $580 million buyout.

"There are glimmers of activity that remind me of the early days of what's now known as the Internet bubble," Williams says. Glimmers, he calls them, tempered by his decades of experience in the Valley. But many others seem to be scrambling to declare this the next tech boom. Certainly, the Internet is back in favor, and with good reason. We now have a high-speed Internet that works, whether it's to connect gossipy teens, deliver software as a service to businesses, or allow truly global IT operations, including large-scale outsourcing. That helps explain why about half of all VC deals last quarter involved Internet companies. With stocks rising--the tech-heavy Nasdaq is up 22% over the past 12 months, the broader S&P 500 up 15%--there's exuberance in the wind.

But this isn't your father's--er, older brother's--tech boom. VC investment in Internet companies last quarter amounted to a mere 15% of what investors plunked down in the typical quarter in 2000. Total tech and internet-related venture investing is less than one-quarter what it was in 2000, and there are one-fifth as many IT venture deals. There were 23% fewer acquisitions of venture-backed tech companies last year than in 2000, with 85% less money changing hands.

1. No Blank Checks
It wasn't just the venture-backed companies that went wild in 2000. Business IT buyers did, too. Consider: At the start of 2001, 72% of companies surveyed by InformationWeek Research planned to increase IT spending, and just 5% thought they'd decrease it. That wasn't a strategy shift; it was a thundering herd. Starting this year, only 46% of companies planned to increase IT spending, 33% were holding tight, and 15% planned to decrease it, according to our annual survey. There's strategic, growth-oriented IT spending happening, but it must clear a high hurdle.

That's not to say business tech spending is moribund. Compared with recent quarters, fewer companies are canceling IT projects because of short-term spending freezes, says Credit Suisse software analyst Jason Maynard, who's the most bullish he's been on the software industry since 2000.