Five Reasons We're Not In A Tech Boom

From smaller VC funding to your paycheck, there are good reasons not to get carried away with today's pockets of tech success.

May 1, 2006

9 Min Read
Network Computing logo

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 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.

InformationWeekDownload.comSure, stock prices, business tech spending, and IT salaries are up, but nowhere near euphoric levels. Whether or not you wish it were 2000 all over, here are five reasons things are different this time around.

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.

Chart: Not Much Pop -- Average quarterly investment in IT by U.S. venture capital firmsThat'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.Companies will increase IT spending by an average 5.5% this year, according to an Accenture survey of 300 business and IT managers in March. Forrester strikes a more cautious tone, finding that companies plan to increase IT spending 3.2%, down from 3.9% a year ago. Still, growth is on companies' minds: The largest percentage, 21%, in the Accenture survey picked new business initiatives as the most important reason for the spending, though nearly 20% also cited upgrading legacy systems and adopting new technologies.

The prospect of growth and the recognition of IT's role in driving it justify some optimism. Unlike 2000, however, even the coolest tech tools are a tough sell. Vladimir Eskin, whose Russian business intelligence company, Prognoz, set up a U.S. office this year, puts it this way: "While most technology buyers in the U.S. realize that their companies are behind what is available in terms of BI applications, in their decision making, pricing clearly dominates functionality."

2. VC Money Isn't Everywhere
In 2000, at the peak of the Internet bubble, nearly eight of 10 VC deals involved Internet-related companies. Back then, VCs pumped more than $77 billion into Internet companies, or about $19.4 billion a quarter, according to Dow Jones/VentureOne. Last quarter, about half of VC deals involved Internet companies, with the amount invested topping $2.9 billion.

VCs, on average, invest less in each venture than they did in 2000--nearly $14.8 million in first quarter 2000 versus $5.9 million last quarter. But the Big Deal is back. It was rare in the bubble days for a company to receive funding of more than $75 million, says Joe Muscat, director of Ernst & Young's global VC practice. Last quarter, Amp'd Mobile, a provider of wireless mobile entertainment services, received $150 million, and ITA Software, a developer of pricing and connectivity software for the travel industry, nabbed $100 million.

Solid startups in hot markets still can find money. WiQuest Communications, a maker of ultrawideband chips for wireless devices, has raised $31 million, including $18 million in late March. "The availability of money has improved and is coming back from the dark days of the second half of 2001 to 2003," says Alun Roberts, a WiQuest marketing VP.VC money's tighter, and that's a good thing. With money going to companies with real business models and promising technology, the emerging technology coming out of those startups is more likely to be relevant to businesses.3. M&A Activity Hasn't Gone Wild
The price tags on a few recent acquisitions--like eBay's $2.6 billion purchase of voice-over-IP provider Skype and News Corp.'s $580 million buy of MySpace--give the impression of a new tech bubble. And there's been a steady stream of acquisitions from big companies such as Google, Microsoft, and Oracle, as they try to stake out new market segments or claim emerging technologies.

Still, tech M&A activity isn't close to its 2000 peak. Meantime, the number of initial public offerings among IT companies is off nearly 20% from 2000. One reason is the market isn't craving tech IPOs. Another reason startups might not be going public is the cost of Sarbanes-Oxley compliance. Mark Ward, CEO of Copan, a VC-funded storage developer, estimates it would cost the company $4 million to $5 million just to comply with the SOX financial reporting and transparency regulations. Still, the company, which in March landed $56.5 million in new VC finding, is contemplating an IPO next year.

(click image for full chart)

Entrepreneurs cashed out of tech startups far more quickly in 2000 than they're doing today. In 2000, the median time from initial VC investment to an exit--acquisition or IPO--was two years and eight months. Last quarter, that had grown to five years, eight months, Dow Jones/VentureOne finds.

Antony Brydon, CEO and founder of Visible Path, a 4-year-old company that's trying to bring social networking to businesses, says the $25 million in funding it has from the likes of Kleiner Perkins Caufield & Byers is enough to maintain its independence. "Acquisitions are a luxury, rather than a requirement to survive," he says.

The fact that people made such a fuss about eBay's acquisition of Skype, a company with an estimated $60 million in sales last year, shows that valuations have come back to earth. Buying a company for 44 times revenue would have barely turned heads six years ago. "People now talk about selling companies at one, two, three times sales," says Steve Bengston, director of emerging companies services at PricewaterhouseCoopers. "In the bubble days, we talked about selling them for two, three, four times page views."4. Stock Prices Are Sensible
It's no picnic if companies make it public, either, as Corel found out last week. The maker of the WordPerfect and CorelDraw software programs launched its IPO only to see the stock close below the offering price of $16 its first day.

Bellwether tech stocks are well below their all-time highs. Oracle is off 68% from its high in 2000, Microsoft is off 53% from its 1999 high, and IBM is off 37% from its mid-1999 peak. Yahoo, a dot-com darling, is off 72%. EBay is trading higher than it did during the boom, up 12% from its price in March 2000. Still, its shares are off 42% from their late 2004 high. Google, which began trading in August 2004, is 11% off its all-time high in January.

Even companies cast for today's tech environment can have their problems. Consider the Credit Suisse Disruptive Technology Portfolio, a basket of 30 public companies chosen because they have business models, technology, or both that stand to shake up or create a tech market. Those 30 stocks this year are up 6.7%, slightly outpacing the S&P 500's 4.6% gain. But 11 of those stocks are down for the year--four by double digits.

5. Tech Salaries Aren't Out Of Control
IT unemployment stands at 2.5%, and still no one's letting you bring your dog to work? Let's face it, the best things about the bubble were the big paychecks, raises, and signing bonuses--we don't miss the off-beat perks as much. There's no clearer sign that irrational exuberance remains absent than the line companies are holding on salaries.

Back in the boom days, compensation packages soared, and IT specialists job-hopped among Internet startups chasing quick millions. Today's 2.5% IT unemployment rate is about the same as in late 2000 and early 2001, but the compensation makeup is way different. In 2001, median base pay for IT staffers was up 9% from the prior year, according to InformationWeek Research's salary survey. Throw in bonuses, which represented 15% of staffer pay, and compensation was up 22%. This year--same low unemployment rate--median base salaries for IT staffers were up only 1%. Bonuses propped that up only 3% more.Having the option to send work offshore, thanks to reliable Internet communication and a far more developed outsourcing industry in lower-cost countries, is one major difference. Perhaps the layoffs and disruption IT workers experienced after the bust made them averse to job hopping. Anecdotally, IT managers talk about how hard it is to find talent and even mention having to raise salaries. But there's no widespread trend.

So far, the numbers show that if a boom is indeed back, it's much more tight-fisted than the last one.

-- With Marianne Kolbasuk McGee

Stay informed! Sign up to get expert advice and insight delivered direct to your inbox

You May Also Like

More Insights