Game over: demand in networking industry is dead

We’re screwed. There’s no other way to put it. Who’s “we?” The network/datacom/telecom industry. And why are we screwed? Because demand is dead. Kaput. Moribund. Innovation has never been better, and demand has never been worse.

The industry owes its presence to venture capital. But venture capital returns are tanking and will be for the next five years. During the boom, venture capital raised US$100 billion per year, which financed 5,000 new companies each year. Today, venture capital is financing 445 IT security companies and 60 radio frequency identification companies. There are three times as many venture firms and 10 times the capital of just 10 years ago. Capital is not the problem; demand is and will continue to be.

The two markets that we could always count on — telecom carriers and enterprise network users — are sitting on their hands and their pocketbooks. The hype machine that worked so well for so long is broken, maybe forever. We told enterprise network users that information was a strategic asset and the CIOs overbought; we told the world that Y2K would kill them and they bought even more; we said that every existing company would be “Amazoned” into oblivion unless they got a black belt in spending by Webifying their applications and they bought. Then the corporados reined in their spending and told their CIOs they had to make do with flat budgets, or else. We scared the telcos into overbuying next-generation technology by financing the competitive local exchange carriers, and then the few telcos left standing figured out that the CLECs weren’t viable. The CLECs not only stopped buying, but they also shut down. Result? The telcos stopped buying, too.

OK, so hype is dead. Is that our only problem? No. Our problem is that the technology stock market is acting rationally. That’s a problem? You bet. We need enough irrational valuation so that new companies can sell at 10 times sales or get merged for at least five times sales. But today, the average IPO is at 2.5 to three times sales, and merger prices are half that. It takes US$100 million in capital to build a carrier-class equipment company and US$30 million in capital for an enterprise software company to break even. If the payoff is only three to five times the investment, then the industry is screwed. Why? Because only 10 per cent of the companies get that far. In the old days, you could go to Williams Telecommunications with your new product. Matt Bross, the CTO, would join your board, Williams would get options on your stock and you were golden. If you had enterprise software or hardware, you trundled off to Bear Stearns, where Jeff Marshall would validate your technology and be a buyer, go on your advisory board, and then you had a real “referenceable” customer, which would put your company’s value in the mega-millions, if not low billions.

Today? No way. Can’t happen. The carriers are investing next to nothing in their wireline operations and not all that much in wireless. Enterprise network users aren’t buying much of anything, either. Stock markets are acting rationally and will for the next five years. Companies still standing will buy up good technology for pennies on the dollar and the industry will be stagnant for the next five years. We’ll have hundreds of companies hanging on, running out of money and hoping against hope that demand will return, valuations will go stratospheric and they will pass from the nonviable to viable stage. Breaking even will be the goal, not world domination.

What will happen to all the investment money that’s hanging out there? It will find new homes, like private equity, which does leveraged buyouts and maybe new areas of investment such as biotechnology, international, media or online music. But investment in young telecom and enterprise network companies is going to be hard coming.

Have I slipped from cautiously skeptical to irrevocably cynical? Maybe. Do I hope I am wrong? Yes. Am I? No.

QuickLink 055229

–Anderson is senior managing director of YankeeTek Ventures, a Cambridge, Mass., venture capital fund for early-stage technology companies. He can be reached at [email protected].

Would you recommend this article?


Thanks for taking the time to let us know what you think of this article!
We'd love to hear your opinion about this or any other story you read in our publication.

Jim Love, Chief Content Officer, IT World Canada

Featured Download

Featured Article

ADaPT connects employers with highly skilled young workers

Help wanted. That’s what many tech companies across Canada are saying, and research shows that as the demand for skilled workers...

Related Tech News

Tech Jobs

Our experienced team of journalists and bloggers bring you engaging in-depth interviews, videos and content targeted to IT professionals and line-of-business executives.

Tech Companies Hiring Right Now