Tech's lost decade: No new big tech wave coming

The venture capital conference I attended failed to show me any new technologies in the innovation pipeline that would revive business spending on tech in the next several years. There was an excessive amount of excitement surrounding News Corp.'s $580 million acquisition of social networking site MySpace. An entire session of startup CEOs bloviating on Web 2.0, an ill-defined concept which tried to package old wine in new bottles, based its enthusiasm on the possibility of a Murdoch buy for their collections of hookup starved teenagers.

Several comments at the conference led me to think that a recovery is not imminent for the NASDAQ -- still 60% below its March 2000 peak:

• US losing market share. A leading venture capitalist noted that Sarbanes Oxley is causing companies to look to non-US stock markets -- in Australia, Japan, China, India, and London -- to conduct their initial public offerings. Moreover, some of the best venture firms are finding superior investment opportunities outside the US in countries like China, India, Vietnam, Malaysia and Poland. The conclusion is that US capital markets are shrinking as a result of these trends;
• Cutback in investment banking resources. An executive of a technology investment bank pointed out that since April 2001 when NASDAQ went from fractional to decimal trading, trading revenue is down 80% and there has been little money to pay for analysts to cover middle market companies -- those with stock market values between $500 million and $1.5 billion. When stocks traded for, say 15 1/4, investment banks made a profit on "the spread." Now that stocks trade at, say, $15.25, that spread has disappeared. And since regulators don't allow investment banking fees to subsidize analysts, there is little money to pay their salaries -- and too small an opportunity to attract new competitors. Fewer investment banks means more limited exit opportunities for IT venture investors;
• Limited exit options. There has been a drop in initial public offerings. For example, prior to 2000 there were 125 IPOs a year -- now there are 25. However, one venture capitalist noted that large companies are potential acquirers of ventures. Companies like Time Warner -- which merged with AOL -- and News Corp. which bought MySpace -- are in a position to acquire startups which disrupt the traditional media business; and
• Selective areas of opportunity. Venture investors are excited about various technology niches. For example, they see opportunities in mobile devices and content and the targeting of advertisements to mobile devices. I was intrigued by a startup which stores and organizes Google search results on a Personal Digital Assistant. There is some interest in open source software companies, although by definition, they must earn revenues from service and hardware since the software is free. Finally, there is much investor enthusiasm for clean technology -- such as ethanol refineries, solar, and electric cars -- although few of these companies are profitable.

The law of large numbers suggests that it will be hard for these relatively small opportunities to move the needle much for big companies like Apple Computer (NASDAQ:AAPL), eBay Inc. (NASDAQ:EBAY), General Electric Company (NYSE:GE), Google Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), Time Warner Inc. (NYSE:TWX) or Yahoo! Inc. (NASDAQ: YHOO). This is not to say that these companies won't innovate. It's just that large growth opportunities are required to enable big companies to experience a financially significant up-tick in revenues and profits. While I think Apple and Google have the potential to come up with such opportunities on their own, I question whether the other companies listed can do so -- either through internal development or from acquisition.

And this conference did not suggest to me that such opportunities are on the horizon.

I am neither long nor short shares of Apple, eBay, Google, Microsoft, Time Warner, or Yahoo. I own shares of GE and have done consulting work for News Corp.'s CEO. For more about me, click here.