Industry slump doesn't preclude advances

Industry pundit John McQuillan, co-chair of the Next Generation Networks conference, told a somber vendor audience last week in Boston that 80% to 90% of the 10,000 venture-backed private technology companies will fail by 2005.

By comparison, 2,500 tech companies successfully went public or were swallowed in upside acquisitions during the boom times of 1996 to 2000.

He cited the oft-repeated causes: the collapse of telecom, a plateau in enterprise spending and the drying up of the financial markets. But McQuillan's NGN co-host, David Passmore, research director of the Burton Group, said the future looks bright for enterprise innovation.

Companies are wrestling with everything from employee-acquired technologies such as PDAs and personal applications to emerging technologies such as voice over IP, wireless and Internet security tools. Some of this requires new infrastructure, and that catches the attention of upstarts and venture capitalists.

Regarding the latter, we recently caught up with Christopher Baldwin of Charles River Ventures for an update on current VC thinking.

Like Passmore, Baldwin says he sees the enterprise picture changing, if for no other reason than "IT has become a consumable," he says. "You can hold your breath for only so long. Sooner or later you have to take more in."

That makes him optimistic about new opportunities, but he points out that the rules have changed. Venture capitalists count on 5x to 10x returns, but can no longer expect that kind of performance from big bets so are shying away from them. "If it's going to take $80 to $90 million to get to cash-flow breakeven, I'm not sure that will work any more."

And because venture firms aren't venturing as much, they are scaling down their funds and their personnel. Once a $1.2 billion fund, Charles River is a $450 million fund today, Baldwin says.

The health of the industry also influences what types of ideas VCs will back. In boom times, incremental improvements on existing technology, while typically expensive, can be worthwhile investments if the incumbent vendors are having a hard time keeping up.

But in lean times large incumbent firms are in a better position for iterative advances and VCs instead look for innovation that can shift markets.

Shifting is what it is all about. At NGN, McQuillan told the audience that telecom has changed completely. "Not forever, but for at least the next planning horizon." In this climate, vendors, VCs and users alike have to revise their strategies on the fly.