Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

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Health of the Tech Economy

I was reading an article recently about how the number of new tech startups in my local San Diego area has doubled, to 70 new companies, compared to the same quarter last year. More than half of those startups were in software, computer hardware or communications. The article included a number of other criteria useful in measuring the health of the local technology market.

The direction of these measuring criteria for technology market health was somewhat mixed: Local tech employment was up, patents up sharply and M&A activity was up as well. Total Venture Capital fundings, which is an extremely important factor in tech company formation, came in less than half the comparable quarter a year ago.

So are these results a good proxy for the state of the broader technology business overall? I think they represent a very good set of indicators. Let’s take a closer look at some of these factors in a broader geographic view, in addition to a couple of additional indicators that I’ve added to the mix:

TECH EMPLOYMENT

I’ve added tech employment as it’s obviously a very key indicator of the health of any sector. Challenger, Gray & Christmas stated that the number of planned layoffs in technology fields fell to just under 47,000 in 2010, the lowest yearly total for the sector since 2000. The firm says this signaled that technology is recovering more quickly from the economic downturn than employers in other sectors.

During the next 10 years, the tech sector is forecast to experience one of the fastest paces of job creation of any industry. There are many anecdotal reports of strong demand for tech talent, especially in the crucial Silicon Valley market. Nearly 150,000 tech jobs are expected to be added in the US in 2011, says Sophia Koropeckyj, an economist at Moody’s Analytics. In February, there were about 6.1 million tech jobs in the U.S., up 2.4 percent from a year ago.

Tech sector employment trends appear much more positive than in the overall economy.

VENTURE CAPITAL FUNDING

The estimated market value of venture capital-financed companies in the U.S. rose 19% in 2010’s fourth quarter and 23% for 2010, according to the Dow Jones U.S. Venture Capital Index. The bulk of this is technology, and past returns are a very good indicator of amount of VC capital that will be available going forward. When VC funds have good returns, more money pours into their new funds, creating greater amounts of capital available to new startups in the future.

CB Insights report on Venture Capital Fundings in Q1 2011 showed total invested capital rose to $7.5B, up from $6.5B in Q4 2010 and $5.9B in Q1 2010. While a bit choppy, the funding trend has been generally up since Q2 2009. Again, this is bullish for the tech sector, which relies more heavily than most industries sectors on VCs for capital formation. Venture capital is still harder to come by than before the recession. However, while still down significantly from the go-go days prior to the recession, Venture capital availability is still a positive indicator of the tech economy’s health going forward.

M&A

The best tech M&A data currently available is from the first quarter of this year, and it is very bullish indeed. Mergermarket’s report on global M&A activity, published in April 2011, paints a bullish picture for acquisition activity in the early part of this year. This report shows the total value of worldwide technology M&A deals rose to $27,872,000 in Q1 2011, up very strongly from $10,729,000 in Q1 2010, even though the total number of deals decreased by 3 in this period. The numbers for North America were comparable.

It should be noted that while Q1 2011 compared very well to the same quarter in 2010, in both North America and Worldwide the trend was down from Q4 2010. So while M&A activity has picked up very strongly since the recession officially ended, the short term trend of the last quarter wasn’t a positive indicator for the future. This means that M&A activity is a bit of a mixed bag with respect to measuring the health of the tech economy.

TECH CAPITAL SPENDING

Forrester Research predicts that IT spending will increase in 2011 by a healthy 7.5% in the US, and 7.1% worldwide.

InformationWeek conducted a survey which showed that 55% of information technology professionals said their companies will increase information technology spending in 2011, while only 19% expect it to fall and 26% expect it to remain unchanged.

“Technology executives clearly see a sustained recovery of relevant Products/Services and a strong appetite for technology-related purchases by U.S. companies and consumers, which helped raise the position of the U.S. market,” said Gary Matuszak, partner, global chair, and U.S. leader for KPMG’s technology practice. “Coupled with demand from emerging-market countries, this combined opportunity bodes well for the industry.”

Technology capital spending trends, particularly in the US, provide a positive sign for the health of the tech economy.

TECH STOCK MARKET VALUES

The Dow Jones US Technology Index is up almost 20% over the last 12 month period. Stock values are very volatile and are affected by many factors other than the overall health of the sector, particularly in the short term. But over time they are a very good indicator of the health of the sector.

What Does It All Mean?

The indicators that we’ve taken a look at offer a mixed bag of conflicting signals up and down. While it appears more of the signals are pointing up than down, we are in an economy with a lot of uncertainty, and no definitive direction that can be predicted with any confidence. However, the software and technology sector appears to be in much better shape in the near term than both the US and worldwide economies overall. Farther out, the prospects for the tech sector appear to be much more bullish, especially when considering very long-term timeframes such as the next decade. Every company needs to draw their own conclusions about the economic impact on their market segment and individual company prospects. But in a larger sense, the arrow for the tech economy is more likely point up than down. If I’m the CEO of a software or tech company, the overall tech economy would be a positive factor in my decision matrix going forward.

So where do you personally think we’re at? Have we recovered, in the process of recovering, or is the tech business still treading water or going backwards? Post a comment and let us know where your own company’s situation stands with respect to recovery and future prospects.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on July 17, 2011
filed in Corporate Strategy, Financing, General Management, Mergers & Acquisitions, market research
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Is The Tech Recovery Upon Us?

Let’s face it, things still aren’t great economically: unemployment is over 10% nationally in the US, credit is tight for small businesses as well as reduced access to investment capital, and consumer’s moods, while improving are still not positive.

However, while I don’t want to overstate the case, but I do believe we are on the way to recovery. This has strategic implications for software and tech companies.

A look at the positives:

Stock markets on the rise–The Dow Jones Industrial average is up nearly 65% in the last nine months. Tech stocks in particular have been strong: the benchmark NYSE Arca Computer Technology Index is up nearly 95% in the same period. This is from a very deep bottom, of course. But it adds considerable wealth increases optimism, which usually leads to positive momentum.

Search firms are adding their own staff– ExecuNet’s benchmark Search Firm Hiring Index has increased the last two quarters, after many quarters of decrease. This is a nice indicator of expected increased hiring by businesses overall.

Worldwide employment on the rise — Manpower, Inc.’s Global Employment Outlook Survey for Q1 2010 states that the employment outlook is mostly positive in the Americas and Asia-Pacific, while still somewhat mixed in EMEA. Labor market strength in Asia-Pacific, which is becoming increasingly important as a consumer market, is expected to return to levels similar to before the global downturn.

VCs still have lots of money to invest — After sitting on the sidelines in fear (like everyone else with money in their pockets) during this great recession, Venture Capitalists are starting to poke their heads out among the economic green shoots. They were sitting on huge amounts of capital that was raised in the pre-recession bubble environment, much of which is still not invested-but still accruing management fees. I have heard that there are now many limited partners filing lawsuits as a result of their funds lying fallow, which may stimulate an acceleration of VC investments in the coming year.

IT spending is forecast to rise — After several down years and a very bad 2009, Garner is projecting an increase in excess of a 3% in IT spending worldwide in 2010. This is very important, and a bullish signal for the tech sector heading into the New Year.

The IPO market window appears to be opening — Security software company Fortinet had a very successful offering in November. Meru Networks, a supplier of wireless LAN solutions, announced today it planned to raise $86M in an initial public offering. IPOs tend to drive increased capital access up and down the food chain, and that window has been closed for some time. If it opens significantly, that bodes well for growth in the software and tech sector.

No more bubbles – at least anytime soon

We’re not heading toward another bubble anytime soon. It appears we’re headed for moderate, but hopefully sustainable growth as a result of our two catastrophic burst bubble in the last decade. Government debt, commercial real estate and inflation potential are concerns in the long run, but appear to be manageable in the near term.

What should tech companies do?

First of all, don’t be stupid and increase spending if your situation doesn’t support it — credit is still very tight, and access to investment capital still remains below typical levels of the last decade. So make sure your plans are supported by cash flow, or in the case of early stage companies, at least access to reasonable levels of debt financing or investment capital.

If you are able to spend, it’s a great time to grow fast or take share from competitors — when the economy is just starting to take off and buying is accelerating, act before your cautious competitors have come out of their shells.

In general, companies tend to be too conservative in their investment and hiring plans — Take note that hiring tends to peak at the apex of an economic cycle, just before growth slows or turns negative. In fact, many experts consider strong hiring a leading indicator of an economy that’s lost its momentum. I’ve never been a fan of hiring just because you have the money and growth rate to support it. This is a leading cause of bloated cost structures and bureaucratic, slow moving organizations. But most companies are pretty lean in staff after several years of recession. So if you really do need people, it’s more productive to hire them now as we begin an up cycle, instead of waiting until the very end of it as so often happens.

That’s my forecast and advice for the software and technology business sector as we enter 2010. What’s your forecast? I’d love to hear it. Post a comment or shoot me an email to add your own spin to this discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil via email at info@pjmconsult.com.

No Comments by admin on December 21, 2009
filed in Corporate Strategy, General Management
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