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:
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.
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.