Monterey, May 24, 2006
By MBITA Member Sheridan Tatsuno, Dreamscape Global
Recently, Sheridan Tatsuno of Dreamscape Global and long-time MBITA member, participated in the annual Red Herring Conference in Monterey, Ca. on May 24, 2006. The following is his birds-eye view of this high-level trade and investors’ conference.
During the 1990s, Clayton Christiansen’s bestselling book, “The Innovator’s Dilemma,” introduced the concept of disruptive technologies. Leveraging that theme, Red Herring magazine’s recent conference in Monterey, California explored new technologies and markets disrupting current business models and provided tips for U.S. companies facing tough foreign competition.
Bob Suh, Global Managing Director & Chief Technology Strategist at Accenture, challenged U.S. business leaders by observing that the U.S. is falling behind Europe and China, which will leapfrog us in mobile and corporate services. In Accenture surveys, U.S. CEOs are consistently more conservative than their Chinese and European peers. For example, only 42% of U.S. companies are investing in Web services and service-oriented architectures (SOA), compared to 50% for European companies and 100% of Chinese companies. Why? Many U.S. companies experienced 60% IT (information technology) failure rates during the 1990s and are now focused on fortifying older systems while being burdened with strict Sarbanes-Oxley compliance rules. By contrast, China is spending more time building IT systems and less on fixing them. Thus, Americans are not working as smart as its competitors, which will hurt our long-term competitiveness.
The conference consisted of a variety of panels addressing major industry issues.
Are online communities disrupting the global media marketplace? Panelists observed that commercial and user content are colliding; M&A (mergers & acquisition) activity by IAC, NewsCorp and Disney is accelerating at a feverish pace. Increasingly, the Wall Street Journal and other mainstream media serve as filters and community builders. Building community is important because trust among anonymous online users is a major barrier to successful commerce. Media companies are faced with the challenge of leveraging social networking, peer-to-peer (P2P), and location-based services to enhance consumer engagement.
The Outsourcing Innovation panel discussed the implications of outsourcing moving beyond the familiar areas of software coding, business process outsourcing (BPO), and call centers. How far up the value chain will it go? Navin Chaddha of Gabriel Venture said capital efficiency requires off shoring, which can work, despite a 50% failure rate. For example, Netscaler developed its Version 2.0 in India after the 2000 market crash and was later sold to Citrix for $325 million. However, Steve Lewis, president of Teneros, believes Indian outsourcing will slow down since many companies experience 100% employee turnover and 50% annual salary increases due to extensive job-hopping.
“There are no senior system guys; 5-year veterans want to be managers. There are no QA and product development guys available.” stated Jim Miller of Cadence Systems, which has 600 Indian programmers and enjoys low turnover and agrees that Indian salaries and competition for talent are intensifying. “India is not cheap; access to talent, customers and partners are key.” To reduce risk, Cadence distributes R&D in India among different organizational levels for products with different risk levels. Panelists recommend that U.S. companies focus on product/service differentiation and long-term competitiveness, and be selective in outsourcing to avoid “outsourcing addiction.” Companies need at least 30 to 50 offshore positions to make it worthwhile and pursue a balanced U.S./offshore approach.
For early-stage companies, the “Keeping the Golden Geese Alive” panelists agreed that, despite a market swollen with cash, startups are working harder to achieve capital efficiency by going global from the start to reduce their cash burn. Many technology sectors are crowded with Web 2.0, ultra wideband (UWB), cell phones media processors, social networks and online video. Furthermore, IT is being commoditized – software in India and hardware in China – so U.S. companies must move upstream in the value chain. The panelists emphasized the importance of a good business model upfront, a strong management team and a focused strategy. One positive development was determined on this panel, that the European Advanced Information Management (AIM) market is booming so many U.S. startups are leveraging it as part of their global strategy.
“Web 2.0 in the Enterprise” is becoming a hot topic now that the online consumer space is becoming crowded and major corporations are running Web 2.0 enterprise trials. IBM’s QED (Quick & Easily Done) Project is working closely with enterprise customers to provide weather feeds for home improvement stores and surveillance cameras for
monitoring professional thieves. Business intelligence (BI) vendors are providing Web-enabled services using “mashups” – a combination of existing Web 2.0 services such as Google maps, voice-over-Internet (VoIP), and tagging. Some companies are developing the new AJAX technology, which is hard to use, but enables rich desktop applications. In general, corporations are leveraging Web 2.0 users to accelerate their businesses.
Although Sarbanes-Oxley has essentially shut down the IPO market, speakers on “Alternatives in an IPO-Less World” panel were bullish, saying that there is plenty of capital and financing options for venture businesses. In particular, there is a flood debt financing, which is good for cash-starved companies without IPO options. Deals in the $40 million to $100 million range are much busier than those in the $5 million range. Exits in 7 to 10 years are common. In this IPO-less world, companies “must be able to walk, stand earlier, and prepare for due diligence.”
Overall, the conference was upbeat and showcased several dozen new startups (see www.herringevents.com/rhspring06/index.jsp). Speakers made it clear that China, India and other technology entrants will change the rules of the game, so U.S. companies must leverage new markets, technologies and partners to survive and thrive in the intensifying global competition.