How Information Technology Entrepreneurship has Changed the World

Internet Upstarts

At one time you would have to look no farther than the Dow Jones Industrial Average to find those companies that mattered in global commerce. Today that is no longer true as upstart young companies have muscled their way into the worlds largest industry: information technology broadly construed.

[Internet Tsunami: A PowerPoint Presentation based upon this material.]

While much of the press has been going to the revolution in eCommerce, the overall eBusiness opportunities are much larger and the opportunities in entrepreneurship in Information Technology are larger still!  I include here links to case studies of companies such as Amazon.com, Netscape, AltaVista, and Akamai.  The latter is particularly interesting as an example of an internet start-up that spins out of a university laboratory and becomes a 17 billion market cap company!

The table below compares the largest components of the Dow average ( the "Blue Chip" companies) against those companies that are equally large, often quite young, but not in the Dow average.  (This data was taken from a Wall Street Journal article on August 30,1999 (page C1) entitled "Does Tech 'Explosion' Alter Market's Nature?")

This illustrates very dramatically that newer companies are the fuel for the revolution in Information Technology Entrepreneurship.  Gary Hamel, in a Harvard Business Review article has suggested that this is simply a new business mode, a model of resource attraction rather than resource allocation.

There is another way to look at this phenomenon.  Lets look at the top 40 largest companies by market capitalization as of the spring of 1999.  The values given are the market capitalization on April 9, 1999 for each of the companies in billions of dollars ($B). Those 27 (the majority) companies in red and marked with an asterisk are companies that are the result of an IPO since 1980. (Source: Frank Quattrone, Credit Suisse/ First Boston)

The Internet Tsunami

Consider the internet Tsunami of new companies(Source: Frank Quattrone, Credit Suisse/ First Boston; Values are In $ Billions).  In less than five years, the market value of public internet companies has increased by over 200 times!  During this time, revenues have increased by less than ten times.  Clearly the market is betting on the future growth

Looking at the overall growth in market value of the technology based companies identifies the major technological eras:  Beginning with the invention of the microprocessor and development of the personal computer a period of exponential growth began that was fed by the rapid development of networking or data communications and new architectures for interactions between people and computers.  First there was client-server in which a two tier architecture prevailed and then the internet world wide web led to a distributed approach which some describe as multi-tier, but I would describe as diverse peer to peer in which most systems on the network interact as peers, but each has a different role, taking on different characteristics.

Consider what this has done to change the face of American industry.  In 1964 technology was the smallest of the major sectors, with the three largest all about the same size.  Today technology is the largest of the sectors with the former largest all in single digits.

Internet Valuations

Some would say that the valuations given to these new companies are akin to the famous "Tulip Hysteria" and other examples of the "Madness of Men."   Alan Greenspan termed the valuations given to the stock market an irrational exuberance.

How does one value a company?

• Assets?
• Earnings?
• Revenues?
• Intellectual Capital?
• Customers?
  In this regard, note that investment bankers (spring 1999) are using the rule of thumb that eCommerce companies are worth $25 per eyeball pair - hour. This refers to the amount of time that each customer visits an eCommerce site and spends looking at the content on that site. 

The last approach to valuation assumes that "loyal" customers who visit a site regularly are doing so in anticipation of purchases and that each hour spent will result in some average revenue to the site.  This is a plausible, but largely untested premise.

Consider this observation from Business Week:

It's not easy to develop a valuation model that explains why a Net stock that trades at 300 times next year's earnings is a steal. Certainly, there's evidence to suggest that the people trading these stocks are not the type to dissect financial statements (page 122). ``I bought eBay (at $125) because I thought it would go up fast,'' says Rod Puckett, 27, a contractor in Rockford, Ill. ``These stocks are like McDonald' s when it first came out, I hope.''

Still, in the quest for the Holy Grail of Internet valuation, analysts are slicing, dicing, and torturing numbers until they can be molded into what might pass for a rationale to back up a table-pounding investment recommendation.

Perhaps you can't be persuaded to buy Yahoo! for 320 times projected 1999 earnings. Is there a way to make the stock more compelling? Shaun G. Andrikopoulos, who follows Net stocks for investment bank BT Alex. Brown Inc., came up with Theoretical Earnings Multiple Analysis, or TEMA. By that measure, which projects future earnings by estimating revenue growth and the operating margins that the company would hope to achieve when it has matured, Andrikopoulos says the p-e on year 2000 earnings is just 192. But factor in a revenue growth that's 55% higher--and he thinks Yahoo!, with a history of higher-than-expected sales growth, deserves that--and the TEMA p-e drops to 124. He's recommending the stock.

The analyst claims that his model gives a ``feel for the realistic theoretical earnings power of Yahoo!'' Realistic theoretical earnings? That might fly in an investment bank, but in English it's oxymoronic.[Internet Valuation]

MORE on Valuation here

The flow of Venture Capital into new enterprises has been nothing short of astonishing.   In the second quarter of 1999, Venture capitalists pumped $7.67 billion into companies over doubling the $3.77 billion in the same period of 1998. [ http://www.infoworld.com/cgi-bin/displayArchive.pl?/99/35/t23-35.32.htm ]

Wilson's Favorite Laws:

What is driving the internet tsunami is a few fundamental physical and mathematical laws that have held true for years and are continuing to drive change today.   There is every reason to believe that these will continue for another 40 years or more!

Moore’s Law: CPU performance doubles every 18 months

Bandwidth law: Bandwidth is doubling even faster!

Metcalf’s Law: the value of a network scales as n² where n is the number of persons connected.

Moore's Law

Moore's Law:  Ever since the invention of the microprocessor by Ted Hoff ( A Rensselaer Alumnus) the performance of a microprocessor has been doubling every eighteen months.  This is directly related to the number of components that can be fit on a chip and is thus related to the minimum size of each component.  Advances in basic physics and engineering have kept this law accurate for over five decades! [Moore's Law]

Metcalf's Law

Metcalf's Law:  The power of networking.  The value of a network scales as n2 where n is the number of persons connected.   Consider AOL as an example.  In the fourth quarter of 1996 AOL instituted flat rate pricing which meant that members had unlimited use of the service for a flat price.   This led to dramatic growth in use.  From that time until the second quarter of 97, average daily use grew at an annual rate of approximately 400% (a quintupling!).   Then the growth settled down to an annualized rate of about 26%.
During this time, the number of subscribers increased dramatically as shown here:   Leading to an explosive growth of total use:
According to Metcalf's law, as the number of users over doubled,   the value of the network quadrupled! This is an important contributing factor to the significance of "lock in."   As one enterprise attains dominance in a market, the value of their user base tends to make it difficult for another enterprise to match.  This is one of the reasons that internet companies focus on market share and are valued on eyeball pairs-hours.

Bandwidth Scaling Law

For the last two decades, the bandwidth of communication on optical fibers is increasing exponentially just as is the power of the microprocessor.  Examination of the graph below reveals two numbers of intense interest.  First the optical bandwidth for commercial networks has doubled over 9 times in the eighteen year period from 1979 to 1997.  This indicates a doubling time of approximately two years.   Notice also that the displacement between the best bandwidth in the laboratory and the best bandwidth in commercial deployment has a delay of just about 6 years.   This means that commercial deployment of bandwidth will surely continue to double for the next six years leading to an overall increase in bandwidth of 8 times!    Those who work in optical networking are confident that improvements in the physics and engineering will continue to improve the best laboratory bandwidth over this period.  Thus we can say with a high degree of confidence that the bandwidth doubling will continue of the foreseeable future! This relentless march of bandwidth led George Gilder to declare that the future was a future of a "Bandwidth of Plenty."

(graph courtesy of G. Hughes)

These three laws will carry us forward for the next half century.  For those that find coping with the fast pace of change, this is a terrifying prospect. For those who love change and the opportunities that change creates, there has never been a more exciting time to live.

A History of Key Events in the History of Technological Entrepreneurship.  - J. Wilson

Labor Shortage in IT

Industries have a major obstacle to overcome in taking advantage of these changes in industry that have become possible due to the enormous advances in technology.  That obstacle is the extreme shortage of skilled workers in the IT industry.  The shortage is compounded by the rapid changes in technology which make some skills obsolete in very short times as new technologies are introduced.  In a 1998 survey, the Information Technology Association of America has  identified more than 346,000 unfilled IT positions,  a 10% vacancy rate, in U.S. IT corporations.

The IT industry now accounts for more than one-third of the growth in the U.S. economy!   It is one of the fastest growing industries in the U.S. economy. The Bureau of Labor Statistics (BLS) projects that the number of core IT workers will increase from 1.5 million in 1996 to  2.6 million by 2006.  This is an increase of 73% during g the 10 year period. They also project a need for more than 1.3 million new workers - an average of 140,000 skilled workers per year over the same period.

According to the ITAA "A number of factors are contributing to this ever-increasing shortage, including an inaccurate image of the IT profession, the under-representation of women and other minorities in the IT workforce, and outdated academic curricula that oftentimes does not keep pace with industry needs. In addition, our country’s policy makers must place greater focus on education and training to satisfy the rapidly growing demand for skilled IT workers."

InformationWeek story about the persistence of the labor shortage based upon data from the Computing Technology Industry Association.

The Information Technology Association of America has been active in identifying and addressing workforce shortages and needs.  Their articles on "ITAA Initiates IT Skills Gap Research Program: IT worker availability, skill sets, and hot jobs & technologies" and "THE IT WORKFORCE SHORTAGE AND EDUCATION" describes the shortage, projected growth scenarios, and possible strategies.

Key References

George Gilder, Gilder Technologies: http://www.gildertech.com/

[CIO Magazine] The Gildered Age: INTERVIEW/GEORGE GILDER, Oct. 1, 1994.

Harvard Business Review; "Bringing Silicon Valley Inside": http://www.hbsp.harvard.edu/products/hbr/sepoct99/99504.html

Information Week: http://www.informationweek.com/

InfoWorld: http://www.infoworld.com/

Fortune: http://www.pathfinder.com/fortune/

Fortune 500: http://www.pathfinder.com/fortune/fortune500/index.html

Metcalf's Law: Metcalf's law and Legacy from Forbes Sept. 13 1993 http://www.forbes.com/asap/gilder/telecosm4a.htm

Moore's Law: http://www.intel.com/intel/museum/25anniv/hof/moore.htm;   http://www.whatis.com/mooresla.htm ;

Internet Valuation: INTERNET STOCKS: WHAT'S THEIR REAL WORTH? Business Week: December 14, 1998

Information Technology Association of America: "ITAA Initiates IT Skills Gap Research Program: IT worker availability, skill sets, and hot jobs & technologies"

Information Technology Association of America: "THE IT WORKFORCE SHORTAGE AND EDUCATION"

InformationWeek (October 18, 1999) "IT Labor Shortage Persists, Hurting the Economy"

27 August 1999 - Jack Wilson