Behind the knee of the Internet curve
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Opportunities over the next decade
By Bambi Francisco, CBS.MarketWatch.com
<<As the Internet hangover lingers, private company investors and entrepreneurs were told Tuesday that more emerging technologies linked to the Internet will be major drivers of investment opportunities over the next decade.
"We'll see the cycle of economic contribution (as a result of the Internet) over the next 10 years," said Vinod Khosla, partner at venture capital firm Kleiner Perkins, who gave the keynote speech at Red Herring Venture 2001, a business strategy conference.
His assessment: "The knee of the curve has yet to come."
Inspirational words for entrepreneurs and investors. The average venture investment per company last quarter fell to $10.9 million, compared to $13.7 million in the final quarter of last year, according to a just-released study by Venture Economics and the National Venture Capital Association.
Venture capitalists are sitting on cash, afraid of more down rounds and entrepreneurs are faced with VCs asking for stricter terms, said Tom Stein, senior editor at Red Herring and moderator of the "Name your valuation" panel, one of the best, if not the best-attended panel at the conference.
If the standing-room only crowd at that discussion said something about the investor's dilemma the current market created, Khosla's repeated words said something about what everyone needs: a reason to be inspired.
"I'm still bullish," he told the crowd. "I'm very bullish and I ignore the cycles of the stock market." By 2010, the average corporation will spend 10 percent of its sales on IT spending, up from 3.5 percent currently, he forecast. Incidentally, 0.5 percent of sales was spent on IT spending in the early '90s, he added.
And every 1 percent of sales that companies spend on IT equates to a reduction of 1.5 to 2 percent of general administrative expenses in one year, he said.
Within the framework of those trends, Khosla said he believes there are opportunities for technology that provide corporations with real-time processing of orders or communications.
And despite the torrent of investments in the optical domain, the shake-out has largely bottomed, Khosla suggested. "The reaction is an over-reaction, today," he said, reminding the audience that he predicted the optical networking shake-out last fall.
That's not to say the process of separating the wheat from the chaff isn't over. According to Khosla, to consider the optical sector, investors need to understand the five areas: routers, long-haul optical, metro-optical, IP services and the access market, which includes equipment between the central office and the end-user.
In the router space, Khosla believes Juniper Networks (JNPR: news, msgs, alerts) has the best product, with Cisco Systems (CSCO: news, msgs, alerts) following with a satisfactory product. In the long-haul optical area, it's unclear whether Corvis (CORV: news, msgs, alerts) , Nortel Networks (NT: news, msgs, alerts) or Ciena (CIEN: news, msgs, alerts) will win; In metro-optical, ONI Systems (ONIS: news, msgs, alerts) has the best product and momentum while Ciena and Nortel are completely out of position, he said. While Redback Networks (RBAK: news, msgs, alerts) , which provides products that handle subscriber management for consumers or businesses that have high-speed Internet access, via mostly DSL, has the pull position in the access market. Redback, which was created by former Cisco employees, has far superior product than Cisco given that it can handle more subscribers, according to some analysts.
Khosla Bubble and other bubbles to come
But investors shouldn't just jump in and heed his advice. Khosla has reason to like the companies he listed given that Kleiner Perkins backed some of them, including Juniper, Corvis and ONI Systems.
Khosla, however, also gave his own words of caution.
As a caveat to his presentation, Khosla told attendees that not only has there been an Internet bubble, but a "Khosla Bubble." He's had a hot streak and that's bound to come to an end.
Moreover, Khosla emphasized, as he always does, to guard against the "me-too" types of investments. He calls them "clones" or companies that provide "incremental change" vs. fundamental, ground-breaking technologies.
Another rush into these flavors-of-the-month types will likely cause more bubbles. "Each sector will be subject to speculative bubbles," predicts Tony Perkins, chairman and editor-in-chief of Red Herring, whose new book "Internet Bubble II" will be released this summer.
But with the biggest bubble behind us, investors should be in better shape to seize the next opportunities that still appear well ahead.
Said Perkins: "We're in the reality period; the caveman-drawing period of the Internet.">> |
