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4/28/2006
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5 Reasons We're Not In A Tech Boom

From smaller VC funding to your paycheck, there are good reasons not to get carried away with today's pockets of tech success.

Bob Williams sure looks like someone out of the last Internet bubble. He's a general partner at Bay Partners, where four of the five companies the venture capital firm invested in last quarter are Internet-based. Last week, his firm backed a Microsoft spin-off called Wallop, hitching on to the online social networking craze that brought MySpace.com a $580 million buyout.

"There are glimmers of activity that remind me of the early days of what's now known as the Internet bubble," Williams says. Glimmers, he calls them, tempered by his decades of experience in the Valley. But many others seem to be scrambling to declare this the next tech boom. Certainly, the Internet is back in favor, and with good reason. We now have a high-speed Internet that works, whether it's to connect gossipy teens, deliver software as a service to businesses, or allow truly global IT operations, including large-scale outsourcing. That helps explain why about half of all VC deals last quarter involved Internet companies. With stocks rising--the tech-heavy Nasdaq is up 22% over the past 12 months, the broader S&P 500 up 15%--there's exuberance in the wind.

But this isn't your father's--er, older brother's--tech boom. VC investment in Internet companies last quarter amounted to a mere 15% of what investors plunked down in the typical quarter in 2000. Total tech and internet-related venture investing is less than one-quarter what it was in 2000, and there are one-fifth as many IT venture deals. There were 23% fewer acquisitions of venture-backed tech companies last year than in 2000, with 85% less money changing hands.

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Sure, stock prices, business tech spending, and IT salaries are up, but nowhere near euphoric levels. Whether or not you wish it were 2000 all over, here are five reasons things are different this time around.

1. No Blank Checks
It wasn't just the venture-backed companies that went wild in 2000. Business IT buyers did, too. Consider: At the start of 2001, 72% of companies surveyed by InformationWeek Research planned to increase IT spending, and just 5% thought they'd decrease it. That wasn't a strategy shift; it was a thundering herd. Starting this year, only 46% of companies planned to increase IT spending, 33% were holding tight, and 15% planned to decrease it, according to our annual survey. There's strategic, growth-oriented IT spending happening, but it must clear a high hurdle.

Chart: Not Much Pop -- Average quarterly investment in IT by U.S. venture capital firmsThat's not to say business tech spending is moribund. Compared with recent quarters, fewer companies are canceling IT projects because of short-term spending freezes, says Credit Suisse software analyst Jason Maynard, who's the most bullish he's been on the software industry since 2000.

Companies will increase IT spending by an average 5.5% this year, according to an Accenture survey of 300 business and IT managers in March. Forrester strikes a more cautious tone, finding that companies plan to increase IT spending 3.2%, down from 3.9% a year ago. Still, growth is on companies' minds: The largest percentage, 21%, in the Accenture survey picked new business initiatives as the most important reason for the spending, though nearly 20% also cited upgrading legacy systems and adopting new technologies.

The prospect of growth and the recognition of IT's role in driving it justify some optimism. Unlike 2000, however, even the coolest tech tools are a tough sell. Vladimir Eskin, whose Russian business intelligence company, Prognoz, set up a U.S. office this year, puts it this way: "While most technology buyers in the U.S. realize that their companies are behind what is available in terms of BI applications, in their decision making, pricing clearly dominates functionality."

2. VC Money Isn't Everywhere
In 2000, at the peak of the Internet bubble, nearly eight of 10 VC deals involved Internet-related companies. Back then, VCs pumped more than $77 billion into Internet companies, or about $19.4 billion a quarter, according to Dow Jones/VentureOne. Last quarter, about half of VC deals involved Internet companies, with the amount invested topping $2.9 billion.

VCs, on average, invest less in each venture than they did in 2000--nearly $14.8 million in first quarter 2000 versus $5.9 million last quarter. But the Big Deal is back. It was rare in the bubble days for a company to receive funding of more than $75 million, says Joe Muscat, director of Ernst & Young's global VC practice. Last quarter, Amp'd Mobile, a provider of wireless mobile entertainment services, received $150 million, and ITA Software, a developer of pricing and connectivity software for the travel industry, nabbed $100 million.

Solid startups in hot markets still can find money. WiQuest Communications, a maker of ultrawideband chips for wireless devices, has raised $31 million, including $18 million in late March. "The availability of money has improved and is coming back from the dark days of the second half of 2001 to 2003," says Alun Roberts, a WiQuest marketing VP.

VC money's tighter, and that's a good thing. With money going to companies with real business models and promising technology, the emerging technology coming out of those startups is more likely to be relevant to businesses.

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