Tuesday, June 15, 2010

The Decline of Venture Capital, Part 3 - the 2010s vs. the 1990s

Implementing Technology vs. Creating New Products
Having one of the thousands of companies deploying Oracle 11g in your state is less exciting than having one of the few companies developing new business software, but the former is tied to far more jobs now that these products have been around so long and installed by so many. In an Indeed search last year, I found four times as many openings in Metro Boston for SQL Programmers than for people with biotech Boston. So many companies in different industries now USE technology, that having expertise implementing it will create tons more jobs than a venture-funded “innovator” developing it.

If Boston needs more people to deploy technology than to create it, you can rest assured Detroit, Cleveland, and Salt Lake City are in the same position. But there's little chance you'll see a database administrator performing routine maintenance on an econ development agency's glossy brochure, even though the lab coat guy whose picture is there represents a tiny share of regional employment.

Green Tech Disappointments
As Biotech and IT have matured, many venture capitalists have turned to Green Tech/Clean Tech/Alt Energy for new investments. But unlike Biotech and IT, many green tech companies have 20-30% gross margins, far lower than the 50-90% gross margins typically seen in venture-funded industries. Because unlike a pill, semiconductor, or software license, most clean tech products have high unit costs.

Historically, one of the chief financial justifications for VC was that unlike industrial manufacturing, high-tech manufacturing created tremendous cash flows past break-even, because raw material costs and labor costs per unit were extremely low, while upfront costs were much higher than industrial manufacturing because of specially-created clean rooms and much higher R&D. Venture capitalists would traditionally hold the company as it raced to cover its high fixed costs, and then sell it or let it go public as it got closer to profitability. But the economics of green tech manufacturing aren't all that different from old-school industrial manufacturing.

Like a car, solar panels (including the thin film products) have high raw material costs. While many use the same material as semiconductors, they don't get smaller every two years like computer chips do. As a result, they have much higher unit costs and are not a great fit for venture investment, in spite of the dreamy hype of the last few years that led to many bad investments in this sector. Fewer companies can get sold or go public when they're not just unprofitable, but need another $1 billion of capital to break-even.

Even with all the feel good clean/green euphoria, venture capitalists are moving away from green tech manufacturing and toward smart grid and energy management, but the companies in these sectors are basically industry-specific software developers.

It's the 2010s, not the 1990s

While VC never had a significant impact outside a few regions, its time as a catalyst for economic development has long passed. Boring companies implementing someone else's technology hold far more promise for new jobs than flashy companies trying to build something “cool”.

No comments:

Post a Comment