The train to the terminal station

Digital Equipment Corporation
Silicon Graphics Corporation
Sun Microsystems

One might get the impression that the boards of directors of technology companies have as much ability to intervene to stop suicidal business strategies as the boards of directors of Bear Stearns did.

But business is simple: you always have to look at the business model of the company and of the company management and other employees. In the case of Sun, there has been zero incentive for Sun management to bring in people who would challenge their decisions or the lax process and culture at the company. They get paid, feted, and admired by flunkies without being forced to actually justify their poor results. In the case of the banks, if your management staff and other high executives have the chance to make hundreds of millions of dollars personally by taking crazy risks with other people’s money, what would you expect? One of the things that I find most ludicrous about economics is the implicit theory that corporate employees identify their interests with the interests of the company: only engineers are stupid enough to do that. Once you realize there is a difference between the business model of the company and the business model of the people who run or invest in the company, the underlying logic of all sorts of wacky strategies that leave upper management well rewarded become clear. I used to be puzzled by well financed startups and public companies that motored along, getting new investment or other financing, being cheered on the street, and so on without having any remote chance of ever making any money. But there are plenty of opportunities for the people who manage, advise, and lend and invest other people’s money to all personally do well from such a business.

Venture Capital falls off the cliff

Through all the bumps and strains in the broader economy, venture outlays kept up an almost eerily steady pace over the previous 21 months, ranging between $7.3 billion and $8 billion each quarter, from the start of 2007 to the third quarter of last year, according to the MoneyTree survey, which tracks venture-capital investments.

But in the fourth quarter, investments plunged to $5.4 billion, a drop of 26.4 percent from the prior quarter and 33.2 percent from the fourth quarter a year earlier, the MoneyTree report showed. The survey is produced by the accounting firm PricewaterhouseCoopers and the National Venture Capital Association, using Thomson Reuters research data. (Boston Globe)

I’m ready to argue is that there is a basic problem in returns demands.  Insistence on earning very high returns fast pushes investors into “elevator pitch” companies with technology that is easy to undertand for non-experts. Imagine trying to explain Visi-calcs product when it was in development stage. Or Adobe’s. Or Oracle’s product. All of these are complex, relatively new, pieces of technology that required long term investment of engineering efforts.