Despite living in the San Francisco Bay Area, I spend very little time in Silicon Valley and even less time interacting with the tech intelligentsia. So it was an interesting diversion to spend a couple of days south of the city, meeting with a number of tech CEOs and venture capitalists. Once I adjusted to my new surroundings (a process that involved having my tie forcibly removed and the grudging acceptance that everyone—OK, almost everyone—was younger, smarter and better educated than me), I was able to focus on some key lessons:
This is not the dotcom bubble 2.0
I keep a pretty sparse office, but I do have a Pets.com sock puppet on my desk. It helps to remind me of the insanity of the late 1990s. The current wave looks different. Yes, there is plenty of fluff and hype. Private funding rounds are once again occurring at stratospheric valuations. There’s also a growing tendency—and this part is reminiscent of the late 1990s—for ‘me-too’ companies to attach a buzzword label, preferably ‘Big Data’, to their name and hope nobody notices the utter lack of a business model. That said, today the biggest component in the NASDAQ is… Apple. And it’s trading at a P/E ratio of less than 15x earnings, cheaper than many regulated utility companies. Plus, the new crop of companies is using asset light business models to produce real revenue at an astonishing pace.
Technology is leading to an ‘arms race’
The race for talent is accelerating. Hedge funds and asset managers are competing with Silicon Valley startups to attract newly minted PhDs in machine learning (with the Wall Street types having to reconsider dress code policies and answer tough questions such as whether or not you can bring your labradoodle to work). Virtually every company is engaged in a war of attrition with cyber criminals, with the average breach going undetected for 200 days! The result? A race to obtain state-of-the-art cyber weaponry between corporate security and hackers who are driven by age-old motives like greed (criminals), ideology (activists) and revenge (disgruntled ex-employees).
Not everyone wins
The assembled crowd was wildly enthusiastic about innovation’s positive benefits to society. At the aggregate level, they are probably right, particularly as it applies to the information economy. We are in the midst of a radical shift in how information is processed, analyzed and exploited. However, while this should ultimately support productivity and growth, there will be friction. Not everyone gets to board the mother ship; some get left behind. One more than one occasion, a tech CEO or chief technology officer highlighted how an innovation would free employees from mundane tasks and allow them to focus on higher value work. What always went unsaid is that many will likely lack the skills needed to exploit the new technology. Expect the labor force participation rate to keep dropping. To the extent it does, slower growth in the workforce should offset some of the gains in productivity.
Still, on the whole I left impressed and more than a little bit humbled (it probably didn’t help that so many of the people I met with had multiple degrees from Stanford, a school I have the dubious distinction of being rejected from on three separate occasions). The one unavoidable conclusion: Real change is coming, whether you’re ready or not. Investors should take note. Probably also a good time for me to upgrade the HP 12-C calculator I’ve been relying on since business school.