Anderson takes the rap for tech crash

Venture firms made 'crazy investments'

By Globe Staff, 5/3/2001

id the frenzy of spending around Y2K help set up the crash in technology stocks?

It is not an opinion you hear very often, but Howard Anderson believes it to be true. Anderson has been a fixture in the local high-tech community for the past three decades.

In 1970 he founded the Yankee Group, a technology research firm, which he sold to Primark in 1996 for $34 million. He has also been a longtime venture capitalist, both with Battery Ventures in Wellesley and, for the past year, at YankeeTek Ventures in Cambridge where he serves as senior managing director.

Anderson has the delivery of a Borscht-belt comedian and the ability to laugh at his own mistakes. We sat down with him recently to get his take on the bursting of the technology bubble.

Boston Capital: So what is the link between Y2K and the tech crash?

Anderson: There was a whole tragicomedy that went on. Those of us in the industry knew that Y2K was not a real problem, but it was treated seriously and it helped set up the problems we are dealing with now. Because of Y2K, every corporate technology executive in the late 1990s all of a sudden had extra money available to spend that was not charged to his regular account. If you give a 2-year-old a hammer, everything looks like a nail. So what did these executives do? They spent with abandon. They upgraded applications, they improved their infrastructure. The industry needed an enemy and Y2K was the enemy.

Boston Capital: But that was not the only thing going on in tech land.

Anderson: No. At the same time Amazon came on the scene. Every major corporation - John Hancock, Fleet - was afraid of being Amazoned. So they spent even more money to Webify their applications. But now, the Amazon threat is over. Y2K is over. Y3K is 999 years away. And corporations have gone back to 1996 technology budget levels, which feels like a recession after the growth rates of the past few years.

Boston Capital: So what happens now?

Anderson: We are going to have a few lean years. Think about this. If you look at the 400 Internet companies that were created, at this time last year they had a market value of about $1.4 trillion. Today they are worth $250 billion. Somewhere, we lost more than $1 trillion. You have to ask: Who is to blame for this?

Boston Capital: OK. Who is to blame?

Anderson: Me. It's my fault. Me and my fellow venture capitalists. We didn't mean to blow through a trillion dollars but things kind of got out of hand. We started to make crazy investments. I will give you an example of one of the turkeys we invested in: Petstore.com. Remember the little hand puppet they used in the ads? That was a $9 million puppet as far as I am concerned.

Boston Capital: What went wrong?

Anderson: The real issue there was: What does it cost to acquire a customer? At Petstore, it turned out to be $300. If you were a customer with a big dog, you spent $30 a month or $360 a year. In pet food there is a 20 percent profit margin, so Petstore got $72 a year. Assuming the dog didn't die, it would have taken five years for the company to make back its acquisition costs.

Boston Capital: And there were lots of companies like that out there.

Anderson: And every one of them needed equipment. If you needed storage you called EMC. For servers you called Sun. For routers, Cisco. And you also needed a systems integrator, so you called Viant or Sapient. When the dot-coms crashed they brought down the arms merchants and the integrators along with them. There were false signals given to the market.

Boston Capital: How different is what happened in telecom?

Anderson: It is a similar story. The established telephone carriers were threatened by upstarts. Normally the carriers spent 10 percent of their revenue on next-generation equipment. But when the new competitors sprung up, the carriers started buying like crazy. Then they cut back. It has been difficult for the carriers but it has been a disaster for Cisco, Lucent, and Nortel.

Boston Capital: Certainly some good new companies were created during this bubble period.

Anderson: There are some great young companies. Akamai is going to be an industry leader. Exodus Communications is an industry leader. But you also have a bunch of companies that are selling at a buck or two a share. Some of these companies are orphans. Underwriters won't return their calls. No analyst covers them. They cannot raise new money. What I think is going to happen is that venture capitalists like us will take them private.

Boston Capital: Does that make economic sense?

Anderson: Sure. The extra cost of running a public company is a million dollars a year. Your CFO has to own at least two suits. The directors and officers need insurance. You have to pay your accountants and lawyers more. On top of that, you have to spend 40 percent of your time sucking up to Wall Street. We could take some of these companies private and they could become profitable in year one.

Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can be reached by e-mail at boscap@

http://www.boston.com/dailyglobe2/123/business/Anderson_takes_the_rap_for_tech_crashP.shtml

-- Martin Thompson (mthom1927@aol.com), May 03, 2001