1 | technology leaders forecast survey dla piper llp...

1 | Technology Leaders Forecast Survey DLA Piper LLP (US)


EXECUTIVE SUMMARY

As the global economy emerges from an 18-month recession, technology leaders are wondering whether

there will be lasting impact on the way the tech industry does business:

n Will the economic recovery stay on track?

n Will the IPO and M&A markets rebound and how strongly?

n Has the model for building and funding tech companies changed?

n Will the US remain competitive in the global technology market?

n What are the challenges that companies and the tech industry now face?

The DLA Piper Technology Leaders Forecast Survey examined these and other questions. On the heels of

one of the most turbulent economic periods in modern history, the international law firm DLA Piper

commissioned a survey of senior technology industry leaders designed to measure current perspectives

and attitudes on the major trends, challenges and opportunities confronting the industry.

When DLA Piper last conducted its Technology Leaders Survey, in October 2008, the turbulent financial

markets weighed on the minds of respondents, and two-thirds of them predicted a recession lasting until

late 2009/early 2010. Today, those same leaders are optimistic about our economic future:

n More than two-thirds (69 percent) of technology leaders project that an economic recovery is at hand and that the recovery will be sustained in 2010.

n According to these same industry leaders, improving economic conditions will bring about a recovery in the US IPO market in 2010.

n However, almost a quarter (22 percent) of technology leaders have concerns about a relapse that would result in a double-dip recession.

n Furthermore, the strong majority of respondents have concerns about US competitiveness in the global tech market due to overhang issues from government debt as well as government regulation, particularly in the areas of banking and capital markets.

n The quality and costs of US higher education also continues to be a strong area of concern among technology leaders.


TECHNOLOGY LEADERS

FORECAST SURVEY

Respondents were asked to complete a short questionnaire designed to measure their thoughts and

attitudes regarding the current and future technology industry landscape. The following charts represent

the collective input of all respondents to the survey. A full overview of the survey methodology can be

found at the end of this report.

Economic Outlook

1. WHAT IS YOUR OUTLOOK FOR THE ECONOMY IN 2010?

RESPONSES % PERCENTAGE OF TOTAL RESPONDENTS

Gradual improvement 69%

Stalled improvement 22%

Substantial improvement 5%

Other (please specify) 4%

Total Responses 20% 40% 60% 80% 100%

n The DLA Piper Technology Leaders Forecast Survey found a very strong belief among tech leaders that the economy would see steady improvement in 2010, with close to 7 out of 10 respondents (69 percent) sharing this view. However, not all respondents shared this optimism, with more than one in five respondents (22 percent) believing the recovery would stall in 2010.

n Prior to the recession, in October 2008, the DLA Technology Survey found that 66 percent of respondents felt a recession was imminent – and 83 percent of respondents felt such a recession would last until late 2009 or early 2010.

“The survey’s findings of strong optimism in a continued economic recovery are consistent with the view

of our clients. Technology leaders are reporting that their cost cutting efforts are paying off in improved

financial results. Combined with a modest increase in revenues as the economy improves, there is a

greater willingness to invest in expansion and new technologies. Until recently, I would have described

the mood as ‘guarded optimism.’ We have not been hearing about a ‘sea change’ in the economy, with

most companies inclined to invest in expansion conservatively, and requiring demonstrated results before

making significant additional investments. Recent announcements of strong financial performance and

aggressive hiring plans by industry stalwarts may further signal a return to optimism.”

— Peter Astiz, Partner and Global Co-Head, Technology Sector at DLA Piper


IPO Environment

2. WHAT IS YOUR PREDICTION FOR TECHNOLOGY IPO VOLUME IN 2010?


Moderate increase: We will see a moderate increase in IPO filings, but IPOs for venture-backed tech companies will continue to be below historical norms.

73%

Substantial increase: We will see a substantial increase in technology IPOs in 2010 due to a backlog of companies seeking liquidity and investor appetite for high growth.

10%

Regulatory impediments: We will see no increase because regulatory impediments such as Sarbanes-Oxley will continue to dampen the IPO market.

4%

No improvement: We will see no improvement because the stock market will underperform.

13%

Total Responses 20% 40% 60% 80% 100%

n Technology leaders also see the IPO market rebounding in 2010, with nearly three-quarters (73 percent) envisioning a moderate increase in IPO filings, although with the caveat that the IPO market is expected to remain below historical norms.

n Industry executives seem to see the recent downturn in the IPO market as primarily cyclical and related to the overall economy, as opposed to structural and impacted by shifts in global capital market development.

“Our survey findings seem to be consistent with the external data and trends we are seeing. The number

of IPO filings has significantly increased compared to the dearth of IPOs in 2008 and 2009, with the

number of venture backed IPOs completed in Q1 equal to the total for all of 2009. Although some recent

IPOs have had a stronger reception, the overall performance of IPOs has been uneven. The continued

uncertainty regarding the availability of IPO exits, particularly for smaller transactions, continues to

impact the model for building venture-backed tech companies.”

— Peter Astiz, Partner and Global Co-Head, Technology Sector at DLA Piper


Technology Company Financing Models

3. HAVE CHANGES IN THE M&A AND IPO MARKETS PERMANENTLY ALTERED THE MODEL FOR BUILDING VENTURE-

BACKED TECHNOLOGY COMPANIES?


Yes: Less funding: Increased time to liquidity will lower returns, thereby reducing the number of venture funds and available venture funding.

24%

Yes: Model adaptation: Increased time to liquidity will cause fundamental changes in business models as companies seek to reach a more mature point to obtain that liquidity.

38%

No: Market is cyclical: There will always be opportunities to build great companies. Markets are cyclical, and over time M&A and IPOs will return to norms.

38%

Total Responses 20% 40% 60% 80% 100%

n The majority of industry leaders – including venture capitalists, entrepreneurs and technology company CEOs – believe that the model for building venture-backed technology companies has been permanently changed as we enter an economic recovery.

n Sixty-two percent of tech leaders and venture capitalists believe that the financial model for building tech companies has been altered, with the majority of those individuals projecting increased time to liquidity for VC-backed companies translating into fundamental changes in business models as companies must seek a more mature point to obtain liquidity.

n One quarter of respondents (24 percent) forecast that such an increased time to liquidity will lower returns, thereby reducing the number of venture funds and available venture funding for technology companies.

n Surprisingly, a full 38 percent of technology leaders simply see the current capital market as in an ordinary economic cycle and think that over time the IPO, M&A and venture capital markets will return to norms.

n One survey respondent summarized: “I think things will be better than expected, but it will be more important than ever for companies to be efficient in their early-stage efforts as there will be less cash available to gloss over errors. The better innovation will still come from the US, but the better investment climate will likely be in emerging markets and China, which for better or worse can place bigger bets on mainline sectors (e.g. clean energy).”


“I view fluctuations in the amount of venture capital available or liquidation preference terms as more

periodic and transitory than ‘fundamental’ in nature. There remains phenomenal power in the venture

capital model developed in Silicon Valley: talented, risk-embracing active investors partnering with

brilliant technologists and entrepreneurs. In our firm’s emerging growth practice we are reminded every

day of the desire culturally ingrained in America to create, compete and succeed. This desire is enduring

and independent of current economic conditions. I believe if government fiscal and regulatory activity can

avoid any dramatic reshaping of incentives for capital formation and investment, we will see, as we've

historically seen, our economic resurgence led by emerging growth companies.”

— Paul Hurdlow, Co-Chair Emerging Growth and Venture Capital Practice at DLA Piper

Government Action and the Tech Industry

4. WHAT DO YOU BELIEVE WILL BE THE IMPACT OF GOVERNMENT ACTION (E.G. REGULATION AND STIMULUS

SPENDING) ON THE TECH MARKET? (CHECK ALL THAT APPLY)


Negative: Greater protectionism and increased regulatory intervention will adversely impact the tech industry (e.g. in terms of cross-border transactions).

50%

Positive: Greater regulation will create new opportunities for technology-based solutions.

13%

Positive: The existing or possible new opportunities arising from government funding of cleantech and other new technology-related initiatives will have a substantial impact on the growth and success of venture-backed enterprises.

36%


Total Responses 20% 40% 60% 80% 100%

Multiple answers per participant possible. Total response percentages may exceed 100 since a participant may select more than one answer for this question.

n The survey identified a split in the technology community in terms of opinions about government action and its impact on the technology sector. Slightly more than 50 percent of respondents see the impact of government action on the technology sector as negative, expressing concerns that protectionism and increased regulatory intervention adversely impact the industry.


n However, more than a third (36 percent) see opportunities arising from government funding of cleantech and other technology-related initiatives. Further, some respondents (13 percent) even see opportunity generated by increased government regulation which could create demand for new technologies.

n The Technology Leaders Survey allowed respondents to record individual comments to elaborate on their answers to a survey question, and the area of government regulation received significant individual comment. Many of those commenting had concerns about a lack of focus or understanding by government leaders of the role and importance of entrepreneurship as a key to the industry and job creation.

n The consensus view on regulation seemed to point to negative consequences in terms of over-regulation of the capital markets, yet positive outcomes in terms of government funds flowing to the cleantech sector.

“The results of the DLA Tech Leaders Survey show a general concern in the tech sector that government

regulation will have a negative impact, with only 13% believing that general regulatory action could have

some benefit. However, where the government has already acted, such as in cleantech, with a focused and

substantial program, respondents are more positive about the effect of government regulation. The results

indicate a support for the free market – along with a general concern that the government is not focused

on the importance of innovation to the US economy and US competitiveness.”

— Howard Clowes, head of the Northern California Corporate and Securities Practice at DLA Piper

US Competitiveness in the Tech Sector

5. OVER THE NEXT DECADE, WHAT FACTORS DO YOU THINK WILL HAVE THE BIGGEST IMPACT ON THE ABILITY OF

THE US TO COMPETE GLOBALLY IN TECHNOLOGY? (CHECK ALL THAT APPLY)


Reduced quality and rising costs of US higher education

44%

Changes required to address environmental regulations

17%

Overhang from the national debt 60%

A weak US dollar 28%


Total Responses 20% 40% 60% 80% 100%



n The level of national debt and the quality of higher education is the factor that will have the greatest impact on the ability of the US to maintain its competitive advantage in the global technology industry, according to survey respondents.

n More than 60 percent of technology leaders express concern about an overhang from the national debt negatively impacting the US technology industry – and 44 percent express concern about the quality and costs of higher education in the US and its impact on the sector’s competitiveness.

n As mentioned above, the survey allowed respondents to record individual comments to elaborate on their answers, and the topic of US competitiveness in the global technology market drew the greatest amount of individual commentary. Many comments expressed concerns about the US business environment, increased regulation, immigration policies and education quality. Sample comments included:

– “There is an improving competitiveness and availability of funding for tech start-ups in other

countries.”

– “The current economy is making the cost of money too high for good returns and thereby

inhibiting investment.”

– “Higher taxes converging with a tougher funding environment is slowing companies and making

competition tougher.”

– “The US government has created an unfriendly environment for business and an unfriendly

immigration policy.”

– “Increasing government regulation and more ridiculous accounting rules are hindering the

competitiveness of US companies.”

– “There is a myopic application of stringent accounting rules for emerging companies that increase

costs, but do little to provide better information for investors.”

– “Immigration needs to be easier; companies need the ability to hire high-quality candidates from

abroad and who graduate from US universities.”

– “There is a sharp contrast between the Chinese focus on education and innovation as compared to

excess US government spending.”

– “US higher education output needs to increase in quality and quantity. US companies must be

positioned better to be able to leverage a global workforce.”

– “The US labor market is too costly; China and India based labor is less costly and education in

India is free. There are large talent pools outside of the USA.”

– “Competition from China and India will have biggest impact on US tech competitiveness.”

– “The tech industry will suffer from a lack of funding, leading to more difficulty for small and

mid-sized companies and a consolidation within the industry as the big get bigger. While this is

not necessarily a bad thing, the industry will continue to suffer from Washington’s inability to

pass meaningful patent law reform, build constructive trade agreements and conduct enforcement


– further hindrances include a hostile tax system (particularly on repatriation of offshore profits)

and the lack of immigration reform that enables qualified graduates of our math and science

programs to remain in the US after they graduate.

“Leaders in the US technology sector, when discussing U.S. competitiveness, point to two major

concerns. The first is the impact or overhang of the large national debt, which does not impact the

operations of a particular company directly but does impact the image of the US globally and its ability to

fully participate in global events. The second concern is the decrease in the number of students in the

math and science curriculum of higher education institutions in the US, which dramatically impacts the

future competitiveness of the US technology sector.”

— James Koshland, Partner, Emerging Growth and Venture Capital Practice at DLA Piper

The Outlook for Social Networking

6. WHAT WILL BE THE IMPACT OF SOCIAL NETWORKING IN 2010? (CHECK ALL THAT APPLY)


Improved monetization: We will see a significant improvement in the monetization of social networking sites.

17%

Continued growth: Social networking will continue to penetrate more deeply into the conduct of day-to-day business and personal lives.

5%

Poor monetization: Social networking will continue to grow, but will not present the monetization opportunities that current valuations presume.

47%

Consolidation: Social networking will continue to grow, but large players will absorb most of the future growth opportunities through acquisition.

32%


Total Responses 20% 40% 60% 80% 100%



n A surprisingly large number of technology leaders were not bullish on social networking business opportunities. Close to half (47 percent) felt that poor monetization would define the social networking arena in 2010.

n Industry leaders appear to believe that social networking technologies will not present the monetization opportunities needed to increase or maintain current valuations. Even those who saw continued growth in social networking businesses (32 percent) also thought the industry would see consolidation as larger players absorb smaller companies and growth opportunities.

“Leading social networking sites like Facebook and Twitter have grown their user base and cultural

popularity at unprecedented rates. However, the opportunities and ability to monetize the user base has

been less revolutionary and continues to rely on advertising, user marketing and software service plug-ins.

The survey data supports the growing uncertainty over how the social networking business model will

evolve – and whether new players can emerge with better monetization models in the face of entrenched

giants with such large installed user bases. We view the social networking phenomena as still being at a

relatively early stage, with ample opportunity to develop as mobile communications, cloud computing

and other game changing trends continue to accelerate.”

— Curtis Mo, Partner, Corporate and Securities Practice at DLA Piper

The Outlook for Cloud Computing

7. WHAT FACTORS WILL AFFECT THE ADOPTION AND/OR RATE OF GROWTH FOR CLOUD COMPUTING? (SELECT ALL

THAT APPLY)


Cloud computing will be pervasive for organizations of all sizes within 3-5 years

56%

Reliability of applications and/or broadband networks will be the major factor slowing deployment.

33%

Cloud computing will primarily be used by consumers and small/mid-size businesses.

22%

Security concerns will be the biggest issue hindering adoption.

49%

Total Responses 20% 40% 60% 80% 100%


n A strong majority (56 percent) of respondents believe cloud computing will be pervasive in organizations of all sizes within three to five years. The largest area of concern is, perhaps


predictably, security. Close to half of all respondents (49 percent) believe that security concerns are the biggest issue slowing or hindering adoption of cloud computing.

“The survey results reflect the fact that cloud computing is increasing, but widespread adoption by large enterprises will continue to lag until issues such as reliability and security are satisfactorily addressed. A significant percentage of large enterprises have begun using cloud services to gain the upfront savings in not having to invest in a private data center. However, the adoption rate for core enterprise-wide applications has been much slower. These companies do not undertake shifts in core technology platforms without a significant amount of testing and assurances. It's really up to the cloud service providers to demonstrate to enterprises that they can handle the increasing demands for faster, more reliable and more secure networks before the revenue from the more lucrative contracts will follow.”— Victoria Lee, Partner, Corporate and Securities and Information Technology Practices at DLA Piper

DLA Piper will examine key technology issues and trends again this fall in conjunction with the

DLA Piper Tech Leadership Summit, to be held in Menlo Park, California on October 12, 2010. For

further information on the DLA Piper Technology Leaders Survey or the DLA Piper Technology

Leadership Summit, please contact Peter Astiz at [email protected].

METHODOLOGY

In First Quarter of 2010, DLA Piper, the international legal practice, distributed its Technology Leaders

Forecast Survey via e-mail to a group of hundreds of senior executives and advisors in the technology

industry, including CEOs, CFOs and other company officers at technology companies, as well as to

venture capitalists, entrepreneurs and consultants.

The 2010 survey is the second such technology market analysis developed by DLA Piper, with the

inaugural survey and report having been issued in October, 2008. A follow-on survey will be conducted

in October 2010.

Respondents were asked seven questions and provided multiple possible responses; they were also given

the opportunity to elaborate on their answers with direct commentary.

Due to rounding, all percentages used in all questions may not add up to 100 percent. Percentages in

questions 4, 5, 6 and 7 exceed 100 percent because respondents were asked to check all answers that

applied. A few minor edits were made to verbatim responses, mostly to correct spelling and verb tense.

1 | technology leaders forecast survey dla piper llp...

Documents