Defrag Blog

(Against all better judgement, I’m writing about some large economic cycles that I think will ultimately affect the Defrag space. Its important to note that while I do have experience in financial services, I’ve *never* been an analyst [like our own Paul Kedrosky], and as such, am in no way qualified to spew the things I’m about to spew.)

So, here’s what I’m thinking about this morning (while exercising, etc):

1. The Dow is at all-time highs, while the NASDAQ is less than half of its peak glory (and the S&P500 hovers near a new high).
2. The economy has undeniably been in a weaker cycle (over the last year), and folks are divided about when certain factors will pick up again.
3. Microsoft is rumored to be in talks to buy Yahoo! (i’ll skip the cute name-combinings.) And Reuters is receiving bids for a takeover as well.
4. Web 2.0 funding (largely consumer-focused) has been on a torrid pace for the past 2 years, and now seems to have slowed a bit.

Why am I bringing all of this up now?

Because my own private thesis (with nothing but intuition backing it up) is that we’re entering a cyclical uptrend that will be analogous (with significant differences) to the late 90s.

First, let me deal with the analogy: In the broadest of strokes, the 1990s saw a recession in the early 90s, followed by moderate growth, followed a slowdown in 96-97, that led to extreme growth (fueled by the public markets) from 98-2001.

By analogy, the 2000s have seen: A recession in the early 2000s, followed by moderate growth into the middle years, followed by the past current year of slowdown (06-07)….the question is - does the analogy hold for 2008-2010?

The overlay on the 90s is, of course, the dot.com boom and bust. An experience that left many scarred, and most with (at the very least) some psychological impairments. If you need proof of this, all you need do is observe the multitude of analysts and pundits that are constantly “calling the top” (in VC funding, web 2.0, Yahoo!, Google, you name it).

The difference this time around (up until this point) has been that: A) on a broad scale, this economic expansion has been fueled largely by real estate markets and a huge surge in private equity; B) the public markets have not opened up for IPOs as they did in the late 90s, and as a result the “exit strategy” in the tech world is now largely about being bought out by one of the big companies.

If you assume that the analogy holds up until this point (a shaky assumption, admittedly), then what do points 3 and 4 have to do with going forward?

#3: Microsoft is rumored to be in talks to buy Yahoo!. And Reuters is receiving bids for a takeover as well.
#4: Web 2.0 funding (largely consumer-focused) has been on a torrid pace for the past 2 years, and now seems to have slowed a bit.

On #3: Everyone is assuming that Microsoft is looking at buying Yahoo! simply because they’ve fallen “so far” behind Google — which is why I bring up Reuters. Is it not possible that some really smart M&A guys at some really smart companies are seeing the light at the end of the slowdown tunnel and thinking that now is the time to acquire assets that will only get more expensive over time? Answer: of course it is.

On #4: My gut-sense is that a whole lot of the “web 2.0″ funding wave has been focused on consumer-facing sites and services. And the contrarian in me thinks that we may now be entering a phase in the tech cycle (yes, I’m a cyclical guy) that favors “enterprise software” (even if that software is delivered as a service). In fact, a TON of the “consumer facing” companies that I know of have an enterprise strategy — and I think this plays into a larger theme that others have elucidated around the “consumerization of IT.”

When I add those two tiny data points together with my cycle analogy, it suddenly becomes a viable idea that we’re about to see an upswing in tech in 2008-2010 that resembles what happened in the late 90s. Now to be sure, I *don’t* mean that we’re going to see that level of craziness. What I do mean is that everything we’ve seen to this point is just a pre-cursor to a much larger wave of growth (and exits and liquidity events and expansion of multiples for both public tech companies and private tech companies that get taken out).

Will this all be seen as the “boom of web 2.0″? I suppose that’s a possible — and Defrag certainly wasn’t started because I believe we’re about to hit some huge “wave” of growth.

What I am remembering, though, is that many of the technologies and ideas that first appeared during the boom of the late 90s are what became the fodder that laid the foundation of innovation that we’re seeing today. Accordingly, I’d argue that the technologies and ideas that we’ll see in the next 2-3 years will become the fodder that lays the foundation of innovation that will mature in the late 20-teens.

In other words, my self-serving thesis would say that the companies in the Defrag space are at the very beginning of a 10 year innovation cycle that will come to fruition around 2017-2019.

Bottom line: we’re only now at the beginning of a new innovation cycle — and I think that the “defrag space” is where that innovation is at.

Am I nuts? Is this all just fluff? Probably. So now, I return you to your regular programming