07/01/2002

Riding The Ups And Downs Of The Technology Roller Coaster

Todd Zeldin, President

ACG Professionals, Inc.

During the late '90s, the technology industry experienced the ride of its life. For a multitude of dot.coms, maximum thrills and chills came in the form of easy venture capital, quick profits, teenage millionaires and laid back working environments. But what goes up must come down. Beginning in late 2000 many of these dot.com thrill seekers found themselves careening out of control, their profits and companies heading for a deep descent. Despite their willingness to hang on tight a large number of these technology start-ups plunged into bankruptcy as they could only watch the floor flying out from under them.

What happened? How did the dot.com boom turn into a dot.com bust so quickly and completely? While hindsight is always 20/20 vision, the fact is that there were a number of clear trends that contributed both to the periods of expansion and decline.

Trends Leading Up to Technology Build Up

In the late '90s, the technology industry was well positioned to enjoy a period of enormous growth. The economy was moving along nicely and expanding rapidly. Wealth increased across nearly all sectors of the economy, layoffs were absent and business was booming. The technology sector was also helped along by low interest rates, low unemployment and high growth – three key factors to any economic expansion.

• Scrambling for talent

Unlike in today's recessionary times, companies were scrambling for quality talent in the last part of the decade and early months of 2000. Top talent was difficult to find; consequently, many firms were forced to fill open positions with under qualified and overpaid workers. Ironically, it is typically these individuals who are being cut first in today's downturn.

• Teenage Millionaires

For the first time in a long time, the expansion in the technology sector sprouted a new generation of millionaires. These new entrepreneurs were young (teens and 20 somethings) who found themselves leading companies with high valuations and low revenues. Today, these one-time CEO wonders find that they are basically unemployable and faced with two options—either accept a job for far less compensation than to what they became accustomed, start a new business or return to school to earn their undergraduate or post graduate degree.

In effect, these former dot.com executives are now dealing with a major reality check. They are finding they must say goodbye to six- figure salaries as well as the "cool" perks that came with their dot.com jobs—no more foosball or parrots at work. No longer can they just hop on their bike and head for their job where they could do whatever they wanted.

• Water cooler discussions

Another trend contributing to the build up of technology growth was the new found excitement people had about technology. Water cooler discussions centered on the latest technology stock or gadget being developed. People began to feel secure enough to trade online. They now felt comfortable revealing personal banking and stock information on the Internet. Even people who weren't interested in technology were talking about technology. They began to fully invest in the power of communication using technology.

• Feeding the Frenzy

This newfound interest in technology grew into a feeding frenzy. Technology was a sure thing. Everyone was either running to a dot.com or turning himself into one. Real estate companies entered the fray by forming technology consortiums where they invested millions of dollars in technology.

Not wanting to be left behind and lose out on the opportunity to get their share of the technology profits pie, many real estate companies began to invest in technology companies rather than in technology programs for their own businesses. However, those firms that did invest in their own technology did well. These were the firms that invested in a way to have cell technology work with their maintenance requests or to connect their accounting system to their budget application. Those who did not have success regarded technology investment simply as a way to augment their returns.

As a result of this irrational exuberance, companies who didn't know anything were in the game of delivering technology to the real estate industry. At the time, no would anticipated that the 401K they saw grow into a 601K would be reduced to a 101K.

• Plenty of Money

While this national exuberance for technology was certainly one cause of the expansion, growth would not have been possible without the plentiful venture capital that was readily available to fund the dot.com startups. These companies were often funded in second and third rounds based on no net income. With little revenue generated, valuations were disproportionately high. As a result, the dot.com entrepreneurs were able to raise money regardless of the business model they adopted. When they ran out of their last round of financing they attempted to raise more money, even at a much lower valuation. However, money dried up and downsizing ultimately resulted in their demise.

As a consequence in this change in valuation methodology, many of the real estate firms that invested heavily in technology were forced to take significant write-downs. For example, AMB Properties caught the dot.com wave and began to court dot.com tenants. They even traded rent for equity. In the final analysis they wrote off $16 million in bad technology investments that included a 93 percent loss in value on their Webvan investment. While still a strong company, AMB temporarily lost its focus. It failed to make decisions the way it used to make decisions. They made sound real estate decisions and then accepted equity in place of rent. They won't soon do that again.

It was a lesson other real estate companies learned as well. Grubb and Ellis, Insignia, Morgan Stanley, and Dean Witter all contributed to LoopNet's $20M second round of financing. In April 2001, the company was forced to merge with PropertyFirst, its primary competitor. Theirs was a case of a revenue model gone wrong.

Where Are We Today?

The dot.com boom has come and gone, but the business lessons it taught those companies which jumped headfirst onto the technology investment bandwagon are here to stay. So what exactly are those lessons? In 2002, the real estate industry is moving forward having learned the following lessons the hard way:

• Refocus on core competencies.

Too many real estate companies lost focus with the result that they ended up chasing the opportunity. Going forward, real estate firms need to look at technology not as an investment in terms of getting a return dollar-wise, but as an investment that improves efficiencies, gains competitive advantages, and provides services for tenants.

• Cut the fat.

Rather than focus on non income-generating functions such as accounting, real estate firms need to pay attention to those departments within the company that add value. Who makes the company money? Leasing and property management. Yet, in most firms, these areas are not in control of the data. Leasing and property management employees need to be given the tools they need to grow the company. As the industry continues to adopt wireless technology, this paradigm shift will become more apparent.

• Invest in technology intelligently.

Just because some mistakes were made during the dot.com boom does not mean real estate should stop investing in technology. On the contrary, real estate firms must continue to invest in technology but do so in an intelligent way. If nothing more than as a precaution for emergencies, it is essential to invest in technology. The fact is that real estate is still an incredibly inefficient industry. Most firms would rather hire another accountant than invest in technology.

• Develop strategic relationships.

While certainly not a new idea, the ability to develop strategic relationships is more important than ever. For the real estate industry strategic relationships and technology are a natural fit. Thus, it is critical to develop strategic relationships with the few surviving real estate technology companies. They survived for a reason.

Technology is more than just a name change. Real estate companies are not dot.coms. However, unless they intelligently invest in technology they may become dot.bombs. Firms must become more critical about how investing in certain technologies will add value to their core competencies.

Todd Zeldin is founder of the Atlanta, GA-based ACG Professionals, Inc. He can be reached at 404-658-9020, or via e-mail at tzeldin@acgpro.com