Innovation is key to riding dot.com storm

I hadn't been back at Stanford Business School, the heart of Silicon Valley, for 10 years. Last week, driving down the unchanged concrete eight-lane freeway, I switched the radio to KCBS news on 740AM. No change there. Still the same sort of AM radio voices squeezing in news soundbites between unannounced advertisements. But here was something very strange - an advertisement for private banking services from JP Morgan bank. JP Morgan, in my mind, was the old, establishment blue-chip east-coast bank, and conjured up images of gentlemen's clubs and the privilege the bank extended to you to admit you as a private client.

Yet here was JP Morgan not only advertising its services, not only advertising its private banking services, but doing it on radio, AM radio! That was weird, a pointer to the fact that the ownership of wealth in the San Francisco Bay Area has shifted towards people who are accessed through AM radio - young people, high-tech people, lots of them immigrants.

The last place stockbrokers and private banks in Ireland would think of advertising, if at all, would be something like 98FM, the sort of popular space where JP Morgan hunts. "Have the private banks contacted you?" I asked an engineer friend whose fourth company was about to be sold for many millions of dollars. "I'm being harassed now," he laughed.

It wasn't the money that made him work to produce new products, he said. It was just the challenge, the sheer achievement of competing and winning to produce engineered solutions that were both cutting edge and in demand.

Enormous fortunes have been made in Silicon Valley. Add a zero or two to the figures we wow at here as hitting the jackpot and you get the idea. Someone got €3 million from Esat? Write $30 million.

The fundamental question people have been asking the world over is whether dot.com valuations were all hysteria on an unprecedented scale, only now beginning to be corrected since Nasdaq's stall earlier this spring.

Oddly enough - or maybe not - people in Silicon Valley are the first to say there was mass hysteria about investing in high-tech stocks. As another business school friend said: "There was a herd mentality among little investors, venture capitalists, equity analysts, fund managers, banks and lawyers all at the same time." In previous herd-induced falls, commercial banks, for example, all went over the cliff together rushing towards Latin American debt. Bond investors piled into Russia, never to get out in one piece. But this time, everyone was at it.

"B2C [Business-to-consumer dot.coms] is sooooo dead!" is the catchphrase. Business to consumer died in March for all to see, though many had given up earlier. A venture capitalist said: "There's just so much junk out there" looking for his clients' money, money which used to be thrown at any new dot.com. No one I met was setting up B2C Internet businesses, although some say there is good value for contrarian investors in the small number of profit-making consumer Internet businesses.

Those I met, who were working on high-tech start-ups, were building enabling technologies for businesses.

Was herd-like madness the only explanation of sky-high company valuations? Not for all. The best explanation that I came across was that new Internet businesses are what used to be R&D projects inside large corporations. New project development has been externalised from the corporations. It now takes place randomly, autonomously in what are start-up businesses.

If these fizzle out and die, that is just as well, and just like what used to happen inside corporations. The pace of change in software R&D means that it is better not to encumber it with corporate decision-making processes or constraints on thinking.

Corporations don't have to bear the cost of failed new projects - they scoop up the successful ones, paying large premiums, if viewed only on a project-by-project basis. Prof Eamonn Walsh, at UCD's business school, has analysed the phenomenon of companies coming to public capital markets at an earlier stage in their development than ever before, when the upside is greatest. They don't seem like companies at all in the traditional sense. The corporate form is just a means of putting some temporary legal organisation on what are autonomous, time-limited project-development teams, with a passion to beat the competition and push out the boundaries of what it means to be leading edge.

Their people want to make money, of course, but that alone ceases to motivate when it comes to multi-millions. The innovation is what will continue, whether investors, banks and venture capitalists move in herds or not. And we in Ireland must be part of it.

Oliver O'Connor is editor of the monthly publication, Finance. E-mail:ooconnor@indigo.ie