Q. How will the early spring’s stock-market gyrations affect Texas tech?
One of the first things cowboys learn is that when a bucking bronco throws them, the right thing to do is to climb back into the saddle as soon as possible. But after being thrown by the bucking Nasdaq stock market last month, more than a few Texas high-tech cowboys may be wary of the ride from here on out. The 34.3 percent plunge of the tech-laden Nasdaq—the first real adversity that many Texas entrepreneurs, investors, and dot-com ranch hands had experienced in their young lives—may have subtly tipped the balance on the greed-fear scale a bit more to the fear side. Analysts are characteristically divided on whether tech stocks will ever regain the highs they hit before the recent fluctuations. If there is sustained pressure on tech stocks in the coming months, high-tech workers in Texas may think twice about hitching themselves to a dot-com start-up. Already, tens of thousands of Texans have seen the value of their stock options get trampled. With some share prices cut off at the knees—Austin’s Vignette, for example, saw its stock fall from 100 in March to 40 just a month later, and drkoop.com was on life support (see “Rx for Trouble,”)—some companies may be forced to re-price those options to keep valued employees from defecting. If it can happen to Microsoft, which last month doubled its options grants for each of its nearly 35,000 employees, it could happen at Dell, whose once high-flying stock has stagnated for the past year.
Or they may be forced to ladle out more cash, instead of options, to keep employees from jumping to less glamorous but more stable companies. But where will the money come from? With initial public offerings being delayed or canceled, venture capitalists in Texas are becoming more cautious on early-stage deals, demanding lower valuations, and squeezing their cards a little more tightly when companies come back for more cash. Investors who have already put money into the pot are not likely to let their companies fold, but they are going to make smaller bets and wait for better hands.
Some grizzled veterans of the high-tech scene, however, are sanguine. Kirk Walden, the national director of venture capital research for PricewaterhouseCoopers, says he does not anticipate any significant, short-term decline in venture capital activity in Texas as a result of the early spring’s harrowing plunge of technology stocks. “Long term, it should bring a touch of reality back to valuations, but it shouldn’t dampen the number of companies being funded,” he says. In the last three months of 1999, 68 Texas companies received a total of $592 million in VC investments. By Walden’s calculations, the typical VC firm earned 30 percent to 40 percent off its deals annually in the past three years, and gains like that are addictive. “The upside is just so high when you hit, even in a market like this,” he says. Besides, he notes, companies like Austin Ventures have amassed huge funds that they have to put somewhere to keep their investors happy.
And what of the next wave of dot-comers? Bob Schwartz, who directs the entrepreneurship concentration at the Graduate School of Business at the University of Texas at Austin, says his students generally remain upbeat about prospects for jobs in the state’s high-tech sector despite the market’s recent decline. “They see it as a temporary aberration,” he says. “I would say their enthusiasm has not changed at all.”