The cold wind blowing from Wall Street is sending shivers through Massachusetts’ hi-tech industry, as start-up companies and their venture backers brace for a slowdown in spending on technology and a prolonged freeze on initial public offerings (IPOs).
Amid fears of deepening turmoil in the financial markets, the businesses that buy everything from computer software to networking gear—staples of the Massachusetts technology sector—are expected to reduce their spending.
Leading the pull back will be investment firms, projected to slash technology outlays by 7-10% in the coming year, according to Tower Group Inc., a Needham, Massachusetts-based research firm.
“Financial services firms are going to be cutting back their technology spending the hardest, but we’re looking at a global economic downturn across many sectors,” said Rob Hegarty, managing director for the securities and investments practice at Tower Group.
Some vendors have found the spending pull back has already begun, especially at finance firms tied to Wall Street.
“The reality is that information technology budgets in the financial companies are in a flux,” said Charley Lax, managing general partner at GrandBanks Capital, which bankrolls start-ups that sell software and other products.
“If I’m talking to the vice-presidents of sales at my companies, I say don’t spend much time on Wall Street in the next six months. Why bother hitting your head against the wall?” Lax added.
Meanwhile, the mounting uncertainty in financial markets threatens to extend the IPO drought that has prevented start-ups from going public and venture capital firms from cashing out on their investments this year.
IPOs are considered a key measure of health for technology entrepreneurs.
There have been only six public offerings in the US so far in 2008, and none for Massachusetts start-ups, according to the Thomson Reuters research house in New York.
Even before the collapse of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch and Co. Inc. this week, 130 start-ups, including three in Massachusetts, had withdrawn IPO registrations filed with the Securities and Exchange Commission.
The cash squeeze at American International Group Inc. and other developments could put new pressure on the start-ups remaining in the IPO pipeline—316 nationally, eight in Massachusetts—to put on hold their plans to go public.
“It’s more likely to be next year some time,” conceded Albert A. Luderer, president and chief executive at BioTrove Inc., a maker of biological research tools that registered to go public last April.
“In terms of market conditions for an IPO, they just don’t exist now. We’re going to take a conservative approach and wait for the market to come back,” Luderer said.
But the financial crisis and the frozen IPO market aren’t preventing some early-stage companies from pulling in financing. That is because venture firms are still flush with cash from limited partners—such as pension funds and university endowments— scrambling for higher returns.
Late on Monday afternoon, just as the Dow Jones Industrial Average was completing a plunge of 504.48 points, start-up Punchbowl Software Inc. was closing on a $2.1 million (Rs9.7 crore today) investment from Contour Venture Partners.
“We closed our round of funding on the worst financial day of the decade,” said Matt Douglas, chief executive of Punchbowl, which operates the MyPunchbowl.com party and event-planning website. “Were we worried something irrational could happen? Of course. But we were working with seasoned investors, who don’t get spooked.”
Entrepreneurs said the flagging economy could force them to husband cash, stockpile more capital and hire more carefully as they look to a longer time horizon before going public, or being acquired.
But the greatest employment impact may be felt at more established companies, as they adjust to declines in orders from businesses and consumers.
Computer firm Hewlett-Packard Co. (HP) said on Monday it plans to eliminate 26,400 jobs worldwide following its acquisition of Electronic Data Systems Corp.
HP, which employs thousands of workers at former Digital Equipment Corp. sites in Massachusetts, wouldn’t break down where it will cut jobs.
Some serial entrepreneurs said a weak economy presents hi-tech start-ups with an opportunity to establish a foothold in the marketplace just in time for a recovery.
“I’ve found that starting companies in bad times is better,” said Bill Warner, founder of Avid Technology Inc., which makes digital media tools. “You can make good hires, and people are more open to new ideas.”
What will be harder for the majority of technology companies in Massachusetts, which sell into business rather than consumer markets, will be persuading customers to buy their products in the coming months, as the Wall Street crisis spreads into the broader economy.
“The softness in the economy is going to hurt information technology spending,” said Lax at Grand Banks Capital. “Information technology spending is done as a percentage of a company’s revenue. So, as the revenue declines, the spending will decline.”
©2008/The Boston Globe