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May 23, 2002
The Hot 100
Summertime is in the air and optimism reigns supreme. On second thought, maybe cautious optimism is the rightful concept for 2002.
Normally, Upside's Hot 100 is a list of companies we, the editors, along with our esteemed panel of outside judges, consider likely to complete successful IPOs. But oh, how times have changed. This year, we are honoring companies with-you guessed it - a clear path to profitability.
For these modest times, this year's Hot 100 comprises companies with promising technologies, solid business models, and meaningful growth over the past 12 months - a monumental achievement in this economic climate. A special thank you to our panel of judges for taking time out of their busy schedules to look at over 400 entries, and congratulations to the Upside 2002 Hot 100.
Biotech
While the biotech industry as a whole continues to endure jolting speed bumps on its way to drug discoveries, venture capitalists have been in a generous mood, showering private companies with millions of dollars. The money currently going into these research and development companies bodes well for the industry down the road, as their technological advances will provide the foundation for new drug discoveries and even accelerate the drug-discovery process. No doubt, in the near future, we will see some of Upside's Hot 100 biotech companies leading the way. -Patty Enrado
Internet Infrastructure
The good news for Internet infrastructure companies is that growth is around the corner. A recent report from Cahners In-Stat Group estimates that U.S. businesses will increase spending in this arena from 15 percent of their total IT budgets to 26 percent. Companies seem particularly intent on securing information flow by setting up virtual private networks. Once that's accomplished, companies will get around to improving supply chains and working with Web-services technologies, which have almost achieved the uppermost position on the hype totem poll. The top honor goes to new wireless protocols, where evidence of consumer adoption has some believing the sector is ready to take off. -Eriq Gardner
Internet Software
Looking back, the last 12 months have been very difficult for software companies as corporations worldwide have scaled back their IT spending plans. Private companies were perhaps hit hardest, as IT managers became much more risk-averse and opted for investing in software from the large, publicly traded software vendors. Nonetheless, some private companies were able to defy the odds created by the poor economic environment, blaze new ground in software functionality, and generate meaningful growth.
We are at the dawn of a new age for corporate competitiveness, where the capabilities of the Internet will continue to change the way corporate executives manage and operate their businesses. Speed and agility sit at the crux of this transformation, and if corporations cannot rapidly adapt to the ever-changing competitive landscape, they may find themselves facing Chapter 11. Internet software is the compass that will enable the corporate world to navigate in this new environment. Internet software opens the door to a seamless flow of information within an organization, as well as between customers, suppliers, and partners. Access to information is the greatest enabler of sound management and strong business decisions, whether it involves supply chain execution, human-capital management, demand management, customer relationship management, or any other area. It is hoped that the thought of having to make decisions in a vacuum will fall by the wayside. Through the success of the following companies, we will move toward achieving this vision. -Jon Ekoniak
Security
It hardly needs to be said that since last September, the security industry has reached a watershed moment. Corporations are spending big money on upgrading both physical and network security. IT budgets are increasing by about 5 percent, with managers citing data protection as their number one priority. The biggest buzz in security circles is the maturity of enterprise security management tools and the continued development of biometrics systems.
Various companies will also introduce new security applications for the computer desktop, such as OS hardening tools and e-mail security products. At the same time, it is likely that computer networks will become more vulnerable than ever, especially because of the relative nascence of wireless networks. Balancing privacy and the government's need for a certain level of intrusion will continue to be a huge issue for those buying and selling security wares. -Eriq Gardner
Semiconductors
Semiconductor companies were among the hardest hit in 2001, suffering a 35 percent decline in revenues. Highlights did emerge, however, as semiconductor research and development divisions outperformed the rest of the industry and continue to propel the innovation necessary for a rebound. While 2002 is expected to be a recovery year, most analyst reports are cautious, saying that real revenue growth will not materialize until 2003.
In the private sector, the companies that have already circumvented the steep barrier to entry in this capital-intensive market and survived the downturn are on their way to a successful exit strategy. Upside has included several semiconductor companies in this year's Hot 100, ranging from design automation-which can save semiconductor manufacturers millions of dollars on their bottom line-to cutting-edge technology for the optical-communications market. -Kendra Wall
Software
In the venture community, we are seeing an exciting new generation of technologies and business models focused on the use of flexible, scalable applications to enhance business transactions across the extended enterprise. All the necessary elements have begun to converge. Infrastructure via the Internet continues to mature with improved security and stability.
A new architecture, Web services, is enabling systems to seamlessly interact with one another. Real-time data and information will soon become the standard, enabling better and faster decision-making and reducing costs. New business models are emerging to support transaction- and subscription-based outsourcing. It is a time of tremendous opportunity for software companies building businesses around these converging trends. -Amal Johnson
Telecom
So here's a countervailing perspective on telecom and data networking: Many of the current crop of startups are doomed. It's not because they don't have potentially interesting products; it's because they are fighting macro-level structural issues that are much bigger than they are. Carriers' capital expenditure (capex) will be down an additional 20 percent year-over-year in 2002, so no one is going to buy much of anything until the companies founded in 1999 and 2000 run out of money. Beware of anyone who says, "We're in the lab at Qwest Communications," as though it's a good thing. But wait! This is a great time to be involved in founding new startup companies.
The thesis is: The carriers actually have to start spending again, leading to a reasonable growth rate in capex (+/-10 percent) in 2003 and 2004. By the time a telecom startup gets organized (late 2002), builds a product (late 2003), gets through lab tests and Telcordia Technologies (late 2004), and starts selling (mid-2005), the demand will actually be there. There are major improvements to be had in port density, multiprotocol support, provisioning, and services. Obviously, the large incumbents will introduce next-generation offerings, but given the spate of layoffs the industry has endured, they may choose to innovate through acquisition. QED. Telecom startups are relevant again. -Adam Grosser
Miscellaneous
Computing and telephony have been set free from the desktop and are now mobile. Personal communications is a high-growth area. Enterprise solutions that can help companies reduce costs should do well even though overall corporate spending is down. But the hurdle rate for sales will be very high, as managers are looking at products that have three- to six-month paybacks.
Data storage is another investment bright spot. Data continues to be created at unprecedented rates and needs to be available to an ever-increasing number of constituencies both inside and outside an enterprise. Last year was a very tough year for optical equipment, optical components, and network equipment. Anyone selling to telecommunications companies will have a tough time through at least 2003, which is when excess capacity should finally have been worked out of the system. -Robin Vasan
The Hot 100 |
