May 2006

Who's Sorry Now?

Pip Coburn was a star research analyst during the Internet boom. Today, he thinks the entire industry has to change.

By Jason Pontin

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Time was, I thought about this stuff all the time. I mean Silicon Valley and the venture capitalists who invested in its startups, and the financial analysts who promoted the companies its investment banks took public. I thought about it because from 1996 to 2002 I was the editor of Red Herring magazine, sometimes called the "bible of the boom." It was an entire world, one that today seems to me as antediluvian as Noah's seaside villa.

I thought about Pip Coburn pretty often, too, because he was the managing director of the technology group of UBS Investment Research, an investment bank, in charge of its 120 technology and telecommunications analysts, and thus a considerable man in the New Economy. But I also thought about him because he wrote a column for Red Herring from late 1999 until shortly before the magazine's collapse in 2003. (The magazine has since been relaunched, in more modest form.)

The cover of the May 2000 issue of Red Herring blazes, "Who Wants to Be a Billionaire?" Flipping through its 480 pages of executive profiles, corporate analysis, econometric data, and an endless succession of "tombstones," (where investment banks advertised successfully managed initial public offerings), I can still find Pip's column, called "Tactics." There I read, "What characterizes a practical framework for tech investing? First, accept life in the tech fishbowl the way it is...as opposed to the way it should be, which is rational." That was almost certainly written in February, one month before the Internet bubble burst.

Arguably, Pip Coburn has a great deal to explain, although not as much as some analysts of that era: in Red Herring, and in his research reports, he was reliably skeptical about earnings growth estimates for technology companies, and he never hawked stocks he secretly despised. But as he writes in his first book, The Change Function, "I wasn't spending too much time at that time thinking about the elephant head on the table [he means the overvalua-tion of technology stocks]...because it really was a lot of fun participating in Nasdaq's run from 333 on October 10, 1990, to the 5,008 peak on March 10, 2000."

Coburn would have reason to repent of his high spirits: by 2002, the Nasdaq stock exchange had lost 80 percent of the value it had at its height. As I write, Nasdaq is at 2,368, and the technology industry has never recovered the ebullience it enjoyed in the 1990s. The Change Function therefore represents a settling of accounts, although its author would deny it. Coburn (who now works for Coburn Ventures, a consultancy that he founded, dedicated to putting "its knowledge about 'change' to work in the realm of technology, telecom, and media investing," according to the company's website) writes, "The purpose of this book is really quite simple. I think there's a problem, and I'm proposing a solution....The technology industry has become self-absorbed as a result of five decades of success....Over time, technologists have become increasingly focused on creating miracles, even if it's rare that those miracles translate into commercial success."

The attractively simple thesis of The Change Function is that most tech-nology ventures fail because tech-nologists manage them. Technologists think their business is the creation of cool technologies loaded with wonderful new features. They think this because they are engineers who thrill to the idea of change. By contrast, Coburn says, "technology is widely hated by its users," because ordinary folk loathe change. Therefore, any new artifact, no matter how much its various features might appeal to technologists, will always be rejected by its intended customers unless "the pain in moving to a new technology is lower than the pain of staying in the status quo."

Or in Pip's geeky formulation:

The Change Function = f (perceived crisis vs. total perceived pain of adoption).

Who's Sorry Now?

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