DLA Piper TechNOLOGY Leaders Forecast Survey FALL 2012
DLA Piper Technology Leaders Forecast Survey q4 2012 Executive Summary In the face of global economic headwinds and amid a high-stakes 2012 presidential election, technology leaders ever focused on the promise of the future are seeking clarity with respect to the economic, regulatory and political landscape. This was the pervasive theme throughout DLA Piper s fifth Technology Leaders Forecast survey, which was developed in conjunction with the firm s 2012 Global Technology Leaders Summit. Will there be greater economic certainty following November s election? What is the direction of tax policy? Will the next administration ease regulations or increase the regulatory burden? How will China s role in technology development and financing evolve? Will the IPO market cool down or heat up? What are the most promising and challenging areas for the technology economy? This is just a sampling of the issues addressed in DLA Piper s latest survey of the major trends, challenges and opportunities confronting the technology industry. By a 3 to 1 margin, technology leaders believe President Obama will be re-elected on Nov. 6th. However, most technology leaders (64 percent) believe that Mitt Romney s election would be a positive development for the technology industry. In contrast, just 41 percent believe President Obama s re-election would have a positive impact on the technology economy, and an almost equal number (40 percent) believe it would not have a positive impact. This is a notable shift from 2008, when 60 percent of technology executives signaled that a Barack Obama victory would be a positive development for the technology industry. These executives and investors, however, have more on their minds than just politics. There are underlying concerns about global economic conditions and the added burden of growing regulation that hinders their ability to access capital and build new businesses. Economic uncertainty was listed as the most significant barrier facing the IPO market and was a significant factor in impeding the success and formation of technology start-ups. Despite these challenges, technology leaders expectations for growth are cautiously optimistic, with most expecting moderate sales and hiring growth. Most subscribe to a belief in a new normal for growth: steady, but slow. Other key highlights of the survey include: Is private equity destined for more regulation? A strong majority (78 percent) of respondents think the 2012 political debate has hurt the reputation of the private equity industry, and most (65 percent) think it likely will result in more regulation of the industry. Would federal tax increases hurt tech investment and sales? A majority (60 percent) of respondents think the expiration of the Bush-era tax cuts will hurt investments in the technology industry, while very few (seven percent) think it will help. However, perhaps counter to conventional wisdom, a significant minority (33 percent) think the Bush-era tax cuts will have no direct impact on investments and growth in the technology industry. What is the outlook on hiring and sales? Tech executives still think their companies will experience sales growth and plan to hire new employees during 02 DLA Piper Technology Leaders Forecast Survey Q4 2012
the next 12 months, albeit at a moderate rate compared to historical growth. Bigger technology companies are even more conservative in estimations of both their sales and hiring. What are the most promising opportunities for tech entrepreneurs and investors? Respondents pegged mobile computing, cloud computing and big data as the most promising technologies for investors and entrepreneurs. Venture capital executives were more likely than other tech executives to rank big data as promising and tended to rank gaming as less promising. Should privacy policies be regulated? More than 80 percent of technology executives say the government should not get involved in regulating privacy policies, with 50 percent saying the industry should take the lead in developing consensus and policies on privacy. Can China transition to an innovation economy? Most respondents observed that China is transitioning away from a production-only economy. However, there is less certainty regarding China s ability to evolve into a hub for innovation and technology development. Only 10 percent of respondents expect China will have a very important impact on technology development within the next three years. www.dlapiper.com 03
Election 2012: Technology Leaders Cast Their Vote The DLA Piper Technology Leaders Forecast Survey found that a strong majority (76 percent) of technology business leaders think voters will re-elect President Obama in November. However, most technology business leaders are very skeptical that a second term for the Obama administration would be a positive development for technology. Almost 60 percent of respondents do not feel President Obama s re-election would have a positive impact on the technology economy. By comparison, 64 percent of respondents think Mitt Romney would positively impact the technology sector. The partisan tables have turned since just before the 2008 election, when the survey found that nearly 60 percent of technology executives believed that, then Senator, Barack Obama would have a more positive impact on technology development and investment than would his Republican challenger, Senator John McCain. It is worth noting that during the US mid-term elections in 2010, these same technology leaders accurately predicted the Republican takeover of the House of Representatives. 24% Barack Obama Mitt Romney Who do you believe will win the 2012 Presidential election? 76% 04 DLA Piper Technology Leaders Forecast Survey Q4 2012
To what extent do you agree or disagree with the following statements: 4% If Governor Mitt Romney wins the White House, it will be a positive development for the technology industry. 7% 26% 35% 28% If President Barack Obama wins a second term, it will be a positive development for the technology industry. 21% 19% 21% 20% 22% Agree Somewhat Agree Neutral Somewhat Disagree Disagree www.dlapiper.com 05
Recurring Concerns on Taxation, Deficits and Regulation Regardless of the outcome of the election, it seems clear that what technology leaders want out of Washington is greater certainty about regulation and tax policy. Those concerns, particularly on regulation, surfaced repeatedly throughout the survey. Depending on who controls the White House and the composition of Congress after the November elections, the Bush-era tax cuts could be extended, made permanent or rolled into a broader tax reform package. Most respondents (60 percent) think allowing the Bush-era tax cuts to expire would negatively impact investments in the technology sector. However, perhaps counter to the conventional wisdom, a notable minority (33 percent) of technology business leaders think expiration of the Bush-era tax cuts will have no direct impact on investments and growth in the technology industry. Eight percent think the expiration would have a positive impact, presumably thinking that it would positively impact federal fiscal stability and deficit reduction. In a previous survey, 30 percent of technology executives said that they believed increased government revenues generated via the expiration of these tax cuts would help reduce deficits and improve general economic confidence. While marginal personal tax rates will always be considered by investors in evaluating total investment returns, given the type of return investors expect from technology investments, particularly at earlier stages, the marginal rates are probably less a driving factor than for investments in traditional family controlled small businesses. Peter Asitz, Global Co-Head of the Technology Sector, DLA Piper. 33% 4% 3% 15% What impact would the expiration of the Bush-era Tax Cuts have on technology industry investment? 44% Significant negative impact Somewhat negative impact Neutral/no impact Somewhat positive impact Significant positive impact 06 DLA Piper Technology Leaders Forecast Survey Q4 2012
When given the opportunity to comment about the technology environment in general, respondents sounded off about the burdens brought about by regulation, and the cost of compliance, more than any other issue. What are the biggest legal or regulatory issues facing technology companies?: Over-regulation security Patent trolls Uncertainty Sarbanes-oxley InvestmentSox Taxes Reporting Requirements Lawsuits immigration H1B Visas The following are some of the specific areas of concern identified by business leaders across the technology sector: Cost of regulatory compliance Dodd Frank requirements Cost of legislated health care requirements Too many public reporting requirements Far too high burden of compliance A strong majority (78 percent) of respondents also believe that the presidential campaign dialogue centered on private equity has damaged the reputation of the private equity and venture capital industry, and 65 percent predicted this focus could lead to new regulation. Among private equity managers and venture capitalists specifically, the concern is even deeper: 93 percent think the presidential race has damaged the reputation of their industry. Sarbanes Oxley is still too onerous The potential of having to manage to various state data security requirements www.dlapiper.com 07
To what extent do you agree or disagree with the following statements: The discussion surrounding the private equity industry in this year s Presidential election: 23% 34% 9% 13% 20% 1% 9% 21% 41% 35% 43% 32% 21% 10% 5% 15% 5% 3% 28% 35% Will make future regulation of the industry more likely Has had a negative impact on perceptions of the industry Has had no impact on the industry Has had a positive impact on the industry Agree Somewhat Agree Neutral Somewhat Disagree Disagree 08 DLA Piper Technology Leaders Forecast Survey Q4 2012
Confident on the Fundamentals, Business Leaders See Steady but Slow Growth Ahead Despite the aforementioned concerns, technology leaders are cautiously optimistic on the fundamentals of their own businesses. The industry leaders surveyed overwhelmingly expected both sales and hiring to increase, but generally at very moderate rates. This reflects a steady improvement from the first survey in 2008. In October 2008, at the very outset of the financial crisis and ensuing Great Recession, 75 percent of respondents reported that their businesses had been adversely affected by receding economic conditions, and almost 70 percent of respondents expected revenues to decline as a result. In October 2010, respondents were shifting their priorities and expectations. Guarding against the harmful effects of recession was quickly becoming less important. Instead, they were focusing on growth amid an environment that was rife with risks and uncertainty, but also with opportunities upon which to capitalize. Now, in the 4 th quarter of 2012, respondents seem to have developed a broad consensus they are settling in for a period of steady but slow growth. Seventy-two percent of technology executives expect their sales to increase over the next 12 months, with 55 percent specifically estimating moderate sales growth. Another 16 percent reported that they expect no change in their sales in the next year, which appears to further signal the reserved nature of the growth expectations. Software company executives were the most optimistic on sales, with 47 percent of them expecting a significant sales increase. Companies of $1 billion or more were more conservative in their sales forecasts, with 66 percent expecting only moderate increases. Revenue expectations, of course, impact staffing decisions. In 2008, almost two-thirds of respondents said they expected their revenues to decline as a result of that year s economic environment. That year, respondents, especially those from large companies, were predicting layoffs. Since 2010, expectations for hiring have been at moderate levels. Of note, the percentage of respondents who said their firms planned no hiring has decreased substantially, while the percentage of respondents who said their firms plan to hire moderately ticked upward. In the 2012 survey, 50 percent of executives report plans for moderate hiring increases over the next 12 months and 10 percent are planning for significant increases, particularly at smaller enterprise and software companies. Twenty-seven percent expect no notable changes in their staffing levels. Again, larger companies were more restrained in their plans for hiring. Forty-nine percent are planning moderate increases in hiring, and 10 percent are planning moderate decreases in hiring. The impact of these moderate expectations in the tech sector says volumes about job growth in the larger economy: most net job creation for the past 30 years has come from startup firms. www.dlapiper.com 09
1% 5% 7% 16% 16% Fall 2012: How do you expect your company s sales to trend over the next 12 months? 56% Significant increase Moderate increase No change Moderate decrease Significant decrease Unknown 12% 5% 12% 5% 16% Spring 2012: How do you expect your company s sales to trend over the next 12 months? 23% Fall 2010: How do you expect your company s sales to trend over the next 12 months? 70% 55% Significant increase Moderate decrease Expect strong increase Expect moderate decrease Moderate increase Significant decrease Expect moderate increase Expect strong decrease No change Unknown Expect no change 10 DLA Piper Technology Leaders Forecast Survey Q4 2012
1% 8% 5% 10% 27% Fall 2012 How do you expect your company s staffing/hiring to trend over the next 12 months? 50% Significant increase Moderate decrease Moderate increase Significant decrease No change Unknown 3% 6% 8% 9% 2% 4% 24% Spring 2012 How do you expect your company s staffing/hiring to trend over the next 12 months? 43% Fall 2010: How do you expect your company s staffing/hiring to trend over the next 12 months? 41% 59% Significant increase Moderate decrease Expect strong increase Expect moderate decrease Moderate increase Significant decrease Expect moderate increase Expect strong decrease No change Unknown Expect no change www.dlapiper.com 11
Examining Challenges to Technology Startups and the IPO Market According to a report by the US Census Bureau, the business startup rate, the number of new firms as a percentage of all firms, has fallen to a low of eight percent. That s down from a high of 13 percent in the 1980s and a rate of 11 percent as recently as 2006. The study also found that startup firms from one to five years old now account for only 35 percent of all businesses compared to approximately 50 percent in the 1980s. In the span of a decade, from the bursting of the Dot-com Bubble through the Great Recession and into this subsequent period of tepid economic growth, the operating environment for startup tech companies and their investors has changed. Recent DLA Piper surveys have shown a solidifying opinion among technology leaders that there is a New Normal in the model for building and investing in startup technology companies. Approximately two-thirds of executives surveyed believe the operating environment has been permanently altered in some significant way. Helping to drive that change are changes in the IPO market. In DLA Piper s April 2012 survey, nearly 75 percent of technology, venture capital and private equity leaders stated that they believe the IPO market will not return to historical levels. The reduction in IPOs has broader implications, reducing the number of dramatic home runs for venture capital investors and lowering overall returns. Fewer IPOs also means fewer small and medium-size public technology companies which traditionally have been the acquirers for other technology companies, further diminishing exit opportunities and returns. More than 60 percent of technology executives said the traditional venture capital model had been permanently altered as a result of these and other factors. Directly to this point, in the 2012 survey, when asked to assess the greatest challenges facing technology startups, respondents ranked access to capital as the primary challenge. Fifty-one percent ranked access to capital as a major concern, and only six percent did not see it as one of the major challenges. Concerns about the overall tepid economic environment and the availability of quality and experienced talent rounded out the top challenges for technology startups. Entrepreneurs were more likely to rate access to capital as the top challenge, whereas the venture capital and private equity communities were more likely to describe the economic environment and demonstrating a valid business model as the biggest challenges. Obviously, these barriers often interrelate. Capital can be difficult to access precisely because of economic uncertainty, and IPOs and venture investments can go awry when tough economic conditions prevail. Rank the biggest challenge facing technology startups: 1. Access to capital 2. Economic outlook 3. Need to demonstrate valid business model 4. Access to quality talent 5. Uncertainties regarding patent/ip enforcement Rank the biggest challenge facing the US IPO market: 1. Uncertain economic conditions 2. Recent lackluster performance of major IPOs 3. More attractive M&A exits 4. Over regulation 5. Monetization challenges for Social Media and Mobile companies 6. Competition from non-us exchanges 12 DLA Piper Technology Leaders Forecast Survey Q4 2012
The Big Opportunities: Cloud Computing, Mobile Computing and Big Data Despite challenges, technology leaders are optimistic and forward-looking by nature constantly seeking the next big idea, the next big innovation. When asked what technology sectors hold the most promise for entrepreneurs and investors in the nearterm future, respondents ranked (1) mobile computing and (2) cloud computing as the most promising, followed by (3) big data. When asked to look further out on the horizon and comment on the most promising under the radar technologies, business leaders most often mentioned mobile, big data, green energy technologies, security and nanotechnology. What areas of the tech economy are most promising for entrepreneurs and investors? 1. Mobile computing 2. Cloud computing 3. Big data 4. Enterprise software 5. Social media 6. Gaming What under-recognized technology areas are likely to have the biggest impact on the Technology sector in the next five years? Big Data Connected Life Sciences Storage Devices Mobile security predictive analytics Enterprise Software Green Energy Nanotechnology www.dlapiper.com 13
China s Progression as a SuperPower in the Global Technology Industry Recent DLA Piper surveys have uncovered a growing uncertainty about how easily the Chinese economy can successfully transition beyond a strong manufacturingoriented economy to include a strong technology and innovation economy. In the Spring 2012 study, 41 percent of executives predicted that China will have difficulty transitioning to a technology and innovation economy, up from only just 18 percent two years ago. In the Fall 2012 study, technology leaders described China as indispensable to the manufacturing of technologies (91 percent reporting); as a key market for technology sales (81 percent reporting); and increasingly important as a source for financing technologies (45 percent reporting). However, respondents were less decisive on China s role as an innovator and developer of new technologies: 34 percent thought China would be only be somewhat important to technology development with the next few years; and 28 percent said they did not expect China to play an important role in technology innovation in the near term. Twenty-six percent were neutral on the subject. Only one in 10 business leaders expect China to be a major contributor to technology development and innovation within the next few years. From the respondents perspective, stronger intellectual property protections (83 percent reporting) and a more robust infrastructure that supports entrepreneurship (43 percent reporting) are needed for China to spur the growth of its technology sector. China s greatest assets to the development of an innovation economy are its sheer market size, large amounts of capital and a large, skilled workforce, according to these same leaders. 14 DLA Piper Technology Leaders Forecast Survey Q4 2012
What impact will China have on the global technology industry in the next few years with respect to: Development of new technologies 3% 25% 26% 35% 12% Financing of technology companies 2% 17% 30% 43% 9% Market for technology products and services 1% 4% 12% 48% 35% Manufacturing 1% 7% 30% 62% Very Important Not Very Important Somewhat Important Not at all Important Neutral www.dlapiper.com 15
What are the biggest threats to growth of the technology sector in China? (Check all that apply.) Free flow of capital 39% Infrastructure that fosters entrepreneurship 44% Technical proficiency of local talent 17% Perceptions of Chinese technology 43% Concerns regarding intellectual property protection 83% Competition from the US 20% Global economic conditions 44% 0 20 40 60 80 100 16 DLA Piper Technology Leaders Forecast Survey Q4 2012
Methodology In late September and early October 2012, DLA Piper, the global law firm, distributed its Technology Leaders Forecast Survey to senior executives and advisors in the technology industry, including CEOs, CFOs and other company officers at technology companies, as well as to venture capitalists, entrepreneurs and consultants. The 2012 survey is the fifth such technology market analysis developed by DLA Piper, with the last survey issued in the Spring of 2012 and the inaugural survey issued just prior to the recession in October 2008. Respondents were asked a series of questions and provided multiple possible responses; they were also given the opportunity to elaborate on their answers with direct commentary. Due to rounding, all percentages used in some questions may not add up to 100 percent. Percentages in some questions may not add up to 100 percent because respondents were asked to check all answers that applied. A few minor edits were made to verbatim responses to correct spelling mistakes, verb tense, and punctuation. For further information on the study and its methodology, please contact peter.astiz@dlapiper.com. www.dlapiper.com 17
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