Global Trends in Technology; New Economy Solutions
An Investment Symposium Presented by Turtlesnap Ventures

November 14, 2001
The Ritz-Carlton - Washington, D.C.

Keynote Speech by:
Keith W. Rabin, President
KWR International, Inc.

Thank you Karen and John for providing this opportunity and to all of you for coming here today. I would like to start with a few words about the U.S. economy and then move on to how current trends will effect the world at large. We will then conclude with a few points on how investors, venture companies and government agencies might position themselves in this environment. If there is time, I can then answer any questions, and if not, I will be around to speak later in the day.

Almost five years ago, Alan Greenspan announced his concern over the potential for "irrational exuberance" in the U.S. economy. Many were concerned whether this rise was sustainable – particularly as corporate profits, personal income and gross domestic product were not performing anywhere near as strongly. Many observers asked if it might be time for the Federal Reserve Bank to "remove the punch bowl" -- to alleviate the dislocations that are an inevitable result of an overheating economy.

During the course of this debate, the Thai economy fell in the summer of 1997, followed by Korea and a series of events that accelerated into the Asian financial crisis. While concern remained over the potential for overheating in the U.S. economy, people now worried about contagion and focused on the need to keep the U.S. locomotive running until Europe or Asia could pull the load. Inflation remained tame, and raising rates appeared likely to aggravate financial tensions elsewhere, which might spill back into our own country with uncertain results.

Toward the end of 1998, LTCM and the Russian economy fell. The Fed delivered a series of rapid rate cuts and U.S. equity markets surged as if they were on amphetamines. The Dow passed 11,700 in early 2000 – almost double what it had been about four years previous, when Alan Greenspan uttered his famous words. This gave rise to the golden days of the "new economy". Many good deals received funding, but many more that were not so good did so as well. Simply put, there were not enough good deals to go around -- and everyone was in such a rush to jump onto the bandwagon that many glaring errors on the part of investors and receivers of capital were ignored. The result was a series of speculative excesses from which we are still recovering today.

By early 2000, Asia had experienced what was deemed to be a "V-Shaped" recovery. The Fed -- determined to let some air out of the bubble -- began to raise rates. Life as we knew it in the equity markets came to an end, and we began to see in short order -- a steady erosion of speculation, and then its sequential effect on other technology names to the overall market as well.

Despite the pain, however, this can be seen as a healthy development. After the protracted ascent of the late 1990s, it was essential to digest the new technologies that had come on stream and to work these speculative excesses out of the system. Depending upon ones views, one could debate until quite recently whether the U.S. was, or was not, in a recession, and the extent of the damage of this rapid deflation of the NASDAQ and other equity indices.

The events of 9/11, however, changed all that. Now pretty much everyone agrees the U.S. economy is in trouble. The Federal Reserve is engineering rate cuts down to what had been unimaginable levels and our government is granting bailouts for the airline and insurance industries with other industries lobbying for similar measures. There are also signs that trade protectionism is again on the rise. Many other stimulative plans on both the federal and local level are being planned. Given the extraordinary context behind these actions, there is little debate about their utility, or the normal give and take that is part and parcel of life in Washington, on Wall Street and our national media.

While these measures will over time likely deliver some of their intended effect – possibly I might add even excessively so -- on the corporate level, companies will be faced with the need, at least over the short term, and quite possibly beyond, to intensively focus on cost-cutting and restructuring initiatives.

The problem, however, is that many of these firms have been restructuring for some time. The quick hits and benefits of new and enhanced IT systems have already largely been achieved. What do they do for an encore? Cut back further on middle management? Reduce customer service? Cost cutting can only go so far and there is a real danger of cutting past the fat and into the bone.

To succeed over the long term, companies must refocus and redefine their mission to develop the products, strategies and technologies that will add revenue growth and enhance profitability. As seen in the recent experience of the telecom industry and our own tech sector, however, this will not be an easy task. This is particularly true within intensively competitive, mature, developed economies such as the U.S. as they struggle to regain their economic footing.

What does this mean for foreign companies and corporations? On one hand there is the oft-said cliché that when the U.S. catches a cold, the rest of the world catches a fever. That is a very real worry. Business investment is down, and how much more can one expect from the U.S. consumer who has against all rational explanations, continued – until perhaps recently – to spend and rack up debt with little concern over the consequences.

This is not good news for export-oriented economies. However, with the continuing emergence of China and other low-cost providers, a reliance on low-cost manufacturing and other strictly price-oriented strategies is unlikely to prove sustainable over the long term in any case -- irrespective of any change in U.S. consumer demand.

Companies and countries need to reexamine their role in the global economy and move to determine the optimal structures that will enable them to develop the value-added business models that will ensure their ongoing competitiveness.

The good news is that for companies and countries who can make a good case that they have the potential to deliver real value, there are many potential customers, business partners and investors out there who are willing to listen and to buy into their stories.

Despite the current anxiety we are experiencing in the markets, there is still a lot of cash looking for a home. Treasury bills and other low-paying securities are not likely to generate the returns over the long term that professional money managers and corporate investors need to justify their existence.

As many conclude the U.S. economy is unlikely to generate the returns they have grown accustomed to -- at least over the short term – they are more willing to look overseas from both a growth and and even more importantly, a value standpoint. Overseas markets are potentially more attractive for several reasons. First, in many countries, demographic trends favor growth and development. Second, there are more efficiencies to be gained from restructuring and reorganization and general business rationalization overseas than in the U.S., where we have been downsizing and moving to introduce IT and other efficiencies for well over a decade. This is certainly the case in Japan and other Asian economies as well as in the emerging markets and to a lesser extent Western Europe. Third, despite the turmoil in our own markets, many overseas markets are even more distressed, for a far longer period of time. This has led to depressed valuations in fundamentally sound companies, which can be realized when these economies turn around.

This is not to suggest that attracting funds or corporate investment in the current environment will be easy. Nothing could be further from the truth. Investors, have by and large readopted a far more conservative back to basics model that requires a company to show real focus, a viable business model, credible management, and an ability to understand numbers and deliver on what they have promised. Demand is down and there is far less of a push to enter into investment for its own sake. Relationships and an ability to successfully communicate and navigate through the investment process is more important than ever.

However, investments that offer real value and which can be justified on a strategic or profitability standpoint, do remain viable. I recently had one mutual fund manager tell me: "Investors are simple creatures. If a company promises us X and we receive it, we are pleased. If we receive X+1, we are very happy, but if we receive X-1, we crucify them."

Expectation management is key. Organizations need to define and leverage their public image without getting too far ahead of the curve. We could spend a long time talking about this subject, but the operative principle is "under-promise and over-deliver". If you know you are realistically going to deliver X-1, promise X-2 or even X-3. That way you will be a hero when things don’t come out as bad as anticipated. The same is true when promising investment returns – always try to exceed your promises in a positive direction.

This brings me to my final comments. What can foreign companies and countries do to improve their chances in the current environment?

First and foremost, companies and countries need to understand the need for an ongoing dialogue with potential and perhaps even more importantly with committed investors, customers and business partners. It is not sufficient to fly into NY, Washington or another U.S. city for several days to participate in a seminar, trade show or other targeted event and expect to achieve lasting success in this market. That is an illusion. Follow-up and the development of on-going relationships are essential. Complex investments and building a business takes time. That is a simple fact of life.

Second, you must take time to understand the motivations and requirements of the investor or potential business partner. We often undertake research for foreign clients to help define the strategic approach that holds the most appeal. And this often changes over time. This can sometimes seem costly, but without research, it is very difficult to decide upon an optimal strategy. As one usually receives only one chance with each investor, doing without it can prove even more costly, and substantial time can be wasted.

Third, a well thought out plan that demonstrates a balance between vision and operational credibility is essential. I cannot tell you how many presentations I have sat through which may be flashy and fully of nice graphics, but do not clearly define who the presenter is, what he has to offer and what he is looking for. This includes knowing how much investment you are seeking and how it will be repaid. This may seem obvious, but I have often seen companies answer with a comment such as, "As much as we can get". This does not inspire confidence or credibility. The bottom line here is "Substance is more important than style".

Fourth, despite my last point -- style and intangibles, i.e. marketing and public/investor relations are critically important. Too many foreign companies believe their technology or capabilities or their perceived importance in their own market, speaks for itself. Frankly, they do not. Investors, executives and journalists are very busy people and they make decisions quickly. Initial impressions and an ongoing capacity to nurture and build awareness, and expand upon established relationships is vitally important.

There are many more pointers I could give, but I will leave you with one more. Get Help! While almost every "How to" book or article I have seen on doing business in other countries counsels the American businessperson to gain local support, many people appear to believe they can achieve success in the U.S. without it. Either by themselves or through a single representative who may or may not have experience in the form of having gone to school or having lived in the U.S. they believe they can effectively navigate the complexity of this highly competitive and costly market. Smaller entities sometimes entrust this job to a relative, and large entities to abdicate this function entirely by entrusting it to whichever investment bank or service firm is managing a particular transaction – irrespective over whether they have the capabilities to do so and have parallel interests over the long term.

I would emphasize, however, in view of the fundamental need to develop the value-added models that enable a company or a national economy to move beyond cost in order to justify premium margins -- marketing, branding, and effective public and investor relations is more important than ever before. While if can be costly and is sometimes difficult to measure, that does not mean that it can be ignored.

Experienced, capable support can be well worth the expense. The key here is not to be impressed by the name or the size of the organization but to find someone who understands and can help your business in a manner that offers real and sustainable value. This includes a familiarity with promotional outreach as well as both the strategic and technical concerns and organizational capabilities of a client organization.

For those of you who seize the initiative and to make the necessary efforts, there are many exciting opportunities out there. Let me conclude by again thanking the people at Turtlesnap and all of you for coming here today.