IT job losses fuel innovation, tech startups

With thousands of IT employees being laid off during the recession, IT job losses have fueled several technology startups.

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In the first quarter of 2009, more than 80,000 IT pros lost their jobs. But now, some of these jobless techies have used their free time to innovate and start their own technology companies.

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"Clearly, necessity is the mother of invention," said Jeff Andrews, a partner at Waltham, Mass.-based Atlas Venture, which invests mostly in hardware and some software startups. "When you lose your job, you get creative real fast, so downturns are times when great companies get started."

Thousands of companies have been forced to lay off staff, outsource their IT operations or close their doors completely, leaving IT professionals who have decades of experience jobless.

In the first quarter of this year, 84,217 high-tech workers lost their jobs, a 27% increase over the fourth quarter of 2008. That number is nearly five times the 17,345 jobs lost in the same period a year earlier and the steepest reduction since 133,511 layoffs were disclosed in the last three months of 2002, according to a new report from Challenger Gray & Christmas.

IT job losses spawn inner entrepreneur
For some, the tough job market has forced creativity, and developers and engineers with entrepreneurial spirit have taken a crack at starting their own companies, said Kenneth Merritt, an angel investor and managing director of the Burlington, Vt.-based law firm Merritt & Merritt & Moulton.

We are working really hard to find these guys and be the first ones to invest in them.
Jeff Andrews,
partnerAtlas Venture

"People who get laid off from larger companies don't have the opportunity to go to another large company right now, and the easiest way to get another job is to create one. So I'm seeing a lot of people starting their own companies now," said Merritt, who frequently consults with and invests in technology startups.

Lately, many of the entrepreneurs pitching ideas to Merritt come from IT pros who worked for GE Healthcare, which laid-off hundreds of employees in South Burlington, Vt., and elsewhere this year.

Atlas Venture's Andrews has also read business proposals from recently unemployed IT folks. His firm sees this as an opportunity to invest in very promising startups, he said.

"We are working really hard to find these guys and be the first ones to invest in them," Andrews said. Most recently, Atlas Venture invested $7.4 million in a cloud computing company.

Patrick Hynds, a systems architect and president of Critical Sites Inc., an IT services and consulting firm, said many of the big companies of tomorrow are getting their start during this recession.

"When [software developers] get laid off or their division is wiped out, they are left with lots of ideas and now they have plenty of time to develop them," Hynds said.

And while a lot of ideas are abandoned mid-development because they can't be carried out, there are sure to be some impressive innovations that are viable, especially in the area of efficiency, Hynds said.

"Most people I talk to are developing money-saving solutions," Hynds said. "They say, 'My company was stupid. They could have been saving millions of dollars and saved all of our jobs if they would have done things this way,' A lot of developers have ideas that they never brought up to their employer, and those closet aspirations will come out."

Aaron Sawchuk, the CTO and co-founder of the data center hosting company ColoSpace Inc., said he sees startup technology companies popping up throughout the Boston area, especially in virtualization, mobile technologies and storage areas.

"Now is a fantastic time to start a new business, because the talent that is available in the marketplace has never been better. You have individuals with 10, 15, 20 years' experience; people who have literally any background you are looking for and are willing to take a chance with an emerging company," Sawchuk said. "Couple that with the fact that core operating expenses like rent, advertising and payroll have not been this low in a decade, and you have the ideal environment for a startup."

Money is still tight, of course
Of course, not all the stars are aligned for entrepreneurs right now. Many venture capital firms have scaled back investments because of the recession, so competition for funds is tougher. Venture capitalists invested $28.3 billion in 3,808 deals in 2008; the first yearly decline of total investments since 2003, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA).

But venture capitalist Sunil Daliwal, who has invested in IT infrastructure technology startups with Boston-based Battery Ventures since 1998, said the grim market conditions shouldn't deter entrepreneurs who have solid business ideas, because his firm and others continue to invest in promising startups.

In fact, Daliwal's first successful investment came when the dot-com bubble started to burst in 1999, he said.

"I remember meeting the owner [of the Voice over Internet Protocol company] Cbeyond in a hotel lobby when he had nothing more than a business plan. … It was a horrible time, but we stuck with a great entrepreneur who had a great technology and built the business through the downturn. It is a $350 million revenue company today," Daliwal said. "This is a lesson of how great companies can make it through a tough time if they stick to their mission."

Daliwal said he has seen an increase in IT infrastructure technology startups in the Boston area recently but couldn't say for sure whether that increase is directly related to a poor IT job market or is a response to the success of other visible startups in the space.

"There has been a much stronger resurgence in enterprise IT in the past few years, and one reason could be because there have been some nice successes around here, and people look at those and say, 'I can do that too.' Companies like Netezza and BladeLogic. … Those were pretty important events in the IT infrastructure space that got people's eyes back on enterprise IT startups," he said.

Research shows that the recession has forced several technology startups to close, but entrepreneurs know the market, the economy and the need to keep costs low have a chance to emerge from the recession intact, Sawchuk explained.

"A difference between the companies we work with today versus two or three years ago is that they are much more cost-conscious. ... [They use cost-cutting measures] that should result in a set of more stable organizations," he said.

Let us know what you think about the story; email Bridget Botelho, News Writer.

And check out our data center blogs: Server Farming, Mainframe Propellerhead and Data Center Facilities Pro

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