Ok, so the last post left you feeling like you should just spin up some Pink Floyd on the turntable … er … ok … I am dating myself here (turntable? sheesh).
What I posited in the last post was that HPC has value. And it should be treated as such.
But I also noted a few things.
First: Short term credit for business is pretty much non-existent. This impacts all HPC providers, smaller ones with fewer capital reserves harder than larger ones with capital reserves. It also reduces the incentive to tie up capital in customers purchases, as this forces all HPC groups to decide which customer to service first, and place the frequent and fast payers at the front of the queue.
Second: Banks aren’t the place to go for capital. They won’t loan you capital unless you have liquid assets and more to the point, monetized liquid assets these days, to pay back the loan. This is important as our government has mistakenly given these organizations hundreds of billions of dollars they could have used to unfreeze the credit market with. Recent reports from various news organizations suggest that not only aren’t they going to lend to business, it is none of our business where our money went, and how our money is to be used. This is important.
Third: Companies of all size are suffering from lack of capital. The equity market has never been a great place to get capital, as the capital is very expensive, and you have to deal with … ah … some interesting antics on the part of those you are trying to get the capital from. Read The Funded for some eye opening and hair raising accounts of entrepreneurs trying to raise capital for their companies.
Fourth: bailouts are like drug dealers giving out free samples. It doesn’t solve the core issue, it only prolongs the pain, and makes the recovery that much more painful. I fully expect the automotive companies to back in Washington asking for more in March 2009. Notice all the other companies crying “foul” now, and wanting a slice of their own.
Getting to HPC. Bear with me.
Here in Michigan, we have been in a recession for … I dunno … a decade? Technically I think it is classifiable as a depression, but I haven’t heard the professional economists call it that.
We have one of the highest foreclosure rates outside of the overbuilt/overspeculated areas in Florida and Las Vegas.
And something interesting is happening.
Homes are starting to sell.
The massive influx of foreclosed homes is doing what government programs wouldn’t be able to do.
They are setting ‘true’ values for real estate.
Ok, ‘true’ is, in this case a relative term. Yes, this means that over the 10 years we have been in our home, all the ‘equity’ we have seen built up have vanished. We went from ~30% appreciation to 0% appreciation. Maybe even 0.001% depreciation.
But homes are starting to sell.
That is, the invisible hand of the market is moving, operating exactly how it is supposed to. Distressed assets are being sold at reduced price, and the resulting prices more accurately reflect the value in the market for comparable homes.
Which is what we need to allow to happen in other markets. The longer we forestall reaching the actual value of the marketable products, the longer our pain will be.
But it points out that while the credit markets are frozen, there are people with cash, and they can make a difference in the market.
Now we are getting to HPC.
Right now, banks are refusing to lend.
Take them out of the equation. If they aren’t in the decision making process, or the action, then they can’t impede the market from finding its value.
Ok, who has the cash to start things moving? Remember, we need a supply of cash to buy things, and a supply of buyers to purchase the things.
First: The government has an SBA loan program. SBA is a program that (eventually) provides small businesses with capital for buying buildings, equipment, etc. It is structured as a loan, guaranteed by the government. The banks lend the money, and the government pays about 80% in the event of a default. Limited risk for banks, capital for small business. More about this in a minute.
Second: The government has an SBIR program. This is basically to pay professors/researchers to examine the feasibility of developing a technology from a research project for a period of time (6 months) with limited capital (no strings attached). It is effectively a vote of confidence for the professor/researcher on the part of the government, and VCs look semi favorably upon it, though that may be alarming in and of itself.
Unfortunately the SBIR as constructed is not terribly well designed. Yeah, I know, some people have done quite well through these programs. But there is the infamous 6 month gap between phase I and if you get it, phase II. The way to make it work is to be done with all the work for phase I by the time you get the phase I, and work on writing the phase II and getting it submitted as quickly as possible during phase I if possible in order to get phase II.
The SBA loan is not well designed, as it is restricted on what you can do with it, it is still hard to get.
But both of these could be streamlined. Made efficient. Expanded. So that along comes a large order … and wham … you can get guaranteed capital vis SBA loan to get the gear you need in hours/days to fulfill the order. Extra clauses in purchase contracts to customers that they have no choice on … no more Net-30 as a suggestion … acceptance testing in-situ and lots of other things to speed payment … , requirements on repayment, with interest and fees (government needs to make money on this to show to the taxpayers).
You have a good idea, and you want to hire someone to work on it (hey … hire someone … novel concept). You can go pitch your idea to the VCs, and maybe, after the 180th pitch, if someone hasn’t taken the idea for themselves (remember, they don’t sign NDAs) you might get lucky and sell 51% of the business for the 100k$ to hire the person for 6 months to get the work done …
… or you go to the revamped SBIR, who help you take your idea and plan, and craft some milestones around it. You get your phase I the next week or two, and work 6 months on getting results. If it works, you take it to one of the bimonthly review boards, who give you thumbs up or down right then and there on whether or not it is worth another month bridge grant to craft your phase II proposal. You craft the phase II, submit it, present it, defend it. If you are successful, you get a phase II for a year to work on commercialization of the project.
What this does for HPC.
It allows the small innovative companies to survive lack of credit. It allows them to hire talent to pursue potentially high payoff/risky work.
It also puts stress on the banks. They are effectively excluded from the credit market by their own lack of participation. Future government money for them comes only with a chapter 11 reorganization, that as part of their recapitalization, they will participate in this market for up to a fixed maximum percentage of their investment portfolio.
So this talks about the supply side of things. What about demand?
Well, its high time that the government built out a great deal more HPC capacity. Since HPC is such a valuable resource for business, for academia … lets make it ubiquitous. Seriously ubiquitous.
No, this doesn’t necessarily mean write blank checks. Lets not repeat the TARP mistake. Remember, the small guys AND the large guys are hurting. Anyone want to buy a GM car if you aren’t sure the warranty will be there? What about a Tesla Motors car if it will?
This does mean buy sensibly. It means make sure every college and university has a high performance computing system with significant meaningful and usable computational power.
It means making sure that there are shared resources for businesses who might not be able to afford a supercomputer of their own to leverage this power at reasonable prices. Speak to the people who are running such things successfully, like the Tsunamic Technologies guys. Avoid the ones closing down shop because they built ASP v2.
It does mean building out our “pipes” so that bandwidth is a commodity. It means building enough storage and visualization and ….
Infrastructure requires investment … intelligent investment pays dividends for decades and longer.
The US highway system enabled rapid flow of goods, services, people between large/small population centers. It helped provide a roadway, if you will allow the pun, for the growth of the economy. And it enabled new business models to emerge that may have been much harder in the past.
Similarly, a massively built out information highway could enable new business models to emerge. Our existing limited information highway already has.
So buy. But buy smart.
And while you are at it, buy on the open market. GSA is inefficient. It protects vendors from the open competitive market. Remember that not every vendor you want to buy from has a GSA contract. Remember that these contracts are expensive and time consuming to set up. Remember that the open market is competitive, while the GSA is “register your price for this item on our price book which might not change for N months/years” even if the open market price changes.
Remember that big companies started out as small no-name brands … especially when you are looking at competitive systems … the brand is a decal, its whats in the box and how it behaves that counts. We get horror stories weekly from customers about one or another brand name product shoehorned into some HPC service process.
Basically what I am saying is take a pair of defibrillator paddles to the economy. We can show how via the HPC market. We just need to shock the credit markets back to life. For this, we need buyers at government/university labs, and credit via the government through a tuned SBA loan program. We need to put the many highly talented HPC folks out there to work on risky ventures with a shot of being valuable, and getting seed funding for these people through a tuned SBIR program. We need to stop giving money to banks, start allowing them to chapter 11 and guaranteeing re-organization loans as long as they participate in this credit injection.
No one is going to get everything they want out of this. It isn’t perfect. But as small businesses are supposedly the engine of this economy … 60+% people are employed at small businesses, this is where most of the economic growth is likely to occur. So nurture it, give it the fuel (credit/SBA) it needs. Let it take risks (SBIR). Give it buyers.
FWIW: the day job is fine, we are more concerned about customers paying late/never than worrying about getting credit. I am about to hire another HPC person, we have just agreed upon a start date. We just need to grow our business by increasing our sales. While the bank and credit markets were crashing, we had some of our best months … ever.
And as a glutton for punishment, I am looking at hitting the capital raise trail early this coming year to help grow the company even faster. Even though I read TheFunded.com with great trepidation …
BTW: feel free to forward this to a congress critter of your choice. Its possible to do some good in this market. HPC has been the source for lots of good. It time to go big with it and have it show a model for helping the economy restore a normal sinus rhythm.