Startup fire sales

By The Chilli staff

Following every Christmas, shoppers descend on the retail stores during January, hoping to acquire bargains. More often than not, the enthusiastic shopper, in the collective hysteria of the January sales, picks up several dubious items. Upon reflection, the chastened shopper realises the error of their ways, and thanks the heavens for a large wardrobe in which to hide the offending items.

Something similar is happening in the tech industry. Our enthusiastic shoppers include a few tech companies, buried underneath piles of cash raised through tech-bubble IPOs. The bargains include several tech start-ups, some in the UK, being wound down as VCs clean up their portfolio.

Tech companies raised cash through their IPOs on the basis of building and growing their companies against a strategic long-term plan. It quickly became clear that collectively, the strategic plans were no more than a drunken haze distorting the vision of newly qualified CEOs and inexperienced VCs and investment bankers. Very few of these post-IPO companies have been able to function adequately as standalone businesses. There is no single reason for this, but the tech crash alone cannot be blamed for the subsequent collapse (or just plain lack) of revenues. Several reasons, including business model, execution, management, failure to understand market dynamics and premature IPO, have been mentioned in post mortems. The huge pile of cash raised through IPOs is being burnt at a rapid rate. Most of these companies have had to shrink their operations, as the projected revenues never materialised. In a situation like this, just what are some of the options?

I. Spend the money by making an acquisition, if organic growth is not possible

II. Return the money to the shareholders

III. Increase the R & D budget to diversify product portfolio

In the hi-tech sales season, there are several businesses up for sale, but some hard questions need to be posed to the management of the potential acquirer:

• Do we know anything about this business and its end markets?
• Do they have a product, as opposed to a technology?
• Do they have paying customers and a revenue stream?
• Are the patents defensible? Do they give us an edge, or are they worthless pieces of paper?
• Do we have the management skills to assimilate a new business unit?
• If we have had trouble running our own business, will this acquisition be a burden or an asset?

Many bargains in this month's sales will not stand up to such scrutiny. Tech investors have been told that they should not expect to receive dividends as tech companies could spend all the cash wisely on expensive R & D and capital items. The evidence from the last three years would argue that other than wastage of cash on frivolous items such as expensive looking HQs, business class travel/entertainment, premium rate international mobile calls and executive toys, the actual R & D budgets have shrunk. The IPO cash is best managed by the post IPO shareholders, so the bubble IPO companies should return the cash to them, and apologise for being unable to build the company in line with expectations set at IPO time. You may win back some of their respect, and the investors would feel more confident that the company is not cooking the books and surviving on the investors cash, without generating any real revenues, products, or paying customers.

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© Chilli Publishing Ltd 2003

22JAN2003