Friday, April 21, 2006

Tech: technology going private

Startup companies litter the world of Information Technology. An executive – or a student – has an idea or a product, and forms a company to develop it. The startup needs capital, people and technology. Capital is often the bugbear; however, at the other end of the equation are the venture capitalists, companies (sometimes individuals) formed with the specific intention of investing – often in startup I.T. companies. Despite shuddering memories of the post-2000 tech wreck, there is a lot of money to be made, and VCs are investing more cautiously, knowingly.

I often hear that going public is the crowning achievement for some startups. There’s a few reasons for this, not the least of which is the opportunity for those at ground zero to realise some of their profits. However, past the venture capital phase – which is, after all, provided only as a kick-off to the profit-realisation point – there will remain a need to raise capital, for marketing, growth, and further investment in R & D. And this comes from going public. The boiler-room of capitalism is the stock market of public listed companies. Its strength is the ability to attract capital, distribute profit and thereby attract more capital.

So why do we hear of some companies going private? This article paints a picture of a strong trend, but I think the journalist just needed an angle. Nevertheless, it is happening. The article points out the flipside to the public listing: the market’s voracious demand for profit, and its short attention span. Specifically:
- there is a large industry of financial analysts feeding the market’s demand for information;
- there is an increasing, and increasingly out-of-balance, demand for results in a shorter and shorter time frame.

In effect, quarterly results are heavily scrutinised, and any failings are punished. Yet three months is a very small manouevring space. The point is made that going private can ease that pressure, while a company restructures, re-invests, looks at its belly button. This is, in fact, a battle between managing a company with short-term or long-term vision, and public listing so often cripples long-term vision. [The same can be said for shorter electoral terms crippling a government’s ability to focus on long-term outcomes.]

Successful longterm vision can be promulgated where a company has sufficiently won the confidence of the markets – and the analysts in particular – with either a robust record, robust management, or robust underlying figures. Restructuring undermines this, and a company that can benefit from being turned around outside the constant market spotlight is ripe for taking private.

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