Annuals and Perennials

When you think about it, there aren’t that many truly great high tech companies around that have maintained success over a long period of time.  Cisco, Microsoft, and Intel are the big three that first come to mind.  You’d probably want to add IBM, Hewlett Packard, Nortel Networks, Texas Instruments, Oracle, Sun, SAP, and maybe EMC, Motorola and Scientific-Atlanta to the list.  If we go overseas, we’d probably add Siemens, Nokia, and Ericsson.  In Japan, you have Fujitsu and Hitachi and NEC.   That’s about it in terms of high tech companies that have been around long enough to have endured through various technology disruptions and business cycles.  Companies like Checkpoint and Broadcom, seem like candidates for future addition to the list, but are too young right now to make it.  You can’t count Lucent because it was formed via an unnatural birth after an 80-year gestation period within a government-sanctioned monopoly.  Agilent suffers from a similar issue although born from much more legitimate parentage. 

I’m sure I’ve missed a few.  But the point is, there just aren’t that many enduring consistently successful high tech companies.  It’s an amazingly short list. 

Although their competitors may consider them invasive weeds, these companies are actually the perennial flowers of the high tech gardenscape.  When you consider how many high tech companies are launched versus the number that become perennials, the statistics look staggering.  I haven’t run the numbers, but I bet the probability of a high tech start up becoming a perennial are about on par with the probability of a newborn baby making it to the major leagues – even with THG assist!

Most high tech start-ups don’t even germinate. The ones that do can enjoy a complete life cycle, but it all comes and goes pretty quickly.   Thus most successful high tech start-ups are like annual flowers.  If they are lucky, they germinate, build some early but tentative roots, break ground and become visible to the outside world, bud, flower gloriously, then quickly dry up and die.  This all happens blindingly quickly.  Yesterday’s lavish flower starts to brown today, wilt and fall over tomorrow, and is in the compost heap the day after that (finally performing a service to society).   At best, if the tech gods shine sunnily on you, you may get a couple of years of full bloom. 

That’s why if you create a high tech company, you pretty much know going into it that you are either going to fail or get acquired.  If you are lucky enough to avoid failing, acquisition is just a matter of when and for how much. 

One of the biggest mistakes made is to wait until your company is in full bloom before selling.  Time is not on your side if you wait this long.  Shortly after flowering, you can start to brown at any time.  Your value can decrease dramatically between going to bed at night and showering the next morning. 

In general, the best time to sell is when you are budding because acquirers can envision you as a survivor that will successfully flower. At that point, they still have time to acquire you and ship you to someone who can add you to a bridal bouquet.  In almost all times, but especially these days, a bud in the hands of an acquirer who has customers who can use it downstream is far more valuable than a beautiful flower in hand that can’t survive shipment to a funeral home or the set of Queer Eye For the Straight Guy. 

What you have to remember is that perceived value is what sets the price – not actual value.  In striving too long to increase actual value, perceived value can actually reduce dramatically. 

In more practical terms, for high tech companies this generally means selling somewhere between three months before and three years after beginning shipments of your initial product.  In that time period, if your initial product idea had any merit, you should be able to rapidly ramp up revenue.  Once shipping, revenue growth should be monotonic and double digit from quarter-to-quarter.   The optimum point for acquisition occurs if you can achieve financials that would result in you being accretive to an acquirer in a time period where most of the market opportunity is still deemed to be in the future.  This allows the acquirer to envision any kind of future value for you that they want to, especially under their wonderful management.  At this point, the perceived future value is probably as high as it is ever going to get.  Any longer than that is a crapshoot.  Any number of bad things can happen and very few good things can happen to further increase your perceived future value.  The market may level off compared to prior projections.  Competition may announce a huge price reduction.  A better alternative solution may come along.  Continued growth depends on a series of good decisions and transitions, the slight mismanagement of which can erase all the value built to date.  Things can unravel quickly. 

In my personal experience, companies who have gotten this right in the past include Kalpana, Grand Junction, VxTel, Alteon Websystems,  Cerent, Rapid City, ArrowPoint, Amber Networks, Bluesteel, Chromatis, Cobalt, StratumOne, HotRail, and Maverick Semiconductor.  All of these companies made a lot more money for their investors by being acquired than they would have made as enduring companies.  More recently, I’d say that the people behind Rhapsody Networks, Neoteris, and Spinnaker got it right.  The entrepreneurs within these companies may have to endure a jail sentence of a year or so in the acquiring company before they can break free and do it again, but they made the right choice. There are lots of other examples of companies who sold at the right time. 

But all-in-all, there are many, many more examples of companies who sold at the wrong time or missed their window altogether and are now in high tech purgatory or the high tech compost heap.  I feel sorry for those companies because they were reaching for a status – that of perennial – which is essentially impossible to achieve.   More reasonable goals could have resulted in a better pay off for all interested parties – employees, management, and investors. 

Now I must get back to tending my high tech start-up garden.   It seems like there has been an extended drought, but with a little careful watering and weeding I think I can have a harvest again.   

(volume 6, number 12)