You probably remember what happened to the tech bubble when it burst in 2000. It was quite a disaster. How could a sector that showed so much promise become so decimated? Exactly what went wrong? And, why does the future now look promising for this once devastated sector?
In a previous article, Finding Dollars for Small-Cap Companies, I talked about how, at the height of the tech boom, investment bankers and venture capitalists (VCs) were so greedy for deals that some agreements were reportedly made on the backs of placemats in restaurants.
In those heady days, a young person with a credible idea of how to make money in the technology sector could get substantial funding from investments bankers and VCs without a well-written business plan and budget.
Because there were too many dollars chasing too few deals, the bubble inevitably burst. Investment bankers had succumbed to pressure to get their investors’ money quickly employed.
But how could this crash of the tech stocks have been avoided? Fundamentals! Yes, the bankers forgot the fundamentals of investing. They forgot about well-written, feasible business plans — plans that prudently look at the probabilities of acceptance of a company’s products and/or services and a sustained market for them.
They also forgot about conservatively prepared cash-flow budgets that show a “burn” rate that can be reasonably supported by facts and figures, so that anyone investing in a deal knows reasonably well that the funds are there to support the company until it turns the corner and makes a profit.
Could This Debacle Happen Again? Certainly. People have chronically short memories. Some of the most seasoned investors can fall prey to the “feeding frenzy” that caused the tech bubble to burst in the first place.
Anyone who reads the history of stock market bubbles and bursts knows that this phenomenon seems to be a recurring cycle. Sure, conservative investing inevitably follows a crash. There is less money to invest after a crash and those with the funds are timid and afraid of getting burned again.
However, inevitably people once again become bullish and start forgetting about fundamentals and sound investing. It’s just a matter of time before mass memories become “foggy.”
Will it happen in the near future? No, and I say this for two reasons. Tech stocks have not fully recovered from their turn-of-the-century pounding; and, the dynamics are different today.
Of course, we can smugly look back four years and say that the handwriting was on the wall, and it was obvious that so many technology startups would not make it. We’re all good at Monday morning quarter backing, aren’t we?
But, the market did go through its cyclical pruning and purging. Most of the weak deals have foundered and are no longer in business.
Today, however, technology has found a permanent foothold into our every day lives. Let’s take a look at where we were a few short years ago, vis–vis mass usage of technology, and where we stand today.
How many of you had a personal computer, say, 10 or 12 years ago? I’ll bet not many. How many of you had a PDA (personal digital assistant), for example, a Palm Pilot? And, how many of you were personally using e-mail as both a collateral and critical form of communication?
Today, most of us have personal computers and PDAs, and use e-mail daily. In fact, e-mail has become an integral and irreplaceable part of our lives. Unfortunately, the downside of this e-mail phenomenon is that so many marketers are flooding us with so much spam.
There’s No Going Back
I don’t think that any of us can delude ourselves into thinking that the spectacular technological progress that we’ve made in the last few short years will ever reverse itself. In fact, it will only become more pervasive and a more integral part of our lives. In a word, we won’t be able to live without it.
Here’s a concrete example. Amazon.com recently reported that its Thanksgiving sales of consumer electronics surpassed book sales for the first time and became the top sales category on the site. This is one indication of the direction in which we are heading.
However, looking back a bit, Amazon.com was non-existent a few short years ago. Back then, who would have dreamed that an online “bookstore” would become a power to contend with?
In fact, in this not-too-distant past, most of us would have doubted the probability that we would have major online retailers at all. Yet today, we have many online retailers with combined sales into the billions.
Let’s take a brief look into the future of technology. Most of us, in my opinion, will have a combination cell phone, wireless PDA and digital camera. This one small device will consist of a personal planner, telephone directory, quality digital camera, VoIP (Voice over Internet Protocol) telephone, and give you around-the-clock Internet access. (See my recent article, VoIP Here to Stay.)
Are You Convinced?
Have I convinced you that technology has taken a permanent foothold in our economy and into our collective psyche? It seems quite obvious to me that this is so.
This being the case, I have no doubt that tech IPOs are on the rebound and will become a force to contend with. I believe that the VCs and investment bankers are now convinced that technology IPOs are coming back and will not disappoint us this time.
I suppose that you could say that the icebreaker for tech IPOs is Google. It certainly has made the point that investors realize that computer technology, with all of its ramifications, is only going to become more pervasive — I would go so far as to say totally pervasive.
Still, the investment bankers and the VCs must be conservative and not overly aggressive when performing due diligence on tech IPOs, or any other IPOs for that matter. I’m reasonably sure that this time around, everyone will be a little more cautious.
(In a previous article, Searching for Capital: Small-Cap Options, I talk about the right way to go about approaching funding sources.)
Looking at the horizon, I think that tech IPOs will be a really bright spot in the performance and growth of our financial markets. I might be an optimist, but I believe that blue skies are headed our way and they are “tech-nicolored.” Good luck!
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public, and can be contacted at [email protected].