Making Money in Technology
After the Bubble, page 21
Toast or a Future?
Is a technology business, whether it is established or a start-up, toast? Or does it have a future?
To some degree, as I suggested in The Amazing Hulks earlier in the article, paying too much for customer
acquisition and pursuing a strategy of growth at any cost are signs of impending toast. It’s also easy if you
have contacts with a company to recognize what I call “former glory” syndrome. A former glory company—Digital
Equipment and Motorola are good examples—has an illustrious past. The present, however, is a business with
its arteries clogged by bureaucratic process staffed by timeservers.
In a purer sense, determining whether a technology company has a future depends on a number of factors,
including:
How good is the technology?
What are the barriers to competitive entry?
How good are the people who work for the company?
Ultimately, you’ll want to have someone expert in the area assess the technology, and do your own
gut-check analysis of the management team.
Valuation Methodologies and Technology Trends
In boom times, technology ventures are valued for their “story”—which is often a hope about extravagant
possibilities more than anything else.
In bust times, technology companies are valued using conservative metrics such as book value, cash on hand,
and trailing price-earnings ratios (PE). Declining growth rates are the norm, so PEs themselves tend to
contract.
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