The Biggest Is Not Always The Wrongest

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It’s The Little Guys Who Start The Fights and The Big Ones Who Finish Them Off

This is precisely what’s happening in many tech areas. The little minnows are dying of a plague; the Lack Of Money Plague.

During the tech bubble, start-up companies got money practically thrown at them, first by venture capitalists, later by the market itself. You’d almost think the investors thought their money was diseased of something.

Now the market doesn’t act like their money is diseased, more like their former favorites are.

Most of the tech startups thought they had to get big as fast as possible in order to survive in the long term. To do so, the doctrine was “spend money first, make money later.” Sometimes that was completely insane, other times less so. When people are begging you to take their money, it is hard not to take it and build your empire.

But just as it was too easy to get money back then, it’s too hard now. For all intents and purposes, most start-ups built on burning money aren’t going to get any more. Their economic oxygen has been cut off. Either they stand on their own two feet before the accumulated money runs out, they find somebody willing to absorb them, or they die when they run out of financial fuel.

In most cases, it’s going to be the third. If you’re talking about a dot.com, essentially there’s too much competition chasing too few dollars, whether it be merchandising or advertising dollars. In either case, there’s going to have to be a die-off before conditions (less suicidal pricing for retailers, higher ad rates for the others) get better.

The man with the last dollar wins.

And guess who has that?

The established companies with other businesses and money behind them have to generally win. Right now, this is not Monopoly, this is Survivor, and the market votes off players every week. All the big guys have to do is wait and outlast the little guys.

Now this is plague, not genocide. Some of the little guys will survive. A few will become big guys in time. Big guys can mess up, too; it just takes longer for it to become fatal.

The big guys aren’t going to be all-too-willing to buy and absorb these companies, either. They may be more prone to in the case of companies with serious, hard, patentable technology, but on the whole, why pay to figuratively put a terminal patient in the ICU when you can take what you want from the corpse for a lot less.

Yes, that’s rough, that’s harsh, that’s reality.

If you’ve ever waited or hoped for a troubled company’s going-out-of-business sale, you’ve done the same thing.

How To Protect Yourself

There’s actually a very easy way to judge who is likely to go soon.

Get the most recent income statement from a company. Lop off the extra zeros, and pretend it’s your
budget. Assume you can’t increase your income a whole lot, or decrease your expenses a whole bunch (say no more than 25% up or down).

If there is no way you can even come close to balancing the money coming in with the money going out, that company’s a goner. That may not work 100% of the time, but it’s pretty close. Not to say any company that meets that test is going to survive, but at least it might have a fighting chance.

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