I blogged last time about cash flow and being a cash positive business or for that matter household. This last blog touched on technology companies, and in the west more and more of us had better end up working for high tech otherwise we will fall behind into a malaise of false value creation which caused this major recession!
There is an irony in this last statement - it can be argued that it was the over valuation of technology companies, especially internet and bio-pharma, which lead to the scenario where high returns on investment turned away from mere overstating hopes for revenues from technologies to outright distortion and criminality based on property. I don't know if in terms of actual monies if there is such a cause and effect relationship, with the "sub prime" fiasco being offered as a lifeboat to investors or used as a band-aid over mediocre performance of technology stocks I don't know.
One concept the last blog and the preceding paragraphs skirt around then is the true cash-flow technology company - a trading business - versus the technology development company -. the R&D money capsule.
As you will know about me I have little time for the latter: I have given my reasons before and will wander into a rant on why I just don't like R&D money capsules. Essentially there is a key difference in personnel which creates a recipe for failure as follows:
These type of businesses are usually started by a "nerd", of a tech-geek and worse it is usually a wee crowd of them in post doc' type or regus professor positions. Otherwise they are slightly geeky nerds who have worked in commercial technology and been shunned from internal R&D resources.
When VC or even soft capital get involved the company suddenly gains a layer of management who allegedly are a good fit from a tech background. Invariably they have quite different experiences and the key CFO has little sense for the science what so ever.
Now what is missing here? Great ideas and the best, dependable management to spend the cash from the net working capital? Well the one person who is lacking here is an entrepreneur or a team of entrepreneurial leaders.
The reverse is true of trading businesses - yes they have plenty nerds but they have a super geek leader who knows how to make a deal and how to make profit from selling stuff!
There was a little joke played in VC (venture capital) environments when a viral campaign asked them to review the proposed team for a new IT hardware and OS firm. The curriculum vitaes and CVs were seen as a joke, nothing they would invest money or even more time in. The team being presented to them anonymously were the Apple team from the 1970s.
Now back to the last blog theme on cash flow: In the trading business then positive cash flow in real periods is the life blood, while in the technology bubble cash flow is a paper exercise until it becomes obvious that they will need to spend a way larger amount to make their milestone, or the promises of the technology have proven to be less of an incremental benefit than anticipated in the early market. Worse, the key patent is rejected for the reasons above.
There is actually a third way, a hybrid type company: this actually either from a capsule who decide to raise more cash by selling some of their labour or ideas, or the reverse where by a trading company decides to start an R&D project big enough to change the essence of the main cash sources and outgoings.
I can't say I have met any of the latter, but several of the former spring to mind in biotech and in fact in the oil technology business. Due to tax reasons, the route to developing either a trading wing or a major R&D investment usually results in the separation of the companies into two entities or often three, with a holding company above the two and owning perhaps some assets there in. This is a shame because it will bring in new, non entrepreneurial accountants basically, that being with high salaries!
There are actually many Steve Jobs in industry who unfortunately felt the heat of becoming a wall street listed company and got out. Invitrogen (life technologies) and a score of other biotech tools companies it eventually eat shared this story, where the entrepreneurial core bailed out. Some companies survive very well, others fail or get taken over rather quickly as they loose their soul if you like.
Steve jobs stayed the course by always knowing that he needed to use money people not the other way around. He was the "apple core" , the nuclear reactor with a driven, domineering yet charismatic and diplomatic personality. He saw along the way people who he though could work with him, not over him or around him. Thus he could continue leading the market oriented technology development and eventually years of sticking to being arrogantly different and subtly stylish paid off with enormous benefits to the company and stock holders.