Growth Trumping Profits…Again

Yesterday’s Wall Street Journal reported that for the first time since the 1999 high tech boom, more and more unprofitable tech companies are going public. Is history repeating itself? It may be according to statistics provided by Thomson Financial which show that 85% of tech companies that went public in 1999 had no profits. If you owned any tech stocks in 2001, you know how that party ended.

Since the beginning of 2006, the percentage is once again growing steadily. Of the tech companies going public in the fourth quarter of 2006, almost 50% were unprofitable. Each of the three tech companies in the current IPO pipeline are also in the red.

Investors once again are turning a blind eye toward profits for tech companies displaying soaring revenues. The Wall Street Journal suggests this trend resembles speculation more than disciplined investing. It seems that everyone is chasing the opportunities associated with growth accompanied by the assumption that profits will follow – someday. The big question is when will someday occur? And if it doesn’t, who will be left holding the bag?

So how might this impact the small or medium sized business trying to raise money? Well, if you’re not experiencing hyper-growth, then keep minding your p’s and c’s. That’s profits and cash flow. Focus on running your business to maximize cash flow and find a lender that understands your business and won’t head for the hills the minute your business (or theirs) hits a bump in the road.

It’s my opinion that banks will, if they haven’t started already, tighten up their credit criterion for lending money to small and medium businesses. The days of Prime flat pricing for marginal credits will be coming to an end – well at least for this economic cycle.

Get to know your lender – look closer at the quality of the relationship and less at the cheaper rate that the bank down the street has been offering. Make sure your banker knows that you have control over his (or her) three sources of repayment.

If you need help finding the right lender or telling your story the right way, feel free to give me a call!

Related Tags: Wall Street Journal, IPO, high tech, profits, cash flow, prime rate