Under Analysis: Punting on Performance

Why have so many technology companies raced to an IPO, rather than focusing on establishing and maturing their business?

The Internet and eCommerce promised much to businesses and individuals all over the world. We saw the emergence of dotcom start-ups by the hundreds - brand new companies whose entire business model was based on the Internet.

Entrepreneurial hopefuls, wanting to take the quick road to paper-based riches and afraid of being left behind, were prematurely jumping on the IPO bandwagon, most without clearly defined objectives or a workable strategy.

And the Australian public was quick to accept and reward these companies, not entirely unmotivated by the promise of quick riches. Australians are punters. We love a bit of a gamble and the ASX offered just that with its technology stocks. Day trading became a full-time, not to mention very profitable job for some. Day trading cafes emerged in major cities, providing punters with an Internet connection, price lists and entertainment for a day on the "job".

Online brokerage firms, such as Commonwealth Securities and E*Trade, have flourished in recent months as thousands of Australia's investors offered their money to companies with questionable business models and management. Yet those days abruptly came to an end in April 2000, when technology stocks had the shakeout many analysts had predicted for months.

The market's tolerance for companies valued in the millions of dollars, with only a few months of operating history, came to a grinding halt. Of the 35 technology-related companies that have listed on the ASX in 2000, 26 (59 per cent) are currently valued under their original listing price. While the stock market correction was harsh on most technology-related stocks, it is those companies without real revenue streams that will be hit the hardest as the stock market continues on its shakeout. Companies with a long-term vision and cash flow will survive the shakeout and will continue to provide sound investment choices.

The market correction has resulted in higher levels of risk for companies wanting to list as a public company. Companies planning on an IPO have delayed these plans in direct response to the current market's volatility. Share swap deals have fallen through, as was the case with Telstra, Sausage and Solution 6.

Aspiring entrepreneurs are being forced to be more innovative and realistic with their business models, as people will be less willing to invest in businesses without sound fundamentals. It seems that the values of the old economy may return as companies with profit-orientated business modes and lean balance sheets will be rewarded.

Although Australia's venture capital market to date has been relatively immature in comparison to the US market, they offer a much better deal for dot-com start-ups.

Venture capitalists typically have a higher level of strategic interest in their investments than a public investor does. They tend to bring proven business knowledge and other added-value capital to a start-up. While a start-up may have an innovative idea, many of them lack the business experience, management and cash required to take the idea through to conception. And that's exactly what venture capitalists bring to the table. Companies needing funds are better off with a few rounds of venture capital raising to help develop ideas and concepts into profitable business models rather than looking for a once off injection of cash from a public listing.

Entrepreneurial hopefuls wanting to take the quick road to the paper-based riches of a premature IPO typically lack a real business plan based on sound fundamentals, and it's unlikely that we will see them around for too much longer. Once a business model has been proven, then and only then should companies consider a public listing.

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