International Investment Topics
But just because we’re saying that tech is back in favour,
we shouldn’t make the mistake of assuming this means that
nothing has changed in investors’ minds.
On the contrary, there are profoundly different (and much sharper)
demands being made of high tech companies than most of them would
have wanted to see a few months ago. Last spring’s spate of
dot.com crashes was sparked by a first wave of over-funded, under-managed
new companies hitting the buffers as their unrestrained ‘burn
rates’ exhausted all the funding that their trusting investors
had put into them. In Britain the worst case was Boo.com, an online
clothing retailer which devoured £150 million before anyone
noticed that its super-high-tech website was too painfully slow
and confusing to be of much use to three-quarters of the world’s
internet users.
International Investment Topics & Holland
In Holland the painful memory was World Online, a service provider
which suffered a near-disastrous launch after its founder sold out.
In Japan, in Germany and especially in the United States, you’ll
hear a dozen variants on the high-tech disaster story. So it’s
not very surprising that the financial markets are now asking a
lot more difficult questions about the tech companies they invest
in. How much experience of marketing do their managements have,
and have they made adequate financial provision for their future
expansion needs? And how big is their market anyway? What kinds
of lock-in clauses are in place to stop their most senior personnel
from selling out and/or jumping ship to a rival enterprise? How
does their future planning look, over a period of three-to-five
years?
Are they aiming to be the biggest fish in their particular ponds,
or have they got their sights set on the (perfectly respectable)
goal of being taken over by a predator for lots of money?
International Investment Topics - Market Size
Not all of these questions have answers, especially the ones about
market size. In a world where many new technologies are carving their
own markets out of solid rock (mobile phones in China, software developers
in India), nobody can really put numbers on these things. But the
companies that survive will be the ones that have at least laid out
an effective management plan. Insist on seeing yours before you invest.
Less important is the question of profits and dividends. Most investors
are sensible enough to understand that a new-tech company that starts
paying dividends too soon is probably depriving itself of growth
opportunities: it’s better for it to keep itself in the red
and spend all the money it has (plus some that it doesn’t
have) on getting as big as possible, as fast as possible.
International Investment Topics & Investors
Investors also understand that dividends don’t matter, because
the point of tech investment is to realise capital growth over a short
or medium-term period. The only real exception to this would be if
a new company’s losses mounted so fast that they devoured all
the available funding before it had reached the right stage for re-approaching
the markets for second-stage funding. This is what happened to Boo.com,
and doubtless it’ll happen to other dotcoms as well in the future.
The other problem with a profits-free existence is that it’s
almost impossible to attach a proper valuation to your chosen company.
With a conventionally-structured company you can work out roughly
how much you’re paying for your shares by dividing the earnings
per share into the share price, so as to give you a price/earnings
ratio. Generally speaking, the higher the p/e ratio, the more faith
the investing public has in its future prospects.
But without an earnings figure to go on, you’re forced to
admit that all your ideas about the company’s valuation are
based on gut feeling. And you won’t be the only one who’s
feeling so jumpy: the whole stock market is continually watching
everyone else for signs that somebody’s nerve might be about
to crack. And that’s what makes new technology stocks, and
their 100-plus p/es, so very volatile.
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