12 May ARE WE THERE YET?
The past two years have been particularly difficult for telecom and high-technology companies. Some pundits smugly claim that it is their own fault. “Their own executives did them in,” is a shout that I often hear. Another is “They had it too easy for too long. Now they have to compete, and they are falling on their faces.”
There is some truth to those statements.
But there is also truth to what a telecom President recently told me. He said “The money market people, particularly the venture capitalists, gave some very bad advice to some very naïve people in leadership positions in this industry. There were too many young and inexperienced venture capitalists playing God with their investors’ money, and too many greedy telecom neophytes eager to do whatever they had to do to get VC money. The VCs sent boys to do men’s’ jobs. The results almost killed us. Too many rookies got used to living on VC money and did not know what to do when it ran out.”
Whatever the reason, most people in the telecom and high-tech industries now are asking, “Is it over? Are we there yet?”
I wish I knew, but I don’t. If I were forced to answer, I would say “No.” The reasons are that (a) businesses continue to trumpet their EBITDA numbers as if they were bottom line keys, and (b) the venture capitalist community is still in denial that they had any part of the market drops. They are still pointing fingers at the “dotcoms” and the “CLECs.” IN fact, nobody can sit for holy pictures on this one.
Some (very little) venture money is being made available, and many, many venture capitalists have lost their jobs (and their investment funds), so the tech and telecom people aren’t the only victims of the market flop. But it appears that the money people must take the first step if we are to get moving again. That first step is not the one many are taking today. They appear to be “hiding” their funds in older, traditional businesses, and eschewing investments in start-ups and technology businesses. They burned their hands, and now seem to not want to go near the fire. The market demand for technology and innovation is still there and growing. Things like Broadband and competitive telecom needs did not go away! How some companies tried to meet those needs is what got us into trouble. But the actual needs are still there.
I propose that money market people (VCs and Investment Bankers) should revamp their Business Plan due diligence reviews to focus on hard numbers like Total Business Plan needs and on profitability dates instead of dwelling on softer measures like EBITDA. Interest, Taxes, Depreciation and Amortization cannot be ignored. They are very real parts of a business, and an old maxim in business is “You can’t manage what you don’t measure.” But measuring them as EBITDA has encouraged some to fail to pay proper attention to the parts. EBITDA essentially measures and reports Operating Income, and does not report or measure the effects of Interest payments, Taxes, Depreciation, or Amortization. In other words, it only looks at part of the business! Too many have been misled.
I sincerely hope that one or more of the leading money market companies has the fortitude to stride back into the market and prime the funding engine. But this time keep your eyes and ears open, send men (not boys), and return to the “old-fashioned” ways of screening for reasonableness.
Dennis Parker is President of Telemedia Resource Group. He welcomes your comments at (firstname.lastname@example.org).