Wooing the markets

Information technology vendors have a new customer. And it isn't you. It's the stock market. The allure of instant riches in this time of hyperinflated market values has given birth to a new kind of business plan, one in which the customer is curiously absent. In this climate, the customer is not so much the end user as the deep-pocketed telco or software giant that throws stock around.

In fact, I've detected a sort of recipe for high-tech entrepreneurship in the latter '90s, based on my recent experience with startups:

Take two to three name developers. Add a few million dollars of venture funding from well-known "angel" investors. Stir in data from a noted market research firm that shows triple-digit percentage growth in your core market. Add a lowercase "e" to your name. Mix well. Fold into a PowerPoint presentation. Do a road show. Hire an investment banker. Wait for the phone to ring.

If you're lucky, you can get bought for many millions of dollars without going to the trouble of signing up customers or actually releasing a finished product.

Think it's ridiculous? It happens again and again. More money was spent on mergers in the first half of this year than in all of last year, according to Securities Data. Consolidation and cheap capital are creating a buyout frenzy. AT&T and TCI reportedly brokered their $US48 billion deal in less than three weeks.

While it's nice that Wall Street is minting high-tech millionaires like M&Ms, it's a little troubling that the customer is so incidental to the whole process. Increasingly, the presentations I hear from start-up companies lead with lists of investors, channel partners and enthusiastic analysts. Increasingly, these presentations lack customer references. Why bother? The customer is a minor player in this high-tech pyramid scheme.

If you've made a killing off the high-tech bull market, good for you. But be aware that some of today's startups are interested only in staying around long enough to cash out at a big multiple. If it's your own money at stake, that's fine. But be careful of betting your company's money on vendors whose most important customer is someone other than you.

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Paul Gillin

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