Sunday, 27 November 2011

Bubble Trouble

I've been blessed with a front row seat to a few bubbles in my life. The first was the dotcom bubble, Asia, then the subprime mortgage bubble (I was in Ireland where it was particularly severe), and now the European sovereign debt crisis. So I thought I would discuss my lessons learned, not so much what the world has learned generally, but more so me personally. This one is about the dotcom bubble.

The dotcom bubble

I can't believe I grew up in a world without mobile phones and the WORLD WIDE WEB. When I was a kid the only place to obtain photographs of naked women (for me anyway) was in the local used bookstore, pretty disgusting if you think about it, and very embarrassing when you mum found the stack of incredibly used magazines under the bed. Oh those.. those are not mine… I'm just keeping them for a friend.

That was until the www made all of this a lot easier. My father had started an IT company so I had access to all the cool new stuff and, one day, I got introduced to a modem and one of my father’s employees taught me to call to a Bulletin Board System, or BBS, a sort of precursor to the internet that was basically just a file system, and all you could do was browse the folders (I remember an incredible 1GB of data advertised) and download the files. However treasure hunting in the this new brave world was unbelievable exciting and I can still vividly recall the sounds beeeeep, beep, beep beep, when the modem established a connection, to this day hearing it, or even just thinking about it, gives me a true sense of joy (just like I can't stand the blackberry email received sound, as it reminds me of a horrible woman, I once worked for, and why I know have an iphone), I was absolutely hooked, and besides certainly downloading my share of photographs, I became fascinated with software development, my dad had already taught me some QBASIC but I spent countless hours learning different languages and tools, and when the internet started to gain traction a couple of years later I was of course very much with it.

My father’s business grew to become one of the largest multimedia companies in the country and I started to get well paid programming jobs. Towards the end of the 90es, when I was 17/18, I was able to get my own apartment, studied for my high school finals with a case of beers on my new balcony, I took a year off between high school and college and worked as a developer on an award winning computer game, life was good, head-hunters would try to snatch you from your own fathers business, endless opportunity and I felt unbeatable. Only reason why I decided to college was because "that's what you do".
Then early 2000 the bubble bursts, marking the end of the dotcom boom. My father’s business relied heavily on project sponsors (usually government grants), and money that was readily available in the boom years, quickly dried up, and his business was in fact extremely close to being bankrupt, and since it was a personal company (no limited liability) that meant he was looking at a personal bankruptcy. However there was still a bit of life left in the dotcom private equity tank, and my father found a PE backed company with worldwide ambitions to buy his business. Imagine the relief. One minute you are bankrupt, the next you are a millionaire. My father sold his company for a substantial amount, some in cash and some organised as a share swap, to the biggest in the world in his sector, and stayed on as MD for Scandinavia, he had made it and was looking at a very tidy future.

BUT the company who had acquired him had spent their exorbitant amounts on acquiring a string a business from all over the world, all companies very similar do my fathers, were shocked to learn that many wrongs don’t make a right and even more shocked there was no more funding available. So they were also looking at their own bankruptcy. For my dad that was a particularly problematic scenario, because he hadn’t received any of his money yet, and the company refused to pay him (although he was still receiving a salary as a director). The trouble was that the sale had been notified to the tax man, and they were knocking on the door to get their share, they don’t care about the minor fact that you havent actually been paid. So he was once again looking at bankruptcy, only this time with a deficit 6 times one year prior. My dad’s lucky break came when he found out that the company was in talks with another PE firm (who apparently hadn’t realised the bubble was well and truly gone) to take it over. My dad therefore sued the company, knowing that no one will buy a business with pending litigation, and as expected the company settled for an amount slightly higher than the original price, he got his cash, and the company was sold to the new PE owners. The shares on the other hand were completely worthless now; the new owners spent another few million but only months later realized they had bought hot air and finally decided to pull the plug.

The era of spending for growth without plan for when/how you would generate an income was over. My father’s shares were now rubbish, he was in an industry that had imploded, but it could have been a lot worse. I remember my dad telling me about another guy in the company who was relocating to a top exec position in America. He and his family had just arrived in the states, when he learned that there was no more funding. All their furniture was on a containership somewhere on the Atlantic ocean, and they had to wait for it, and then ship it all back to their suddenly very uncertain future. Noone in the industry had thought that investors would stop giving you money.

For my father it was actually a reasonably slow dead because there was some ongoing projects and the liquidator was naturally able to extract whatever possible value they could. But little by little he said goodbye to all his staff, many with completely useless skillsets (i.e. web designers) in the post dotcom bubble world. He had never taken on any partners and therefore had the sole responsibility of presiding over the closure.
I was in college but got (re)involved at a time where my father was deciding what to do with his future, we managed to buy back the rights to some software, and we spent a lot of time trying to clean up the accounts which had been left in complete disarray by the laid-off CFO. Our plan was to take some of the existing code we had and make it available to multiple customers over the internet, what you would now call software as a service. We were relatively successful, but it had been a difficult process and we didn’t always see eye to eye, so I eventually received my share and left the business (btw happy to report that both company and product are still going). I decided to completely leave the uncertain world of technology and instead become a banker (yes but how could I have known). I started studying banking and finance and soon thereafter left the country for study (and never returned). My father still has an IT company and he has decided to keep it small as a lifestyle business, and he is happy.

When writing this I called my dad to ask if he had any regrets and he said NO. He got to work with incredible people and great projects for many years, it took it’s toll physically and mentally but he can’t imagine a more exciting journey to be on. What he did say was looking back as the company grew he spent most of his time on admin, perhaps he should have delegated more so he could have been more involved in the creative process, so possibly he should have taken in partners.

I would add the following;

.Don’t run a large business as a personal company. It is enough that you are investing all of your time 24/7, your health and sanity on trying to build a company and give people jobs, you don’t need to stake your entire life on it. Banks/Investors that ask for personal guarantees I have a big problem with.

.Build a recurring revenue stream to fall back on when shit hits the fan. It can be tempting to just take the cash now, because then you can invest more aggressively in growth, but the day funding dries up (even temporarily) what will keep you going is your recurring revenue. For software companies it is annual licenses (instead of fixed price), support agreements etc. all the stuff a start-up never think about.

.If you are successful you will likely encounter people that will try to intimidate you into taking a poor deal. Get your own legal counsel, it’s worth it.

.Be honest with yourself about when enough is enough. What is your financial and physical/mental limit, when to shut it down because it isn’t working. This is the hardest thing of all. Many entrepreneurs need a few attempts before they make it big, which is only possible if they can see a business failure as distinct from a personal one.

.DO IT!

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

Theodore Roosevelt

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