40 years ago, corporate finance was a different world. Knowing the right people was often the difference between a good deal and a bad deal. Valuations were pegged to an industry benchmark, and it was difficult to find someone who was willing to deviate from the standard. When venture capitalists looked for investments, they’d seek out industries where they could leverage their connections to streamline business processes. The process was specific and calculated. It wasn’t the numbers that needed to be bent to suit the business, but the business that had to adapt to meet the numbers.
In many ways, these strategies still apply today. Lenders need to estimate their return on investment, and business owners want to maximise their profits. But the modern marketplace demands that companies remain agile. In this environment, they’re not willing to compromise their company in order to improve their numbers. Instead, it’s the numbers that must be changed to facilitate growth. How does technology factor into this equation? This point can best be illustrated by the factors involved in creating the dot-com bubble.
In the late 90s, tech companies stock prices were soaring. Investors had nothing but faith in these companies, and the opportunities seemed to have no limit. Surprisingly, these valuable companies weren’t actually making any money. Every month, their expenses outgrew their income. They were banking on a “get big quick” strategy. The idea was that they would get as many customers as they could, as fast as possible. Once their services were considered standard, they could set the price. Until that day came, investors were quick to provide cash loans in exchange for a little equity.
The problem with this system is that there is no solid way to measure the value of a business. If you were starting an oil company, the value would be easy to measure. There is a finite amount of it in the ground, a certain cost to get it out of the ground, and a price buyers are willing to pay. But that same formula wouldn’t apply to a company like Facebook. When they first announced their IPO, analysts couldn’t seem to agree on a prediction. It’s not like Facebook’s business model was completely new, Google had been profiting from a comparable strategy for years. Today, Facebook has plenty of revenue. But their product is almost too intangible to properly value.
40 years ago, no savvy investor would have ever considered investing significant money in Facebook. Business ventures with no current revenue were a huge risk. But technology has shown the business community that the market can change overnight. Today, the real risk is missing out on the next big thing. For up and coming tech companies, this is a good thing. All you need to do is prove that your idea can gain some traction, and you’ll likely be able to finance it. While dollars and cents are certainly an important part of business, market influence now a significant factor in both the success and respectability of your company.