Although taking a long term view may be difficult for entrepreneurs living in "Internet time," understanding the cyclical nature of the economy will be critical to success in 2001, according to corporate and securities attorneys with Foley & Lardner.
"Owners of emerging growth companies must accept the fact that business and funding sequences in capital markets are cyclical and then put that reality to work to their own advantage," says Martin A. Traber, head of Foley & Lardner's corporate and securities practice in Florida. "Although there may be a constant number of dollars 'in play,' their deployment changes and the successful business owners will be those who understand the changes and position their businesses accordingly."
Noting increasing media references to down markets, Traber says a down market can best be defined as one with more limited harvesting strategies, more extended "hold times" and lower "pre-money" valuations, particularly as these factors affect three levels of entrepreneurs:
1. The most mature level of entrepreneur has already had the experience of several successful harvestings and/or rounds of financing into the current venture. These are the well-funded companies with good management track records. Even in periods of consolidation and dismemberment, companies with good access to funds and seasoned management will continue
2. The middle tier of entrepreneurs includes many individuals who trade their technology expertise for equity. Even though their businesses may suffer during periods of constriction and consolidation, there is still demand for their individual executive technological talent.
3. The remaining tier is that of start ups who may have a great idea but little financing, no track record nor ability to execute with their own technical skills. When business conditions tighten, these entrepreneurs are most at risk and may become consolidation targets.
"There's nothing new about the cyclical nature of the economy," says Traber. "You can examine virtually any industry and any decade and track the progression, such as the multiplication and then consolidation of cable companies and telecommunications companies in prior years. In the coming year, we'll see how the cycle affects Internet technology entrepreneurs."
During the next 12-24 months, Traber anticipates a good market for "business backbone" software that will allow businesses to perform more efficiently and effectively. Many of these firms have been growing quietly during the past years, although their progress may have been obscured by interest in the more flamboyant dot.coms.
"The cycle points to a return to traditional metrics," concludes Traber. "Going forward, the entrepreneur with a solid business plan, strong management skills, effective marketing capabilities and a profitable model that has achieved the leading edge of its revenue projections will be the one whose business is most highly prized by the investment community."