Turnaround Issues for Distressed Tech Companies

April 17, 2009 at 12:11 pm

In a recent whitepaper Strategic Options for Distressed Technology Companies I discuss how turnaround management for venture-backed technology companies is different from that for companies in more traditional industries.

Technology companies are different in a number of ways.

1. They have little debt but a lot of equity in layers of preferred shares.

2. They are usually at an early stage: little if no revenue; the product development may not be completed.

3. The management is often incomplete.

4. There are few hard assets: most of the value of these companies is tied up in the workforce and intangibles.

5. They have a very limited cash runway (this is of course true for most distressed companies. However, VC-backed companies are generally financed to the next milestone, not to cash-flow break-even).

The key elements that affect a company’s turnaround options are technology, market, and management.

1. Technology: if it doesn’t work, the solution may be to redesign in order to reduce functionality to a commercially viable application.

2. Market: if the target market’s devloping too slowly, perhaps focusing on a narrower market segment will lead to faster revenue.

3. Management: if existing management is responsible for getting the company into the hole or the company is taking a new direction, the current management may not be the best choice to take the company forward.

External factors, such as the current economic downturn, can play a considerable, amplifying role.

So how do these high tech differences make turnaround management different ?

– There is less opportunity to raise cash through selling off hard assets.

– Sale of non-core assets usually entails liquidation of intellectual property, which may have a very limited market.

– Workforce reductions need to be carefully planned as the company’s value often lies within the workforce.

– Strategic refocusing may be more feasible than in established companies, as technologies can be applied in different applications, and the company is not yet locked into one specific market.

– The limited use of debt can lead to a faster decision, as VCs have been through this before.

– External advisors can play a crucial role as management is usually not trained in the dynamics and complexities of turnarounds and restructures.

Sadly enough, many technology companies fail to realize the severity of the situation early enough; many make insufficient changes too late when the only possible option is the liquidation of the company.

The full article can be found at http://www.thebrennergroup.com/assets/pdf/strategic-options-distressed-tech-companies.pdf

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).

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Entry filed under: Financial Advisory, Restructurings, Shareholder Services.

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