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. None 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 skill sets (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
In an attempt to capture more of the first home owners market,
Lenders have been lending up to 100% of the value of homes. In the past
year, many have started lending all of the home price, as well as the
taxes and fees to the value of an additional 6% above the price of the
home. This makes the total borrowing 106% of the value of the property.