Tuesday 26 January 2010

The Company When It's Young: Long on expectations and short on experience. Can grow very fast and High Risk.

The young company is full of energy, bright ideas, and hope for the future.  It is long on expectations and short on experience. 

It has the cash that was raised in the offering, so chances are it doesn't have to worry about paying its bills at this point.  It expects to be earning a living before the original cash runs out, but there's no guarantee of that.

In its formative years, a company's survival is far from assured.  A lot of bad things can happen. 
  • It may have a great idea for a product but spend all its money before the product is manufactured and shipped to the stores. 
  • Or maybe the great idea turns out not to have been so great after all. 
  • Or maybe the company gets sued by people who say they had the great idea first, and the company stole it.  If the jury agrees with the plaintiffs, the company could be forced to pay millions of dollars it doesn't have. 
  • Or maybe the great idea becomes a great product that fails a government test and can't be sold in this country. 
  • Or maybe another company comes along with an even greater product that does the job better, or cheaper, or both.

In industries where the competition is fierce, companies knock each other off all the time.  Electronics is a good example. 
  • Some genius in a lab in Singapore invents a better relay switch, and six months later it's on the market, leaving the other manufacturers with obsolete relay switches that nobody wants.

It is easy to see why 1/2 of all new businesses are dissolved within 5 years, and why the most bankruptcies happen in competitive industries.

Because of the variety of calamities that can befall a company in the high-risk juvenile phase of its life, the people who own the shares have to protect their investment by paying close attention to the company's progress. 
  • You can't afford to buy any stock and then go to sleep and forget about it, but young companies, especially, must be followed every step of the way. 
  • They are often in the precarious position where one false step can put them into bankruptcy and out of business. 
  • It's especially important to assess their financial strength - the biggest problem with young companies is that they run out of cash.

When people go on vacation, they tend to take twice as many clothes as they're going to need, and half as much money.  Young companies make the same mistake about money.  They start out with too little.

Now for the good part: 
  • Starting from scratch, a young company can grow very fast. 
  • It's small and its restless, and it has plenty of room to expand in all directions. 
That's the key reason young companies on the move can outdistance the middle-aged companies that have had their growth spurt and are past their prime.

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