KEN OLISA - RICH or RIGHT?

In this regular monthly column, Ken Olisa will try to ensure that pundits Professor Right and Ms Rich provide meaningful answers to readers' questions on how to build value in IT businesses. Please address your questions to: ([email protected]).

With the world approaching economic meltdown, what is the likelihood of raising venture capital?

Professor Right: The present economic uncertainty is bound to have a negative effect on the venture capital industry's willingness to invest in technology stocks. The Nasdaq index is always the first to suffer from economic worries because, of course, it is heavily weighted towards technology.

The ideal exit for most venture capitalists is an IPO, or initial public offering. So raising venture capital in this climate will be difficult. The good news, however, is that it won't be much more difficult than it was before - most venture capitalists hate IT companies and try to avoid, as one once put it, 'anything with a plug on it'.

Ms Rich: I would agree with the professor's analysis, so far as it goes.

But only for the short term.

The natural consequence of financial market uncertainty for those working in the financial services industry is a rapid and extensive loosening of the bowels. This effect, while inevitably widespread, is unlikely to be long-running for the venture capital community, because most venture capital funds are time limited.

This means they typically have only five years in which to spend all their money and perhaps another three in which to get significantly more than all of it back. We are all slaves to some greater force and even venture capitalists have a god. For them it is the power of being able to raise the next fund. To do this they have to be able to show historical form. Therefore they have to keep on investing. However, uncertainty like that currently swirling around the City's knees, is likely to make them even less risk friendly than usual.

Generally, this will tend to push venture capitalists towards the safer prospect of MBOs (management buyouts) rather than riskier startups - irrespective of the sector. As an IT company, this means making sure that your business proposition is a sound one, based on a researched perspective of the market and underpinned by strong demonstrations of just where the revenues will come from.

If you are a proven management team with a great but as yet undeveloped idea, the solution might be to find an existing firm that could be used to exploit your idea and then raise enough money from a venture capitalist to buy it.

We were contemplating floating our company on the UK stock market. With the economic turmoil around today and stock prices and company valuations falling, should we wait?

Prof Right: Yes.

Ms Rich: Yes.

I run a small, specialist software company that focuses on network management software. After five years, we have customers all over the UK and France and last month a German company approached us to see if we were for sale. We thought about it for all of a microsecond and then said Ja! How do you think the current market uncertainties will affect the chance of us getting a good price?

Prof Right: What on earth is happening to our once great nation? If you care about your company, be very wary of selling it to the Germans. For some reason that's no longer 'PC' to mention, the Germans have got it in for our national heritage. I just don't know how we can have found ourselves in a position where national treasures such as Rover and Rolls Royce ended up in German hands.

As if that wasn't bad enough, once they've taken us prisoner, we have no control over the jobs and management of our companies. Unless you want to join the great sellout, my advice is to keep your head down and show the world that we British can run companies too.

But that's enough politics. To answer the specifics of your question, it all depends on two factors:

- Are you intellectually and emotionally ready to sell the company?

- How much cash are the acquirers willing to pay in relation to the volume of paper they're offering?

The first test needs to be applied to you and the other shareholders.

As a student of the art of war, I have learnt that the only truism about deals is that those with the greatest stamina always win. Therefore, you need to be confident that you and all the others with the power are in 100 per cent agreement. That will mean that any acceptable offer won't be blown up by a recalcitrant shareholder.

Secondly, you need to decide how much of a gambler you are. If the acquirer is a private company, you should probably go for an all-cash deal. That's because the buyers' paper (the shares in their company that they are willing to spend to buy you) is of uncertain value. It won't really be worth anything until they go public or are bought itself, and that price is anybody's guess.

If the acquirer is a public company, the situation is a little less uncertain - you can at least ascribe some sort of value to its paper. The problem is to try to figure out whether its price will go up or down before you cash in its shares.

This has to do with the price of your company. Say, for example, the price you agree is #1 million. And let's say that half of it is in cash and half is in the buyers' stock. So far, so good. You have half a million in the bank and half in 'paper' - shares in the acquirer. The challenge is that paper. If you can sell it immediately, it's almost as good as cash. If you can't, then the problems - or opportunities - begin.

If you have to wait and the stock is likely to double over the next year, then you've hit the jackpot. Because the stock will now be worth #1 million, your total deal has grown by 50 per cent. If, on the other hand, you have to wait and the price of their stock falls by 50 per cent, then you have lost big time because now the whole sale is worth only #750,000 - #500,000 cash plus 50 per cent of the nominal #500,000 paid in paper.

Ms Rich: Now that the strains of Land of Hope and Glory have faded away, I'll address myself to the real question. Why on earth would anyone, after five years of hard graft, blood, sweat and tears, ever, ever sell out for only #1 million?

While everyone I talk to is worried about the prospect of a global recession, I'm still with the Conservatives in being more concerned about the impending arrival of the euro. The majority of our business is with Germany, France and Benelux.

Should we be changing our price list to the euro and what currency should our accounts be calculated in?

Prof Right: This is decimalisation all over again. I remember a clothier at my old university - years after D-day, he was still pricing everything in pounds, shillings and pence. His only concession was to use some form of log table to calculate the price for the customer once he'd added up all the bits and bobs. Stood him in perfect stead until he died. Didn't do his business any harm - in fact, he became something of a tourist attraction so his business actually improved.

The euro will be introduced next year. Although the Continental politicians have trumpeted its importance for a long time, I have yet to be convinced that it will catch on. Can you really imagine the good folk of Berlin or Paris giving up their precious deutschmarks or francs? Especially now that Kohl and Mitterand are no longer around to promote their little plot.

My advice is to wait to see whether the whole euro experiment succeeds or just goes the way of the poll tax. That way, if it works you'll know how to sort it out in the light of the experience of the early adopters, and if it doesn't, you won't have wasted all that time.

Ms Rich: Yes, and the euro.