Rough times may be ahead for tech industry

Since March of this year major stock market indices have gained about 50% in value. The tech industry is on par with this growth during the second and third quarters of 2009. This increase is from a bottom in the market back in March originating from a decline that started in late 2007. This decline was due in part to overinflated fear of financial system collapse and the changing political environment in the US.

As a result, the past two years have seen a major shift in the landscape of tech industry entrepreneurship.

Looking back, the late 1990’s and early 2000’s brought a wave of tech Initial Public Offerings (IPOs) that made silicon valley the place to be. Today, most technology companies seek financing through private equity investors, while the IPO landscape has nearly faded away.

Exploring the trend of the few tech IPOs made in 2009, they all have one thing in common: their initial market capitalization is much less than that of the “boom” days. Once an IPO has been made, a common pattern is for the company’s market value to fall, although the IPOs from this year eventually regain to their initial offering price.

This is a sad realization for those wishing to find short success by building a company with little investment, make an IPO and become an overnight billionaire. The truth is this just doesn’t happen in today’s economy.

For the more established tech companies and companies in other industries, the recent increase in market value may be misleading. Financial reports show that indeed companies are able to make a profit in today’s economic environment, but only by taking sometimes drastic cost-cutting measures.

The result we see today is increasing unemployment due to companies reducing their overheads to maintain profits and keeps investors happy. While this may be a good short-term solution to increasing or sustaining the bottom line, looking longer-term, zero or negative growth is a danger to the entire global economy.

Recent market IPOs include Rackspace, a web hosting and infrastructure company; Bridgepoint Education, an online education company; Rosetta Stone, a maker of language learning tools; and DigitalGlobe, a company who has satellites that take digital images for services like Google Maps.

These companies all resemble each other in that their initial price quickly dropped once publically traded, though usually rebounding later on. Of companies doing IPOs today, we see they are mostly established companies with a proven business model that is clear for investors to understand.

Companies today need to focus on building better products and services to generate strong revenues. While short-term gains may be won through cutting costs, decreasing revenues and marketing of existing products and services will lead to failure.

Although traditional retail and manufacturing have fallen victim to the pattern of cost-cutting rather than innovating, the tech industry has this problem magnified.

Announced last week, the next tech IPO in queue is NewEgg. This company is a distributor of computers and electronic components online, and is a massive force in the consumer hardware industry. Recent financials show it is over a 2 billion dollar company. However, with margins under 2% the company has little room for error.

Looking at the gold of the industry, giants like Microsoft, Apple and Google continue to dominate. With the exception of Apple who is up 108% since March, these industry leaders have not grown a significant amount. They do have a business model that is understood by investors, however.

Apple’s innovative products and lead in the smart phone market make it a key player for growth. As Microsoft comes out of its worst fiscal year ever, the launch of Windows 7 to a welcoming crowd brings hope that the worst is behind the company. For Google, its continued dominance of the online advertising space provides a solid foundation of revenues that seem to weather economic turmoil well.

Compare these companies to the likes of Twitter and Facebook who can’t seem to find a solid business model; or to Palm, whose recent gamble on the Pre smart phone was met with a deafening lack of enthusiasm.

To overcome the current market recession, companies should focus on what they do best. Certainly becoming more efficient and cutting costs is a positive thing to do, now is the time to develop new and innovative products and services that can be a catalyst of growth and innovation for the next 5-10 years.