Hi-tech companies have to refocus their strategy during the IT recession or face the possibility of closure, even if they have a lot of cash, warns PricewaterhouseCoopers.
While in the late 1990s a large amount of venture capital funding was channelled into early-stage hi-tech companies, the IT recession has led to a decline in demand for technology products.
"This has in turn extended the time needed for early-stage companies to reach cash generation," it says.
"At the same time difficult financial market conditions prevent easy recapitalisation or fund raising. The result: innovative hi-technology companies that have created promising intellectual property could soon face closure."
The group says many companies have found only temporary methods to avoid a crisis.
PwC partner Doug Franke says although it is now harder to get capital, there is still money available and many people are looking for good investments in IT.
Whether hi-tech companies are facing a crisis depends on the kind of firm and the niche in which it operates, he says.
Sectors such as biotechnology and security are still attracting deals but Franke says businesses like online auctioneers are no longer "flavour of the month".
Facing closure
PwC says solutions are hard to come by as investment has not been channelled into readily realisable assets such as retail premises and stock in the way a chain of stores would have done.
Cash has instead been spent on research, development and marketing, not hard assets that could be used as collateral for bank loans.
"It is often found that contingent liabilities that do not crystallise until the company is wound up, such as staff costs and property lease obligations, can be substantial relative to the company`s hard assets.
"This means that the period available to find solutions is shorter than in 'traditional` business. The consequence is that survival for many innovative hi-technology companies is uncertain despite apparently large amounts of cash."
Franke says some tactics to remain solvent, such as renegotiation of trade terms and property lease obligations, can be temporary fixes.
There may also be other sources of cash, such as the trade and industry department`s Support Programme for Industrial Innovation (SPII), a matching fund programme which has up to R75 million a year available for certain hi-tech and other companies meeting certain criteria.
About 80% of the funds made available so far have been used by technology-related companies.
Keys to survival
However, PwC says there are two approaches to finding more permanent solutions: refocusing strategy and realising value.
The group argues that hi-tech companies are often spread too thinly. They have a core technology around which they have built various offerings for a number of markets. Each additional offering adds layers of costs in development, marketing and sales, and support.
Providing the products are sound and demand is just rising slower than needed, a company in this situation can refocus its strategy to a single survival niche it can dominate. It can keep only what is needed for that niche and raise cash by selling technology, capabilities and assets not needed for the niche.
In addition, it can cut costs by outsourcing support, IT, operations and finance.
"The key to exit through a sale or merger is to unlock the value in the intangible assets that have been created by the investments into research and development to date.
"The young hi-technology company is likely to have intellectual property or organisational capability that is highly valuable to a small number of specific buyers. The aim is to match up the assets and capabilities of companies to create a viable business."
Another situation, it says, is when one company`s non-core activity operates in the core space of another player. The first company`s technology or customer base could make the rival dominant in the space and be able to extract value where the first company could not.
PwC says even though many private hi-tech companies need more time than expected to become cash-flow positive and find it difficult to raise funds in current capital market conditions, companies that pursue these strategies can survive "if they act before it is too late".
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