Keep a Level Head: Would Your Company Survive on 50% Resource Capacity?

Private equity has boomed this year and with it comes an eerie feeling of déjà vu. Markets and economic conditions have never mimicked the immense interactions of global monetary & fiscal policy. It's no wonder so much inexpensive money is floating around and leveraged only by risk and a 10x return on a 1:10 ratio of success. The expansion of tech has exacerbated the level of opportunity in biotech, pharma, and diagnostics, especially genomics and drug discovery here in San Diego.

Every week I read of new companies gaining investor confidence by finding niche inventions reaching market segments with diverse and somewhat confusing implications. Building market sizing models around the abundance of entries quickly shows the gravity of the situation. With market share broken into slivers and the possibility of dominate players with low barriers to entry, easy access to capital, and foresight to purchase overextended, failed assets, there will be a not too distant future of empty buildings leaving behind the aspirations of entrepreneurs and employees who followed the dreams.

Though this may seem to be a cautious view in the honeymoon of 2019, skeptics continue to echo the ongoing concerns of financial experts over the past years. If we look forward to the headlines of Influencers in the years to come and rationalize the indicators of excessive gains, one cannot argue when everything was working to the advantage of every investor it was obvious the lottery of participation trophies would come to a close.

Knowing the cyclicality of all factors of economics, start-ups as well as established entities must begin the process of capital preparation. The difficulty in this concept is determining if in fact this strategy is considered "timing the market" or if it's simply a forecast of averaging variables and variances considering the dynamics leading to high revenue growth. If that growth is inorganically driven, the purpose of preservation is more dire than a company able to organically grow without the use of debt. If a company using debt to refinance past debt and normalizing equity based on historical P/E ratios then the financial strategy is in line with logic.

However if debt is utilized to purchase extremely overinflated market caps and not reinvested in core business ventures the impact of a downfall will be as steep a ride (or steeper) as it was to the top. The purpose of this article is to remind management to steady growth to current market conditions rather than expect this wild ride to continue forever. Expansion is a necessity for growth and it's far too easy to make bulk or large purchases based on forecasts during a period where the company has only seen clear skies. If the data used to forecast is positively sloped, take into consideration the global impact of commerce, the effect of changing market conditions, and how the company will strategically achieve or sustain revenue with far fewer resources.