Investors Look for High-Tech ‘Crevice’ Firms
It’s the “crevice” companies that are attracting investors and venture capitalists to high technology these days, and for good reason.
“There won’t be any more small companies that rapidly become billion-dollar companies, no more Apples--or at least, only a very few,” said Jay Frederichs, of Glyn Capital Management in Menlo Park, Calif. “So I’m not even looking for one. . . . Instead, I’m looking for a small company that can become a respectable medium-size company. This industry is all about niche markets these days.”
Frederichs was one of more than 1,200 money managers and venture capitalists attending the Hambrecht & Quist annual technology conference in San Francisco last week, hoping to ferret out the best stories among the almost 170 companies making presentations. The companies that seemed to draw the most attention were ones that have positioned themselves in specialized market segments that don’t appear to have a monolithic leader.
Investment and venture money is slowly returning to high technology now that the steep slide in tech stocks has halted. As the signs increasingly point to a recovery in the technology industry and companies put aside the red ink, H&Q;’s technology index of 175 companies is back up to nearly 700 from its low of 427 (although still more than 30% off its high of 1,040).
Investors More Careful
The downturn that followed 1983’s run-up in stock prices and glut of new public offerings left its mark on adventuresome investors.
“Sure, I’d like to find something,” said one portfolio manager for a Midwest-based investment fund. “But we’re all being more careful. And I’m glad. Stock valuations are more realistic, and even if it’s not as fun, it feels safer.”
At previous such conferences, company presentations sometimes have brought swift reactions from attending investors, said Michael Murphy, editor of San Francisco-based California Technology Stock Newsletter. Again this year, Murphy tracked the daily performance of the stocks of the 124 public companies making presentations and said there was only about a 1% overall gain in the prices during the conference.
Murphy said the conference attendees were “less invested in technology than I expected them to be. Usually, I would have expected them to have maybe 30% (of their portfolios) in technology, but most of them have only 10% to 15%. . . . There’s an awful lot of money here, but they’re all fairly cautious. Where they can see a broad upturn, they can throw money at it. If they don’t see it, they won’t buy at all.”
One of the apparent favorites was not even a high-tech company but rather one of the non-tech stocks in Hambrecht & Quist’s growth-companies portfolio. Durakon Industries, a Lapeer, Mich.-based maker of bed liners for pickup trucks, made an early morning presentation Tuesday, showing a 70% dominance in its market and an anticipated 36% increase in profits this year. Brisk over-the-counter trading for the next two days pushed the stock up to a 52-week high, and Durakon stock ended Friday at $16.62 1/2 a share, a gain of almost 20% for the week. (On Monday, Durakon closed at $17 a share.)
Signs of Recovery
Investors continue to be reserved, said William Hambrecht, chairman of the San Francisco investment firm that sponsored the conference, because of the continuing weakness in some sectors of the industry. “They all see signs that it is turning up” from the slump and slower growth rates of the last 18 months, “but I guess if they would become sure that it really is turning, they would spend.”
The conference closed with presentations from about 40 small private companies--most of which are expected to make forays into the public stock market within the next two to three years. Many of the venture capitalists attending the conference had seemed to be biding their time throughout the three previous days, awaiting a look at companies such as MIPS, Alliant and Scientific Computer Systems, which make mini-supercomputers, and Adobe Systems and Interleaf, two companies involved in corporate electronic publishing.
Hambrecht agreed that the venture capitalists were hankering after some fresh places to put technology investments. “They are ready for some new names that have unblemished records.”
Throughout the conference, Hambrecht pointedly stressed that his firm had become wiser about underwriting offerings and funding start-ups through some of the missteps by its own venture capital arm--an apparent appeasement to clients and investors who may have suffered along with H&Q.;
Growing Impatience
But after all the expressions of caution, the atmosphere seemed laced with a growing impatience. Hambrecht sensed it. “Yes,” he said, “there might be pressure” from the venture capitalists for some of the hot private companies to go public earlier than expected. “They all need a shot in the arm, to pump up their portfolios. Basically, they have a lot of portfolios (in which) the only things recognized have been the troubled ones.”
Hambrecht said, however, that the market would exercise its usual discipline. “The venture capitalists may be rooting for these companies (to go public), but the market will either take it or it won’t,” he said.
