ENTREPRENEUR Mike Welch has warned the current “bulge” in technology company valuations may be unsustainable as it is being fuelled by too much private equity money.
The Blackcircles founder also believes many young people are being given unrealistic expectations about running a company by trying to attract money before they have viable business models.
He said:” I read about companies raising more money than 10 years of equivalent turnover at valuations I can’t even comprehend.
“I try and reverse engineer that back to any normal business valuation formula and it just doesn’t fit.
“My worry for business generally, more so anything with a dot com on the end of it, is I remember 1999 and 2000 and similar things going on. The numbers just don’t seem to stack.
“I’m not saying there is a bubble but there is definitely a bulge. I wonder whether there is a pop at the end of that.”
Mr Welch, who sold Blackcircles to tyre giant Michelin for £50m in May 2015, also cited the growth in the number of “entrepreneurial experts” as something to be wary of.
He said: “All of a sudden we have professional entrepreneurial advisers who have no basis or right to put themselves in that position.
“People are trying to be entrepreneurial by virtue of being experts because it is the fashion.
You can do university classes on being entrepreneurial. I just don’t understand it. It worries me. You get tub thumpers spending most of their time on social media or in the press talking about things they don’t really understand. It is quite dangerous as they create this pied piper situation.”
Mr Welch praised the guidance about basic business principles he was given by investors such as former Tesco boss Sir Terry Leahy and experienced Scottish accountant and non-executive director Graeme Bissett.
He said: “They used to drum it into me. Success is making a pound profit, it is having cash in the bank, it is making money and having satisfied returning customers and growth.
“They are your keys, anything else is kind of a distraction.”
However Mr Welch believes much of that basic grounding is being lost in a rush to attract ever bigger rounds of private equity backing.
He said: “What I am hearing people talking about as measures of success is different rounds of funding. I don’t even recognise all these different kinds of categories.
“You see guys high fiving over their category C raising of x even though the net effect is they have even less of the equity.
“These are businesses that aren’t even generating any sales yet.
“I think there needs to be a bit of a naval gaze by some of these investor groups. You can’t blame the novice start-up enthusiastic young guys and girls trying to run businesses. It is the people coming in with the big cheque book.”
While Mr Welch understands the attraction of big equity injections he would like to see legal moves made to protect company founders.
He said: “Those companies which are taking the money might potentially look back on exiting and go, why do I only have half a per cent of my own company?
“I would legislate to put a minimum amount of equity for a founder that they can’t go below within five years to save them from themselves.”
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