Today's fashion in the high-tech sector is to fire employees "because of the crisis." It seems that no companies are currently laying off workers for purely business reasons: such as not having put a single shekel from cash flow into the company's coffers since it was set up, thus making its shareholders lose patience. Or because the company has been burning up money for many years, its revenues are dwindling, and the till is empty. Today's firings are because of "the situation."
One must understand the difficult situation in which high-tech managers, and primarily start-up managers, find themselves. The majority of shareholders, mostly funds, demand cuts. On the other hand, funds keep their money close to their chest and do not promise a thing regarding the future. It is not improbable, when a start-up company wants to call in a fund's commitment, and ask for a subsequent round of raising capital, that it won't receive it. Companies that have not raised funds recently will have major problems, because in the next two quarters, until it becomes clear in which direction matters are going, funds will be in no rush to hand out capital.
Signs of realism
A company that fires people sends a message that it is a company which is realistic and not complacent. There is no fear that somebody will think you are going bankrupt, because everybody is having difficulties, and today's environment is most accommodating regarding layoffs, despite all the pain and regret. On the other hand, today, a CEO who is not looking where to make cuts is irresponsible.
But the layoffs are always "because of the situation." Does somebody suspect that the high-tech company Nova Ltd., a lightweight start up and is firing 30 of its work force 10% - is "a sign of the crisis" as part of the media define it? Or is the firing of seven employees by MIND CTI is only because of the difficult situation in the market, and not domestic problems, which are not necessarily connected?
In the case of Nova there is a pattern: at the start of the year it fired 20 employees "because of the fall in the dollar." Today, with the exchange rate at 3.7-3.8 NIS/$ this is not a relevant explanation. Nova's CEO has not explained the reason for the present layoffs, and that's preferable from his point of view. Everybody's interpretation is that the company is taking steps because of the crisis. Not, heaven forbid, because the company's business model has not succeeded in proving itself, even though it has been changed several times.
80%-85% of start-up companies
The sad statistics are that on average 80%-85% of start-ups will close regardless of good times or bad times. That's the rule of thumb in the industry; the part of the cup which is half full - the fact that 15%-20% of companies succeed - is most encouraging. Layoffs in those companies are natural, if sad, especially in times like these when uncertainty is a key element. Far from the spotlight, even before the crisis, companies were firing people all the time.
Last summer Giora Yaron, a serial entrepreneur, whose last exit was the sale of Qumranet to Red Hat for $107 million, told us that "every company can shed 10-15% in fat. In companies that I managed there was an order: they had to fire 10% each year." Yaron also claimed that most companies make periodical cutbacks in order to refresh their ranks. The recent firings at Amdocs probably fall into this category, because every year the firm parts company with hundreds of employees, and 2008 is no different.
It's impossible to stay on the boat and drink whiskey
This week, with the firing of 23% of the work force (30 employees) by Exanet, where Yaron serves as chairman, he told "Globes." "The biggest tsunami of them all is approaching. You need to write an article about who is not firing, because all companies are firing. It is impossible to stay up on the boat drinking whiskey, when there is a tsunami on the horizon which is approaching." If Yaron allows himself to talk about a tsunami approaching, we can take it for granted that other companies must take this into account, and everyone must understand that not every company that is firing staff is necessarily in deep trouble.
So today's anomaly has created an interesting situation: layoffs of five people at Pudding Media; MobileMax, Delver and others have become lead headlines. These are companies which once had to make positive accomplishments, and work very hard, to get into the newspapers or achieve public recognition.
Looking into the IVC database on an ongoing basis, one sees that companies are folding all the time - that is the dynamic of the industry. At the moment it is simply interpreted as another indicator of what we expect to happen, and as one more sign of the crisis, while the fact is that nobody even knows if we are at the beginning, the middle, or the end of the crisis.
Fourth quarter test
The real test from the point of view of investments in companies and their survival will be in the fourth quarter of 2008 and first quarter of 2009. The funds are reducing their investments in companies at the moment because of the uncertainty, which means that in another month or two there will be almost no capital raised and everybody will be sitting on their emptying coffers.
The fourth quarter is traditionally strong in most sectors for Israeli companies. If company results will be weak, we will know for sure that something very bad is waiting for us around the corner.
Published by Globes [online], Israel business news - www.globes-online.com - on November 5, 2008
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