Unlevel Playing Field

One of my hopes during the great New Economy bust and shakeout was that all of the copy-cat and also-ran companies would get the boot, leaving more room and less noise for those companies with solid ideas and management teams. While the New Economy brought — and can still bring — a lot of promise and potential, too many organizations were formed on an infirm foundation of a ballpoint-pen-and-napkin business plan, rose-colored VC glasses, and little passion or personal commitment. Companies were built to flip, not last, and when the flip flopped, so many floundered.

According to the McKinsley Quarterly, maybe not enough companies floundered. “A surprising number of small and midsize software companies survived the downturn,” the report says. “Not all of them should have.”

Slicing the sector by size reveals a discouraging pattern among those with pretax revenues below $50 million: a survey of 2,121 software, hardware, IT services, and semiconductor companies shows that many small and midsize ones are drowning in red ink. The bar graph above suggests that for smaller concerns, a perennial lack of profitability, combined with the growing scale and influence of their largest competitors, is bringing judgment day near. Some companies will have to be acquired; others will try to get bigger by merging with complementary businesses.

“A perennial lack of profitability”: Sound familiar? The nod to acquisitions is good news to those with the mania, but what, if anything, did we learn from the New Economy? In our March issue — and coming soon to a Web site near you — the Fast Company team explores whether business people will make the samme mistakes again as business turns up.