Shimmy's theory of security company relativity, part 2

So, we have a glut in the market of companies that have raised 25 to 40 million dollars or more, have revenue of between 5 and 20 million dollars and are borderline profitable at best.  As my uncle used to say about me, to heavy for light work, too light for heavy work.  What are these companies to do? 

I think the possibilities fall into just a few choices:

1. Earn your way out of it - This is totally dependant on the ability of the company increase their year over year revenue. The problem is most of the companies in this predicament are only growing 10 to 20% a year.  That is just not enough, especially if they are not profitable.  The biggest issue is not breathing your own exhaust here.  Too many companies announce fantastic quarters, but being private don't give out the actual numbers.  I think any exec team has to ask themselves the hard question of what it will take and how realistic is it to make that growth rate real. The cold hard fact is that most security companies in this category are not having organic growth rates at the levels required.

2. Merge - I think this is going to be a common theme in the years to come.  With the public markets not an option and more VC money expensive and hard to come by, combining companies is a viable option to achieve the size necessary.  The key is the merger has to be accretive financially and complimentary from a technology point of view. 

The idea here is that in a merger you can get some economies of scale, take some cost out of the equation, have technologies that just don't roll up into one product, but are still complimentary.  What I mean by that last one is that if I already sell a product for a dollar, adding another technology to it and still selling it for a dollar is not enough.  Most importantly, the combined revenue allows the merged companies to have enough size and market to compete on better footing with the larger companies in the market.  I think 35 to 70 million dollars in revenue is the range for the merged companies.

The hard part is who manages the new company and how do you value each component company.  Often times these two details will make these deals really hard to get done.

3. Lower your expectations and settle - Like a 39 year old never married person, maybe lowering your standards and "settling" will help. No one wants to hear this, but faced with the reality of your options, this may be the right choice. Get out with your skin on and live to fight another day. I am sure we are going to see lots of these kinds of deals that will represent real bargains to the acquiring companies.

4. Just keep limping along, praying for a miracle - There is always the chance that either the market "discovers" something new about your products or you come up with something new that explodes.  The company that did Guitar Hero was around for years and years, until they came upon Guitar Hero.  The problem is most investors don't have that kind of return horizon.  There will be some who do this, but is it really dead men walking?

Well that about sums up the options.  My view is that too many companies will take option one. Only when they have exhausted themselves will they honestly look at option 2.  By then they may have worked themselves out of an optimum time for a merger at good terms.  Ultimately, they may have to settle. 

Someone asked what about StillSecure.  Fair question since I do work here.  Actually, we are still in the rapid growth phase.  With our current revenue growth rate, we should have the velocity to break out of the pack. However, if we don't continue along that growth curve, you can bet I would urge my fellow StillSecure execs to consider merger options