Financial Market Turmoil Affecting IT

With financial markets in turmoil around the world and the subsequent tightening of credit markets, it has become much harder for companies of all types to continue doing business as usual, much less to grow and prosper.

That may be particularly true in the technology sector, which sometimes operates on thin margins, and at the mercy of venture capitalists and other funding sources.

In general, large, established technology companies will weather the storm fairly well, said Gus Tai, general partner at Trinity Ventures, a venture capital firm in Menlo Park, Calif.

"Well-managed IT companies have contingency plans and access to capital if they arent generating cash, so generally speaking, most IT companies will be fine," he said.

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Also fairly insulated against current conditions are technology distributors. In an industry brief released August 13, Brian Alexander, senior vice president of equity research at Raymond James, a diversified financial services holding company based in St. Petersburg, Fla., noted that he did not expect IT distributors to be adversely impacted by current market conditions. The reason, he said, is that distributors have spent the past few years re-orienting their financial maneuvering, resulting in lower debt balances.

Alexander noted that many of these organizations also are protected by credit facilities that largely insulate distributors from changing credit spreads.

But not all IT companies may fare as well. Companies closer to the financial industry, such as financial services firms, may start to feel the pinch, Tai said.

"Financial services has been one of the best verticals for launching and growing new IT companies, and, historically, companies developing leading-edge technology look at financial services companies to adopt their technology first," he said. "So financial services companies that are still growing will be slowed down for the next several quarters because of whats going on in the financial markets."

Smaller, private IT companies that rely on raising money from venture capitalists or smaller private equity firms also may be at risk, as will IT organizations in the process of buying other IT companies in their market segment. Strategies for both types of companies will slow, Tai predicted.

If the markets recover within a few quarters—something Tai expects to occur—the rate of IT startups shouldnt be adversely affected, but if it were to continue for a year or more, the rate of new IT companies will decline.

Given the situation today, how smart was VMware to issue its IPO?

Judging from the market reaction, very smart, said Deven Parekh, managing director of Insight Venture Partners, a New York-based company with a controlling interest in Ziff-Davis Enterprise, which owns eWEEK.

"There will always be a strong demand for companies that have fast growth and great margins like VMware, there will always be a strong demand," he said. "Other companies with slower growth and unproven profitability like DemandTec (a retail software company, based in San Carlos, Calif.) got a less strong reception."

VMware could probably weather just about any storm, given its strength, Tai agreed.

"VMware is one of the fastest-growing software companies in the history of software. Its fundamentals are so strong that it could have gone public any time it chose, and it wont experience any cyclical market issues that would affect performance," he said.