Is it technology looking for a market or a market looking for technology?

Whenever I hear a company CEO say, "We have great technology and we're looking for new applications for the technology," I know this company is heading for trouble.  When I hear a CEO say, "We know this market and we're looking for new technology to solve problems that exist with users in this market," I'm interested.  So are investors!

It is so tempting for those who have developed a technology to think that there must be a market that can use this technology, that the technology developers lose objectivity and try to start a company to find the market that can use the technology.  This company is about 90% of the time doomed to failure. So, why don't the owners/developers get it?  Businesses succeed because there is demand (a market) for their products and services not because they have great technology.  OK, the most successful companies have great technology AND demand for their products or services.

But, you say, what about a market that will develop in the future and the entrepreneur who has a vision that the market will develop in the future?  Well, you've heard that timing is everything.  Most entrepreneurs who have a vision of a future market can't imagine how long it takes for a market to develop and exhaust their resources before there is a viable market.  Those that enter this nascent market just at the inflection point when a viable market is developing succeed while those who enter too soon fail.  This is particularly true for companies that have a new technology.

Don't get caught in the trap of having an interesting technology and believing you can start a company to find a market for the technology.  Knowledgeable investors know this is a formula for failure.

Is the cost of complying with SOX worth it?

When I team-teach a portion of our Business Ethics class in the Rollins MBA program, one of the presentations by a team in the class is on the pros and cons of SOX.   The side that discusses the cons always questions the cost/benefit of compliance with SOX.   After the presentation, I ask the class to determine the percentage of stock traded, as a percentage of the shares outstanding, in a publicly traded company on the New York Stock Exchange in a given week.   I'll suggest a large company and tell them to go to Yahoo or some other site for this information.  They usually find that the number of shares traded in a given week for that company is 2-3% of the outstanding shares in the company.

Then, I ask the class to tell me the market cap for that company based on the quoted price per share at that time and most of the class gets the answer right - the share price times the number of shares outstanding.

Then, I ask them to predict the effect on the price per share if the New York Times or the Wall Street Journal has a headline that the SEC is accusing one of more executives of that company of wrongdoing.  The students are usually at a loss at predicting the price decline that will occur, but some find a few companies where that has happened recently and excitedly announce that the price per share went down 10-30% in one day resulting in a decline in the market cap by several billion dollars.  So, the alleged wrongful (unethical by definition) conduct may have reduced the wealth of the shareholders in that company by several billion dollars.  How could this be?

Because stock prices are set by transactions at the margin (only 2-3% of the outstanding shares per week) in normal trading.  But, when a public relations disaster hits, it would not be unusual for more than 5% of the outstanding shares to be traded in one day driven by institutional sellers.  So, what is the lesson in my Business Ethics class?

Unethical conduct by one or more executives in a publicly held company can result in a reduction in shareholder wealth by hundreds of millions (or billions) of dollars when the wrongdoing may only have benefited the executives by a few million dollars or less.  So, the value of the increased oversight by the board of directors and the audit committee caused by compliance with SOX should by measured by avoiding the reduction in shareholder value if wrongdoing is prevented.  But, how can shareholders know if wrongdoing is prevented?  They can't; but, in my experience, the invisible hand on the executives of the company due to SOX is a form of insurance against wrongdoing and the premium paid is the cost of complying with SOX.  Based on the public relations disasters many companies have faced when wrongdoing is discovered, the premium for reducing the likelihood of wrongdoing by complying with SOX is well worth it.