Viability is one more thing firms have to worry about — and prove

A nasty and pompous word is making the rounds of Silicon
Valley’s ailing software companies these days. If you’re an
investor hoping for a quick comeback, you should be aware
of it: It’s viability.

By Scott Herhold
Mercury News

It doesn’t have much to do with the elegance of the
software, or its ease of use, or how it might save
customers money. It has everything to do with whether a
software supplier will be in business two or three years
from now.

Here’s how it works: In the dog-eat-dog world of software
sales, well-funded Company A tries to out-muscle its
lesser-funded rival, Company B, by suggesting to customers that Company B may not be around much longer — and would be a
dubious supplier.

The ugly five-syllable v-word was a major topic this week at Technologic Partners’ Enterprise Outlook conference at the San
Francisco Marriott — in part because dozens of the young software companies presenting at the conference are facing exactly that
punishing question.

“A customer asked me the other day whether I was going to be in business 20 years from now,” said James Demetriades, the CEO
of SeeBeyond, a Monrovia company that makes it possible for customers to integrate their various software programs. “I asked him
whether he was going to be in business 20 years from now.”

This is no joke, no matter how ludicrous the question may sound. In fact, the issue has given new firefighting duties to the chief
financial officers of software companies. Not only do they have to watch the books and answer investors. Now they have to
reassure customers that the firm won’t fold its tent.

“It happens up and down the food chain,” says Paul Holland, a venture partner with Foundation Capital. “It’s something that
companies in a stronger financial position are using as a lever against companies that don’t have as much money in the bank.”

This frequently means that young companies are busy answering detailed questions about their finances before they get a major
contract.

Pete Solvik, a senior vice president for technology at Cisco Systems, revealed at the conference that Cisco asks for quarterly
balance sheets from young venture-funded companies in sensitive deals.

And Demetriades says that when SeeBeyond signed a deal with BMW, officials from the German car maker compiled a several-inch
thick notebook of financial details about his company’s prospects.

There’s plenty of reason for all this caution. Burned by a litany of software failures, companies want above all to avoid expensive
mistakes. Cisco’s Solvik says his company, known for taking chances on innovative young companies, was burned when five or
six suppliers that provide software over the Internet (“application service providers”) went bust.

But now the balance sheet is the new anvil of doubt even for well-regarded companies. Take Brio Software (BRIO), a Santa Clara
company whose software lets companies analyze their businesses.

Though it’s taken a beating in the market — the stock finished Wednesday at $1.40 — Brio is hardly ready to give up the ship: It’s cut
payroll sharply and taken out a new line of credit. But with only $27.8 million in cash or cash equivalents at the end of March, it’s
less well-capitalized than some of its rivals, which include Informatica (INFA) and Oracle (ORCL). And it would be absurd to think
that they would not try to raise doubts about Brio’s staying power.

What does this all mean for an investor? Well, the viability question by itself won’t destroy a company. But it’s one more reason to
be skeptical about how fast an ailing firm can return to health. And it’s one more incentive to examine how fast the company is
burning money, or collecting its bills. You can bet that its biggest customers are doing so more diligently than you.

Scott Herhold’s Stocks.comment appears Mondays and Thursdays. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San
Jose, Calif. 95190; e-mail [email protected]; phone (408) 920-5877.

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