Frank Thoughts: The Risk and Reward in Technology Investing
Dave Canal
November 08, 2018

When I was young, I thought a business would last forever.  After all, J.C. Penny still exists and it’s a 114 years old.  But I was to learn, in 1973, why the saying, “Technology is a business that eats its young” was so true.  My understanding began with the initial public offering of Prime Computer.  It had a great business, but one that was to last for just 26 years.  That lifespan was very different than J.C. Penny’s.

At the time, there were dozens of mini-computer companies.  I recall thinking, “Does the world need another one?”  But, this one had a unique advantage.  Honeywell, one of the largest in the business, wanted out.  Prime intended to be compatible with their installed base and Honeywell was supportive.    

It is hard to imagine today, but at the time all computer companies had closed systems.  Whatever brand you bought, you had to stay with going forward.   As your business grew, and you needed to add more computing power, you had to buy from the company first chosen.  That was 43 years ago, but I don’t think I’ve seen a company since then with a better “runway” of opportunity.

Despite that opportunity, I knew it wasn’t going to be easy.  1973 would mark the end of the “nifty fifty” era (50 growth stocks) and the start of a miserable secular bear market.  The stock market would decline 49% over two years making it the worst decline since the crash of 1929.   As a consequence, my firm was unable to form an underwriting syndicate.  My boss decided we would bring Prime Computer public by ourselves.  There were maybe 10 of us.  I was surprised, but when you’re young you feel invincible. 

The offering was priced at $7 and we placed 400,000 shares.  It was enough to build a plant, hire people and get the company started.  I told potential investors they should only invest money they fully expected to lose and probably would.  After all, the company had no revenue, no profits.  But if it did succeed … well the possibility could be extraordinary.  And so it was.  The stock subsequently went up 37 times from the initial public offering price of $7.  But not before it went down to $.50 in 1974!

I learned from the experience, when investing in a small company - especially a startup - you should be prepared to lose.   So it is important to be emotionally “cold” indifferent about your investment.  Secondly, one must understand technology companies have short life cycles because their existence is due to innovation.  Of course, the real appeal of investing in technology is how fast it can create great wealth.  Think Facebook or Google today.  But that upside can also create a downside of equal speed.  

The fastest downside was another mini-computer company.  This one was in California.  Its life cycle as a public company was less than two days.  F.I. DuPont & Co., a firm owned by Ross Perot, had brought it public.  The CEO of the new IPO was also its founder.  In celebration of his pending public offering, he had purchased a Ferrari.   Unfortunately, the car went off a cliff on the Pacific Coast Highway the day after going public.  Perot - to his credit - broke all trades and refunded the investors’ money.  He could well afford to do so.  His company, Electronic Data Systems, had gone public in 1968.  By 1970 he was worth 1.5 billion.  Ironically, it was probably the fastest upside creation of wealth in technology history.           

Francis Patrick Boland                                                        

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