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The View

Tech start-up leaders have to wow IPO audiences – so can Razer’s Tan Min-Liang dress and talk with the swagger of Steve Jobs?

HK investors love IPO chasing, putting their money to work in a low-yield environment, hoping to trade “X” into “2X” as soon as possible. Investors should think differently about tech firms

PUBLISHED : Friday, 10 November, 2017, 3:47pm
UPDATED : Friday, 10 November, 2017, 4:44pm

Investors have not considered the historical quagmire that has plagued many technology companies – the risk of migrating from their existing to a completely new technology platform.

It’s almost impossible to quantify and judge if a young or old firm can make it; even the most experienced venture capital firms can’t determine the outcome of a big bet on the future.

On Friday Razer – a US and Singapore-based, gaming hardware and software developer – priced its IPO at HK$3.88 per share, with a demand of 291 times the number of offered shares to the public.

Razer’s IPO price gave it a market cap of approximately HK$34.4 billion. The global offering price values the IPO at HK$4.1 billion (US$526 million).

It’s shares are set to debut on the Hong Kong stock exchange on Monday.

HK investors love IPO chasing, putting their money to work in a low-yield environment, hoping to trade “X” into “2X” as soon as possible. Investors should think differently about technology companies.

Hong Kong’s retail-based market is being fed spectacular growth from young tech offerings while still using the local market’s usual listing statistics once reserved for property companies and traditional industries.

Listing frenzy continues: Li Ka-shing-backed Razer prices IPO near top of range; Yixin way oversubscribed

It doesn’t quite capture the investment story or the risks being undertaken by technological innovation. The statistics are more like a voting rather than a weighing machine.

Don’t be too concerned that Razer, which is run by Tan Min-Liang, its co-founder, CEO and executive director, posted a US$59.6 million loss in 2016 on revenues of US$392.1 million.

Or that according to Reuters’ analysis, annual sales from its peripherals business only advanced 5.7 per cent last year or that gross margins on gaming laptops were stuck at 2.9 per cent.

Champion tech companies inventing breakthrough, life-changing products are expected to be highly priced. Unlike traditional companies where you are buying historical earnings, you are mainly buying future dominance and their promise of huge cash flows with tech outfits. And that is the big risk inherent in such business models.

That’s why all start-up tech leaders have to wow audiences by living the legend – dressing and talking with the swagger of Steve Jobs.

Whether the new Razor Phone, due at the end of the year, will capture the imagination of gamers around the world and compel them to switch smartphones is a journey into the unknown – and that’s what makes technology so exciting.

Unlike traditional industries, where product and technology innovation are differential, incremental and evolutionary, tech companies wildly succeed and ignominiously die based on their next innovation and leap. And the risks of those leaps are determined by many unforeseeable factors. True disintermediation comes at a high price.

The history of technology platform migration is gruesomely littered – like ships in the Bermuda Triangle – with the carcasses of big and small promising companies that failed badly, as venture capitalists say, “to cross the chasm.”

It’s perilous as there is usually no fall back position. Unlike a property company, there are no real assets to salvage. It’s mostly all or nothing when it comes to valuing intellectual property.

Strong growth in the global gaming market is expected to reach US$160 billion by 2021, a 52 per cent Y-O-Y improvement, according to data from Euromonitor. But, this is not a recipe for, but rather a prerequisite for a high valuation.

Looking back in history, few young people have heard of vanquished computing names like Digital, Sperry and Wang. Once leaders in their fields, they all tried and failed to pivot from mainframes or word processors to desktop or notebook computers.

Or remember when Palm failed to convert its popular Palm Pilot personal digital assistant (PDA) into the next generation of devices – and then PDAs were easily integrated into mobile phones.

RIM (Research In Motion), the Canadian developer of the BlackBerry, failed to visualise and act on the future of smartphones over its flagship brand, and doomed the company after 2007, when Apple launched the iPhone.

A young coder for RIM told me the development team knew the end was desperately near when their manager waved the new iPhone in the lab asking if they could reverse engineer some of Apple’s innovations. Too little. Too late.

Market studies won’t necessarily tell you what consumers want; sometimes innovators need keen instincts to sense and lead users thereby creating demand.

Razer’s unknowable risk chasm, and something that can’t be easily answered, is ‘can it quickly succeed in shifting and betting its product platform from the proven (gaming based peripheral devices) to the unproven (mobile gaming smartphones)?’

Their names and products have disappeared into folklore. But, the one thing they all had in common is that they possessed financial resources and talented engineers. And all of them were selling into strong markets with endless future growth and vast potential.

Few tech companies have succeeded at the migration. Apple changed from desktop computing to smartphones. Netflix from DVD mail order to online streaming. Both were led at the time by extraordinary leaders with deep experience.

Razer’s unknowable risk chasm, and something that can’t be easily answered, is ‘can it quickly succeed in shifting and betting its product platform from the proven (gaming based peripheral devices) to the unproven (mobile gaming smartphones)?’

Aggressive and entrenched smartphone makers will surely respond decisively.

Perhaps Razer’s investment risk would be reduced if it stayed private for another round of financing and showed some early success before going public. But, now we will find how local investors will cope with tech risks.

Whether the new Razor Phone, due at the end of the year, will capture the imagination of gamers around the world and compel them to switch smartphones is a journey into the unknown – and that’s what makes technology so exciting.

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