Pay Now or Pay Big Time Later

Remember the old TV commercial in which a mechanic touting oil changes suggested that we could pay him now or pay him later? A little now, or much more later (implying that an engine rebuild would be the option). I would like to extend that hypothetical into the more complex realm of technology enterprise building.

Think about the problem this way. Proponents of technologies tend to be both optimistic and adventuresome. Being willing to accommodate a large measure of risk is virtually a prerequisite for entrepreneurship in technology areas. In sharp contrast, conservatism is the natural state for the investment and financial management community. The degree to which these decision-makers accept risk depends on numerous factors, but clearly they expect their investment to lead to a financial success — with as little risk as possible. In enterprises grounded in technology, business success likely depends on technological success. Unfortunately, evaluating the likelihood of technological success is difficult for the investment and financial management community.

In situations where potential investors and technology proponents have widely differing perspectives on the risks associated with technology deployment, the likelihood of investment is almost certain to be smaller than it would be otherwise. On the other hand, when an investment in a technology-based enterprise occurs in the absence of true understanding of the technology, it is likely being made on something other than an informed and objective basis.

How can we promote better technology investment decisions? An independent assessment of the technology must complement traditional due diligence. All of the factors which are typically considered in conventional due diligence are still relevant. In fact, some of the issues in traditional due diligence will be especially important in the technology sector such as, for example, those related to intellectual property.

Despite the obvious need for technology assessments, I am afraid that they are not being made — certainly not routinely. There are probably a number of reasons for this. Even if companies, investors or interested governmental agencies were willing to pay for competent, independent technology assessments, to whom would they turn? For financial advice, there are investment advisors. For a review of a company’s balance sheet and cash flow, there are accountants. If environmental concerns arise, there is a growing community of professionals who can provide an environmental audit. Independent professionals are easy to find if it is important to appraise a company’s real estate holdings. But when it comes to technology assessment, there is as yet no such community of easily-accessible professionals.

Another problem is that there is so little precedent for independent technology assessments. Investors are unaccustomed to thinking in these terms and tend to rely on the old rules of the game. Because independent technology assessment is not expected, it is rarely thought of or planned for. Thus, it is rarely done, and the negative consequences are becoming increasingly obvious and important in our present economy. There may also be competitive disadvantages to a financial entity requiring a technology assessment. In a group of potential investors, if one insists on the expense of a technology assessment and the other does not, which is more likely to be successful in buying into an enterprise? (But, in the longer term, which is more likely to be successful?)

It has been said that those who do not know the lessons of history are doomed to repeat its mistakes. Certainly there are lessons to be learned from the experiences of those who have invested in a wide variety of new and emerging technologies. Even before the recent spate of dot-com failures and Nasdaq troubles, we experienced cyclical investor disappointments and enthusiasms for artificial intelligence and biotechnologies.

Could the use of objective, independent technology assessments have ameliorated the problem? Can we learn to accept the up-front costs to reduce the risks?

Pay now, or pay later – big time.

R.R. Goforth, Ph.D., is the general manager of Beta-Rubicon Inc. in Fayetteville which may be reached on the Web at www.beta-rubicon.com.