Benjamin Kuo’s Blog

Perusing the Deloitte Technology Fast 500 list for this year — the ranking of the fastest growing companies in North America, based on the last five years of revenue–it’s quite surprising to note the sheer number of Southern California firms listed. Deloitte, which ranks these every year (disclaimer: Deloitte recently became a sponsor of socalTECH, though that has no influence in our coverage), uses the five year revenue numbers of companies to create their listing. This morning, we’ve been bombarded by companies bragging about their improvements (i.e. “We’re number 480 something on the list!”).

However, it was interesting to note that Number 1 on the list was ReachLocal, the Woodland Hills-based provider of local search advertising services — topping the list with 146,050% growth over 5 years. The firm started out in 2004 with revenues of $100,000; the company reported it had revenues in 2008 of nearly $146.7M.

So, what can you draw from the list of companies? Just glancing over the list (there’s really too many SoCal firms to completely list them all):

1. Internet advertising and related industries, at least for SoCal, were strong. Aside from ReachLocal, I see The Search Agency (SEO services, #83), Hydra (Internet ads, 87), Gorilla Nation at 243, and Oversee.net at 326.

2. Semiconductors — which hasn’t seen much investment in recent years, and seems to have been mostly ignored– still seems to be powering growth rates, with San Diego’s Entropic Communications at number 5 on the list. Westlake Village-based Inphi is at 134. San Diego’s Ethertronics is at 143.

3. Medical equipment and biotech was more than well represented – Carlsbad-based GenOptix was at 15, Tustin’s AMDL Diagnostics was at 19, Irvine-based Spectrum Pharmaceuticals at 22, San Diego’s Santarus at 23, Ista Pharmaceuticals based in Irvine at 47, Aliso Viejo-based Clarient at 59, San Diego’s Amylin Pharmaceuticals at 76, CytRx in Los Angeles at 120, EndoLogix, in Irvine, at 169 were just some of the firms in that category.

4. Software had a fairly good showing. Cerritos-based IGNIFY is 71,San Diego’s ESET is 105, Kyriba, based in San Diego, is 184; Smith Micro, Aliso Viejo, was number 210.

So, what other interesting observations can you gather from the list? One–is very few, if any of these companies (who seem to be seeing not only growth but rather impressive revenues) are the hyped, brand-name Silicon Valley Internet companies you might expect (Silicon Valley’s own list of high growth companies came from the biotech/med equipment/semiconductor/networking/cleantech/software industries). Second, here in SoCal, there are an awful lot of Orange County companies represented, despite not a lot of recent venture activity–in part because of biotech/medical devices firms who are hitting their stride.

File this under one more thing you really ought to know as a startup: don’t invest in auction rate bonds.

For those who aren’t familiar with them, auction rates are a type of long term bond which are sold via a dutch auction by investment banks. They are typically used by companies to manage their cash, and have been popularly used by companies of all sizes to eke out additional gains on the cash they are sitting on. However–along with lots of the rest of Wall Street–there is a liquidity crisis here, which has resulted in a cash crunch for many startups.

Essentially, what has happened is that there are many VC-backed companies who had parked their VC investments temporarily in these auction rate instruments, as a way to pick up some additional interest. Auction rates are an alternative to things such as money market accounts, or just plain cash sitting in a bank account.  The problem is, the market for those investments has essentially collapsed, locking companies from their cash. Even though those companies may have a bunch of VC financing, they cannot touch that cash until the market resumes–and it’s unclear when that might happen. For a startup with a rapid burn rate, that can mean they run out of cash very quickly — unless their venture capitalist steps in with a loan, or they are able to finagle some other kind of loan from an investment bank.  There’s also the potential that a VC — seeing that a company has managed to muck up its handling of its cash, and looking at how a startup is doing–might reconsider their investment in a firm.

It appears that many of the companies caught in this crisis may have been caught because the folks managing that VC cash — a part time controller or even just an accountant — wasn’t aware of the liquidity dangers. I have heard that those with actual CFOs have for the most part been spared, since CFOs generally do more due diligence and are more conservative in their investments for their cash. But, in any case it’s a case of “what you don’t know CAN hurt you.”

I chatted yesterday with Joe Morgan, who has been credited as being the very first person to start warning about the liquidity danger of auction rates, and he told me the whole story behind this fiasco.