Editor’s note: This is the latest in a series of Q&A’s with leading technology executives in the Carolinas and Georgia about how tech startups and investors can survive – and flourish – in 2009.
RESEARCH TRIANGLE PARK, N.C. – As president of , Mike Merwarth drives the company’s commitment to quality and finds great satisfaction in working with his technical, consulting and sales teams to provide hospitals with innovative supply chain tools.
Merwarth’s leadership and vision were integral to the development of the recently launched MediClick for Contracts & Analysis, a breakthrough application that streamlines the contract management process for hospitals.
An experienced software executive, Mike began his career at IBM in 1977, working in marketing and sales. Mike joined Global Software in 1983, serving in several key management roles during his 17-year tenure, including sales director and vice president of sales. In his last position at Global, he served as general manager of the healthcare-centered business unit that later became MediClick. Thriving and expanding, the group spun off from Global in 2001.
Merwarth is a graduate of Davidson College and a life-long North Carolinian, now calling Raleigh home. LTW caught up with Merwarth to talk about today’s business environment and how decision makers face constant pressure to do things faster, better, and cheaper.
What is your advice to fellow and would-be entrepreneurs in 2009 – Conserve, cut or invest? None of these?
Experienced business leaders have learned that some of the best opportunities arise in challenging times. For software companies catering to businesses, it may be a good time to reconsider key components of your business models. For example, rather than selling perpetual licenses for your product, where the bulk of revenue (and cash) comes when you sign the contract, consider how you might transition to the recurring revenue model common to Software as a Service (SaaS) companies. As you win new customers, most of the revenue is spread over several years in term of the contract, making it simple to predict your revenue/expense calculations with precision. It may not lend itself to explosive growth from one year to the next, but it lets you grow at a steady place and gives you tremendous stability in an unstable economy.
Who will be not just the survivors but the winners still standing when the recession ends?
I’m reminded of Andrew Carnegie of Pittsburgh steel fame. In the late 19th century, the economy cycled rapidly through booms and busts. Demand for steel production was tied closely to railroad expansion. With railroads rapidly expanding, investors poured capital into building steel mills. When the growth of railroads slackened, these steel mills were mothballed and investors incurred huge losses. Carnegie was fanatical about managing costs and growing at a measured pace with minimal debt. As the low-cost producer with a strong balance sheet, he thrived when times got tough. The software business isn’t exactly steel manufacturing, but there are common lessons to learn. I think this recession is going to force many software companies to try and match their revenue models to their customers’ ability to pay. Companies dependent on selling their products for large, upfront fees may well be facing a nuclear winter, because their customers’ cash assets are reduced and/or being horded. They will have to reduce costs dramatically or perish.
What is your biggest concern as we start the second month of 2009?
Noise about downsizing, outsourcing and declining sales numbers will distract some businesses that actually have a solid business plan and strategy. It is important that they filter out the static and maintain focus throughout the downturn.
Conversely, what are you most optimistic about?
When times are flush, companies tend to reach for the “bridge too far” and stray from their core focus, looking for exciting new ways to grow sales. In a recession, managers have no choice but to prioritize and focus. It makes businesses leaner and more attentive to the true needs of customers. When the recession ends, you will see companies emerge with stronger fundamentals, better discipline, and more attuned to their customers. That makes for a healthier base for growing the economy at large.
In what areas do you see opportunities for growth in 2009?
I think the field of clean energy technology is tremendously exciting and overdue for recognition and growth. However, the ROI may take awhile and the investment capital is going to have to come from the government until the private sector recovers. For those industries not in the path of the government cash infusion, I think the best opportunities will exist for products and services that offer the quickest, most substantial ROI in hard dollar terms. Let me offer a case in point. Our company provides products and services to the healthcare industry. Some people think that healthcare is immune from the financial crisis, but it isn’t. There is an acute shortage of capital for investment, and operating revenues are down. In this difficult environment, we have seen an unprecedented adoption rate of our new product, MediClick for Contracts & Analysis, because hospitals can achieve a clearly quantifiable ROI within a few months. Tight budgets mean customers are demanding a quick payback. Businesses that can satisfy that requirement will reap the rewards.
If the IPO markets remained closed, how can life science, medical device and other capital-intensive startups best generate cash to keep investors onboard and the company doors open while pursing R&D?
If you are beyond a first round of financing, then your investors are going to try to protect their investment with additional funding, provided that they retain their faith in you and your business model. It is crucial that you keep an extremely tight focus on your core business priorities and take good care of your existing customers.
What do you believe will be executives’ biggest challenges this year?
Companies of all shapes and sizes will be forced to prioritize this year. Managers cannot spread resources democratically and cannot expect to keep every department head happy. The best executives will identify and allocate funding to the departments most critical to their growth.
Will venture financing tighten, especially for startups, as recent surveys have indicated? If so, how do you (or) your clients (or) your portfolio companies adapt?
Venture capitalists go into Rip Van Winkle mode in this environment. It’s challenging for them, too. They’re having a hard time raising new funds to invest, and they’re much less willing to put cash into businesses that don’t have quick prospects for profitability. This is survival of the best balance sheet. If you need more debt or equity investments to keep going, it’s going to be tough. If you leveraged up when credit was flowing, you’re probably finding precious cash being suctioned off for debt maintenance. When new financing is hard to come by, you have to concentrate on the fundamentals of business (i.e., either bring in more revenue to cover your costs, or reduce your costs below your cash needs).
Do you believe off-shoring of jobs will increase this year?
Yes, but it’s unfortunate. Every MBA spreadsheet model says the returns are great from off-shoring, but they fail to calculate the impact from loss of quality and direct management control. I’m sure there are cases where it makes sense, but I think the fad overshot its usefulness. It will not be part of our business model, I can tell you that.
What advice would you offer to job seekers in such a tough environment?
Be prepared and stay relevant. If you aren’t finding paying opportunities, find a business that lets you donate free consulting time. You’ll be prepared for opportunities as they start popping up, you’ll keep yourself relevant, and you’ll keep your skills well-honed.