Bubble watch – pre rev tech co plans $750m float

By September 18, 2006News

xg_logo.jpg

The Sunday Times yesterday reported that XG Technology aims for a $750m float.

I have nothing against XG and know very little about the company, but I hope they don’t get this float away.

XG claims to have developed a rival technology to Wimax that is significantly superior.  It looks like they have a mixed business model of planning to be a service provider themselves and to sell their technology to other service providers. 

A couple of quotes from the article that set the scene:

XG is seeking a high valuation for a company that has yet to generate its first revenues.  However, Mooers [CEO] said XG had already received $20m of signed orders from Florida firms that are keen to introduce commercial broadband services over xMax next year.

XG has generated considerable controversy in certain parts of the telecoms industry.  Some critics have even claimed that its technology defies the laws of physics.

It sounds like they have a great company – large market, next gen technology and good early traction.  It might even be worth $750m.  One thing is for sure though – its prospects are very uncertain and revenues will be very hard to forecast accurately.  For me this makes it a venture deal.  Public market analysts are generally not able to find the time to engage sufficiently with companies to understand when a company misses its forecasts whether it is just a bump in the road or a sign that the company won’t deliver on its promises.  As a result they often assume the worst.  I am a strong believer that in general companies should avoid the public markets until their businesses have matured sufficiently to be reasonably predictable.

In the case of XG the high valuation will give it a high profile and should it fail to meet its forecasts the fallout would be significant.

Up until now the public markets have stayed away from deals like this and if there is a bubble at the moment (and I think there are signs of that) it has been confined to VCs.  If it spreads to the public markets when the inevitable correction arrives it will be more severe.  You simply can’t have a crash unless the public markets are involved.  Moreover our close involvement with companies and capital structures make us VCs better placed to deal with changes in prevailing valuations.

Add to that the fact I’m skeptical about whether XG can be worth $750m and you see why I’m worried.  As I said above I don’t know the company well and I am open to being convinced otherwise, but on the face of it I would guess there is too much techology risk and go to market risk for this to be worth so much.  The parallels with Cambridge Broadband here in the UK point to that conclusion also. 

I did a bit of surfing to see if there are more reasons to be positive and for some thoughts in this direction check out Angelero’s blog – but overall the lack of pages about XG leaves me thinking I’m right to be skeptical.