The Fast50 guys aren't doing so well. Just a year ago local CPAs Brightman Almagor lead an initiative to add Israel to the global Fast50 competition held by its partner firm Deloitte Touche, in which companies are ranked according to their growth rates.
That was back in the technology heyday when managing partner Igal Brightman was appointed to a senior position in the global firm as head of the technology sector. The appointment was considered natural in light of the technology sector's weight in accounting work and Israel's weight in the technology sector. It seemed like The Word from Zion would be heard the world over.
When Brightman Almagor set criteria for the Israeli Fast50, the technology sector was still in halcyon days and the Israeli firm determined companies would be rated according to their increase in market capitalization. Since the ranking included startups that are not publicly traded, the ranking used the numbers from the latest fundraising round and compared them to the pre-money valuations in prior rounds.
But just as the rankings were published, the results themselves became irrelevant in the best cases and absolutely ridiculous in the worst cases. Just then, in early 2001, the air began to hiss out of the startup valuations bubble. With each passing month, the "value" at which the startups raised financing became less and less relevant and the valuations collapsed at the same pace they had once inflated. And sure enough, in the last year, several of Israel¿s most promising startups were sold off at bargain basement prices and some just closed their doors.
The Fast50 people understood that the 2000 ranking was nothing but amusing, but they couldn't retreat from the results and had to give prizes based on company values that any green-around-the-ears venture capitalist could tell you were too high.
The accounting firm's criteria for last year's Fast50 has become a symbol of the gay bubble. When accountants, the most conservative profession on earth, got swept into ranking companies based on such a fluid and insignificant criterion as value for private placement, we wrote that it must have been a good sign for the madness then gripping the entire business world.
The Fast50 people were quick to correct their error and the 2001 ranking got back to basics, rating companies according to a clear accounting gauge from the days of the Old Economy ¿ revenues.
The new Israeli Fast50 were published yesterday, ranking both public and private technology companies according to the rate of increase in revenues from 1998 to 2000. Upon publication it became clear that the average rate of revenue increase for these companies was 681% with the top five posting gains of, hold on to your hats, 3,744%. Inarguably impressive figures.
Oh dear, it seems the 2001 ranking meant to be on firm ground with a clear criteria of revenues is not much better than the 2000 ranking with its preposterous valuation criteria. Apparently in the mad, delusional technology world of the past three years, it isn¿t even possible to learn anything real about the quality of a company from its revenue line.
The best example of this is the company that leads the list ¿ Ceragon Networks (Nasdaq:CRNT), whose revenues leapt 6,754% in the years 1998-2000. At first glance, any company that manages to grow revenues at that pace must be a fantastic success story, particularly when we are talking about revenues of tens of millions of dollars.
But people who know the Ceragon story well, like the stories of many of the Fast50, know that a large portion of those 2000 revenues were essentially artificial: Ceragon manufactures communications equipment purchased by new telecoms that sprang up in the past few years. Those companies made huge equipment requisitions in 1999 and 2000 for which it later became evident they had no need.
Three processes took place in 2001. It became clear that many of the business models on which the communications and Internet sectors were based didn¿t work or were years ahead of their time. Many of those new telecoms went bankrupt or encountered financial difficulties. The sectors' old timers began to slash their investment budgets.
In Ceragon's case it became clear that a large portion of its revenues were artificial. First of all, many of its customers had no business model and were powered solely by the capital market. Secondly, some of those companies took delivery of equipment but didn¿t pay for it, forcing Ceragon to make massive inventory write-offs and provisions for debt that will never be collected.
First Ceragon's share price caved by 90% and then the company began to post successive drops in revenue from quarter to quarter. Q4 2001 closed on $3.3 million in revenue compared to $12.6 million in Q1.
Ceragon is restructuring and recovering but clearly had it not gone public during the boom, it wouldn¿t even exist today. More importantly, the Fast50 is swamped with stories like this ¿ companies whose revenues grew by leaps and bounds and hundreds of percents during the boom, but that doesn¿t mean the companies ever created any real economic value.
We originally considered suggesting the Fast50 change their ranking criteria to growth in net profit over time. But since the Enron affair, a company whose net profit grew quarter over quarter like clockwork for years until it suddenly became clear that it was all an accounting trick, we didn¿t even want to go out on that limb.
We are sadly left with no choice but to determine that rankings that list companies that grow by thousands of percents are dangerous. For every company that grows with mindboggling speed and becomes a true success story, there will apparently be another five right behind it whose phenomenal growth in market cap or revenues or sometimes even profits hides a much more complicated reality.