According to today's McKinsey Quarterly Update, a surprising number of small and midsize software companies survived the downturn. Not all of them should have.
Technology valuations are back up—in some cases, almost to bubble levels. But the revenue picture isn't rosy for all high-tech companies. Slicing the sector by size reveals a discouraging pattern among those with pretax revenues below $50 million: a survey of 2,121 software, hardware, IT services, and semiconductor companies shows that many small and midsize ones are drowning in red ink. The bar graph above suggests that for smaller concerns, a perennial lack of profitability, combined with the growing scale and influence of their largest competitors, is bringing judgment day near. Some companies will have to be acquired; others will try to get bigger by merging with complementary businesses. Still others will find sustainable niches to harvest, often by working within the platform of a larger vendor with better access to customers.