Still Dreaming

I don’t know if it’s just the Asian business press not getting details right, not challenging assertions, or whether something is getting lost in the translation, but consider this quote from Nikkei Asian Review:

"Over the next three fiscal years, the Tokyo-based company intends to invest as much as 30 billion yen ($280 million) in medical-related startups and turn what is now a business with virtually zero sales into one with sales of 130 billion yen and operating profit of 4 billion yen in fiscal 2016.

"Fiscal 2016" is April 2015 to March 2016 in Nikon-speak. Thus, what that paragraph says is that it is possible to take US$280m today and from scratch create a profitable business with sales of US$1,213m next year. A business with US$37m in profit. I plugged those numbers (plus a few simple assumptions about industry, growth, and debt) into a startup valuation calculator I have and come up with a valuation of US$684m for an investment of US$280m. Hmm. That’s like buying dollars for fifty cents. Gee, can I have some of that action?

We did get a little more information about Nikon’s ideas: “one plan is to develop equipment to manufacture glass and plastic slides for biological samples.” Okay, but why does Nikon need to buy a startup to do that? Seems like this is a natural product that would sit alongside their microscope work and not really require another company. 

There’s no doubt that Nikon is late to the diversification game. Both their main businesses go through incredibly risky up/down cycles, and if they both get in sync with down cycles, as seems to be happening now, it can prove disastrous: essentially the company would have no choice but to contract. 

But the “Nikon Medical Plan” seems to me to be a little pie-in-the-sky, and not exactly a sure thing. Moreover, as the article points out, this is the first time that Nikon has really attempted true outside startup investments like this. Those of who’ve been in the startup world know just how unpredictable things can be. You can be wildly successful, a total failure, and walking dead, and it isn’t always the product that determines that. 

It seems to me there’s too much spreadsheet worship in these pronouncements by Nikon. Years ago we used to call this Visicalc Mentality: if you plugged numbers into a spreadsheet and they showed a profit, then there must be a profit, because computers don’t lie. 

I’d love to be proved wrong on this, but US$280m is a bit of a drop in the bucket type of investment to get well established in a hugely competitive and quickly moving business (medical related). I’ll be very surprised if any medical startup Nikon buys produces a tangible profit number on their fiscal 2016 financials. 

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