by Joseph Kirch

Created on: November 09, 2008

Prospectuses are just that: red herrings about how well a company will do.

There is little doubt that the secret to success of any organization is its abilty to provide a new or better service, or innovative product. Woe is the expert who is often wrong about the prospects associated with any venture. Most, if not all of the most successful companies in America, were born from radical ideas. While a prosepctus might provide a snapshot of the comany's financies, and thereby it's prospects for success, there are countless of examples of companies that have defied the odds and become behemoths.

A classic case is Microsoft. The company was expected to fail. All of the financial gurus on Wall Street expected it to fail. It was competing against some of the largest most well funded companies in the country, many of which were entrenched in the industry. But, MSFT did what others did not do because Bill Gates and Paul Allen saw beyond the numbers; they had a vision; a vision of a company that could change the world. A factor such as this does not come through in a prospectus. Numbers are often cut and dry. While it may present the facts, it does not always account for the intangibles, for those elements that set a company aside from the rest; elements and factors that contribute to the success of any venture.

While it is safe to say that a prosepctus provides a snapshot of the odds of success, one needs to do more than simply their homework. Sometimes, change does not conform to what is expected. One might be the best person in the world when it comes to research, but when is not able to turn an idea into a lucrative venture, something is wrong. One might spend tremendous effort preparing and not enough time executing an idea. Action, one is often told, speaks louder than words. And, such is the case with a prospectus. Oftentimes, effort greatly outdistances massive preparation.

We often root for the underdog. Wall Street spends billions each years on investment banking; with trying to calculate the best companies; where to put capital. One is often reminded that in a capitalist economy with a stock market, that capital flows to where it is best used. And, a prosepctus, while detailing the use of capital, does not compensate for the human factor. That the junk bond era was a time of such great change is unquestioned. Companies that looked terrible on paper, on a prospectus, could only find financing through bootstrap efforts. And, yet, many of these companies have risen to be titans within the American economy.

Prospectuses are over rated. The fact remains that success is due to a variety of factors, least of which is a company's initial financial position. That cash flow is the single most important element in a company's success; that give a strong prospectus a company can increase its capital base it is true; but without the ability to maintain a strong cash flow; to produce a good product, or provide a good service; all this effort is for nothing.

Success is an evolutionary process. While it would be nice to say that the experts are always correct; that investment bankers are always able to choose the winners; the truth if often the opposite. Great companies are born from great ideas; and the numbers do not always indicate this. What might appear to be a mediocre idea at the outset, might very well prove to be a huge step in evolution. The prospectus should be viewed as only a tool; one of many; in determining the possiblity of success; and not the end all final judgment.

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