Comment by ses1984
3 hours ago
Have you ever heard the phrase ceteris paribus? It means all other things being equal. It's a phrase economists use to discuss things in the ideal, sort of like, "imagine a spherical cow in a vacuum" but for economics.
The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze everything else, do not allow it to vary, and look at the backlog in isolation. Obviously such a situation would never actually arise. Even if things were trending in that direction, the two companies would very quickly diverge from ceteris paribus.
Obviously having a backlog is better than no backlog because unless you make a new sale tomorrow, you have a problem. You will have idle capital and labor resources. Which company do you think has easier access to credit?
Private equity is very much interested in the margins. That is one of the key differences between private and public companies. Public companies are under pressure to grow at all costs. PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
The depth of the backlog also happens to be a pretty decent proxy for how much competition there is the market. A deep backlog means there isn't another firm around to fill that demand. That makes your company look better.
Let's go a little left/up the funnel. Imagine two startups, all things equal, their sales funnel goes wide > qualified > sale. They consistently convert 5% of qualified leads into sales. Do you want to be the company that has zero qualified leads, or $4.5b of qualified leads?
Ceteris paribus can be stretched to the point of absurdity though. A startup with $4.5b of qualified leads, vs one with zero? Come on now...
For the sake of argument, we're imagining both startups have equal levels of investing/funding secured, equally talented founders and employee, equal access to equal networks (i.e. I'm imagining something like defense or aerospace, to make it a little easier to imagine a startup getting $4.5b in qualified leads), equal technology or IP, equal EVERYTHING as per your hypothetical... and yet somehow one startup has $4.5b in qualified leads and the other does not.
I truthfully would rather buy into the one with zero leads, because presumably, under ceteris paribus conditions, that startup must be priced at a discount to the other one, since it has no leads... and yet, EVERYTHING ELSE is equal (equally strong team, equally good tech, equal networks, etc.), and so it seems to me, that I would be able to buy a larger equity stake for a discounted price, and have EQUAL odds of winning future business since this startup is EQUAL in all other respects expect for the odd qualified leads backlog.
Would you rather buy shares in NVIDIA, or buy shares in another company that is equal to NVIDIA in every way (same talent, same tech, same everything), but just happens to have no backlog of confirmed orders? I think I'd like to buy this shadow-clone of NVIDIA, because I would buy into the thesis that there is more room for growth, vs buying the incumbent... after all, ceteris paribus, right?
The all things being equal makes no sense in this regard.
It's like me saying "all things being equal except you're a duck"
You can't be a duck and have all things equal. Same way a company can't be equal to another company and have a $4bn backlog. This isn't an independent variable like the color of your logo.
> PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
So PE doesn't maximize profit but instead maximizes profit margin? This makes no sense. Why?