Before you fall in to the trap of IPO and tech startups
Let’s make this quick and easy. Startup is a business designed to grow big, fast and if a startup didn’t live up to its designed expectations it will either fold down or pivot in to something else, something its founders never passionately envisioned.
Now what’s an IPO? It stands for initial public offering and for those who are not in to equity or stock trading it is as simple as raising capital from the public investors through the secondary market (NASDAQ, NYSE etc.) to make it attractive the underwriters, early movers from the primary market will concoct something from thin air to huge multi-billion valuations with basis they made from themselves and come up with an acceptable pricing for the offering. You’ll wonder why Lyft’s IPO price is $87.24? Because there’s so many black magic and wizardry happened in order to pay back the early angel investors, venture capitalists etc. That’s what you call an Exit Strategy.
I have reviewed several startup business plans looking for seed funding, second or so forth round of funding from simple to most ambitious world-changing ideas but nobody really knows what is profitable until each of their revenue models are put in to test for profitability, some tech startups are lucky enough to get multi-million funding without going through the profitability test because the end game is to pass the bag of their shit to the unlucky guy in their IPO.
How is it done? In simplest terms, a tech startup who just dreamed up a profit or revenue model that doesn’t actually work in a real world will pitch an MVP (minimum viable product) to a group of private equity investors, agree on an acceptable share price in order for the startup to continue on working and marketing the product to generate a decent cash for valuation purposes regardless if it’s positive or negative in their books, this period is normally known as the incubation, others who pretend to be in the know will call it gestation, but it’s actually incubation. Do you actually believe that Facebook is living through ads revenue alone? Cable television is still the most powerful force in advertising regardless of what you read.
After the incubation period, the exit strategy will come in to play. Let’s do a simple math: imagine a startup XYZ issues 100,000 shares to private investors(angels, VC whatever) at an agreed value of $10/share, then XYZ startup effectively raised $1,000,000 in seed funding. Assuming the 100,000 shares represents 50% of the company and the rest are split among the founders then the ball park value of your company is $2,000,000. Take note, this exit strategy doesn’t care whether there will be actual profits from company’s core activities. Now, the underwriters, VCs, angel investors decided to make 2000% from capital gains which is basically $200/share so the offer price to the public will be $200/share. Of course an IPO will not be successful without creating demand (hype) so that other fund managers can snatch and push the share price to $500 and as they say “to the moon” on the listing date and possibly dump it back to $10/share leaving the clueless high and dry and asking for help in all Facebook trading groups. That is the exit trap and it’s free money.
